Estate planning gives you the opportunity to let your final wishes be known. Many of us don’t like to think about dying. But it’s important to leave behind clear instructions on how you’d like your affairs to be settled and who should be carrying out those wishes for you.
For example, who is going to take care of the kids or feed the dog? Can someone access your bank accounts to pay your bills? These are some of the questions that may be addressed with proper estate planning.
When it comes to the distribution of your assets, estate planning also allows you to have a say on who gets what – which can help minimize confusion and the chances of infighting amongst family members. If you don’t have a will or estate plan when you die (or “dying intestate”), your assets will pass based on the laws in your state.
Estate planning details will vary from person to person based on the complexity of their financial situation. But generally, there are a few basic documents that everyone should consider putting together, such as a last will and testament, a living will and power of attorney. Properly designating beneficiaries and titling accounts are also critical.
Let’s take a closer look.
Starting with the basics: beneficiary designations and account titles
When it comes to distributing your assets, you may be able to accomplish a lot through beneficiary designations and account titling. Generally speaking, assets with clear beneficiary designations do not have to go through the probate process. Life insurance policies and retirement plans are two common examples.
You may also want to consider naming contingent (or secondary) beneficiaries, so if the primary beneficiary isn’t alive, the account will pass to the next person listed. For instance, if your spouse is the primary, you may want to think about putting your kids down as the contingent beneficiaries. This way, if you and your spouse were to pass at the same time, the assets would go to your children.
What about bank accounts?
If you have a joint account with your spouse or partner, they can access funds in that account after your death. If you have an individual account, you could add a Transfer on Death (TOD) or Payable on Death (POD) designation. While you’re living, you remain the sole owner of the account, but these special designations allow you to transfer the individual account to a beneficiary of your choice after death. (This is similar to a beneficiary designation you have on your 401(k) or IRA.)
Preparing basic documents
- Last will and testament. If you have individual financial accounts or separate personal property (like a home or cars) that don’t have a beneficiary designation, you can name who you’d like to receive these items in your last will and testament. This is a basic estate-planning document that lets others know how your possessions (financial and non-financial) should be divided. Your will is also where you can provide instructions for the care of your loved ones who depended on you while you were living. Dependents may include your children and pets.
Remember, having clear instructions is important, but you’ll need to designate someone to carry out the wishes in your will. This person is known as the executor, who will help administer your estate after your passing. You will also need to choose a guardian if you have children in the event that you and your spouse both pass away at the same time.
- Living will. If you are in a coma or on life support, a living will can explain your end-of-life wishes without burdening your loved ones with those incredibly difficult decisions.
- Power of attorney. In addition to a living will, you may also want to name a healthcare power of attorney to weigh in on the details of your medical care like where you may receive treatment. And you could also prepare a durable financial power of attorney. This allows you to name an individual to handle certain financial affairs in case you’re incapacitated and cannot handle these responsibilities yourself. For example, the individual could make financial decisions on your behalf, pay bills and have access to your funds.
- Digital executor. You may not have heard of a digital executor before. But with so many aspects of our life going digital these days. You may need to name someone to manage your online accounts, such as email and social media. With a digital executor, you can instruct how you’d like those accounts to be handled.
Designating beneficiaries and preparing your will and powers of attorney are some of the key components of basic estate planning.
While we can’t cover everything in one article, other considerations you may want to think about are your funeral and burial details. For instance, would you like to be buried or cremated? Is there a specific song or reading you’d like at your service? You can include a letter of instruction along with your other estate-planning documents.
Once you have your documents in order, you should keep them in a safe place and let your loved ones know where they’re kept. This is so they’ll know exactly where to find them if something were to happen to you, saving your heirs from having to look for them during an already stressful time.
Keep in mind that if you don’t have a will, the state may have to step in to determine the distribution of your assets.
Many people may avoid the conversation on estate planning with their financial advisors because it often means you have to think about some unpleasant topics. But at the end of the day, planning ahead means that you get the opportunity to have a final say on how you’d like your affairs to be handled.