You may be young and healthy, but that doesn’t mean estate planning should be ignored until you’re old, wealthy and have a family. Being rich is not a requirement to having an estate plan. Even if you’re young with relatively little assets, certain estate documents can ensure the assets you do posses end up where you’d like them to go when you pass away. They can also provide directions as to what sort of medical care and decisions you’d like made on your behalf if you become incapacitated and are no longer able to make decisions on your own. I know dying is probably the last thing on any healthy individuals mind, as our mortality isn’t something we like to think about. Yet, it’s a fact of life. As financial planners, we have to consider these things when we advise clients. Planning for their future means planning for all possibilities and risks, death included. This doesn’t mean it has to be a negative or conversation though. As the late Stephen King once said: “There’s no harm in hoping for the best as long as you’re prepared for the worst.” In this guide to estate planning, I’ll walk you through the basics, important documents estate planning documents for millennials, and how to get them in place on your own.
The ABC’s of Estate Planning
Definition of Estate Planning
According to Investopedia, “estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death.” That “asset base” could include any item of significant, tangible value, such as a house, investment accounts, cash, you name it. Each person has their own estate planning needs, but frequent reasons can include preserving wealth, ensuring financial support for family members or loved ones, or donating to charity.
The estate planning process culminates in a written document called a will. In essence, a will provides instructions for how your asset base is to be distributed upon your death. Distributing the assets from the will occurs through a legal process called probate, where the authenticity of the document is proven to be valid by the court. The court then officially appoints the executor named in the will.
This person is entrusted with distributing your assets according to the instructions left in the will. They also bear a number of other responsibilities, including:
- Estimating the value of the entire estate
- Paying off any taxes or debts owed
- Filing the final personal income tax return for the deceased.
Note: Being an executor is no easy task. Before you name an executor of your own estate, make sure you have a conversation with that person to ensure they are willing to bear the responsibility and you fully trust they will honor your wishes. Your will and the executor named in your will is a two-way street.
Other Important Documents
Power of Attorney
This is a written authorization that allows another person to act on your behalf for legal, business, financial, or health care matters. There are three main types of power of attorneys: special, general, or temporary. A special power of attorney may only act on your behalf in specific matters, while a general power of attorney may act on your behalf in nearly any capacity. A temporary power of attorney only allows said priveledges for a specified period of time. A power of attorney can also be specified as “durable”. By default, a power of attorney is considered null and void if you become incapacitated, either due to physical injury or mental illness. However, a “durable” power of attorney, would remain intact.
The majority of retirement accounts, annuities, and life insurance products let you decide who receives the assets when you pass away. That person is designated as a beneficiary. Beneficiary designations take precedence over anything stipulated in your will. They also typically avoid probate court and are received as soon as the beneficiary is made aware.
Also known as an advanced health care directive, a living will provides instruction for whether you’d like to be kept on life support if you became terminally ill or fall into a permanent vegetative state. It also details the extent to which life support measures you’d like taken if any, such as a feeding tube or pain medications. Living wills take effect once you have become incapacitated, terminally ill, and cannot communicate your desires on your own.
Health Care Proxy
A health care proxy is similar to a power of attorney in that it allows someone else to act on your behalf, except only as it pertains to healthcare matters. A living will stipulates your wishes for end-of-life medical care. A health care proxy is in charge of carrying out your wishes in your living will, but they can also make all other medical care decisions on your behalf if say you are not terminally ill but temporarily incapacitated.
Also known as a revocable trust, a living trust is created during a person’s lifetime and is designed to be used for your benefit while you are alive, but be easily transferred to your beneficiaries upon your death without having to go through probate court. A living trust designates a trustee who holds legal possession of any assets or property transferred into the trust. In most cases, the trustee of a revocable trust is also its creator. However, because the trustee doesn’t give up control of the ability to make changes to the trust during their lifetime, the trust’s assets are included in their gross estate at death. Meaning they could potentially owe estate taxes.
Why Should I Consider These Documents?
If you have assets you care about that don’t have the ability to designate beneficiaries on their own, such as a rare coin collection or vehicle you own, a will is always a good thing to have so you can specify who those assets should go to when you pass away. If you have kids or are married, or both, a will also allows you to specify who should raise your kids or how your money is allocated if something were to happen to you.
A living will and health care proxy are also good documents to have regardless of your age. Life is highly unpredictable. We know illness or injury can afflict us at any time. These documents provide peace of mind for not only you but to your family and loved ones as well. You can rest easy knowing your wishes will be carried out as they pertain to your health care decisions if you can’t make them on your own while your loved ones can rest easy knowing they don’t have to make very difficult and/or contentious decisions on your behalf. Always better safe than sorry.
Lastly, make sure any retirement accounts or life insurance policies you own have beneficiary designations on them so the funds can be easily transferred upon your death. If you have a parent or family member co-signed on any debt obligations, it may make sense to have that person listed as a beneficiary for your accounts to lessen any financial burden they might bear if something were to happen to you. This is a simple form you usually fill out when you open a retirement account or take out a life insurance policy.
How to Get These Documents In Place
If you’re young, chances are you don’t have a very complex or diverse financial picture, so any estate planning you engage in now is likely to be fairly simple and straightforward. For a will, living will, and health care proxy, you can use Nolo.com or Legalzoom.com, which are both simple and easy to use services that will allow you to create these documents on your own for less than $100.
Your beneficiary designations should be set up from account inception, but it’s always a good idea to review your listed beneficiaries at least annually. Your circumstances will likely change over time, so it’s important to keep your beneficiaries current so your 401(k) doesn’t go to your sister if you have a major falling out with her or decide the funds should go elsewhere. If you have no one you’d like to list as a beneficiary, you can always pick your favorite charity or charities to inherit any funds left after you die.
Estate planning can be a relatively complex process with many different moving parts. Hopefully, now you have a better understanding of what all it entails and which documents may make sense for you to have. If you ever have any basic questions surrounding this, feel free to reach out to us or schedule a free consultation. If you just don’t feel comfortable handling any estate planning on your own or need to make sure special parameters are included beyond just the basics, I recommend consulting an estate attorney to assist you in the process.
Chad Rixse grew up in Anchorage, Alaska, but has lived in the Seattle area since 2007. He majored in Spanish at the University of Washington where he honed his fluency in the language and discovered his passion for travel and connecting with other cultures. He’s a self-professed golf addict who can never seem to get his fill despite still struggling to break 100.