Whenever I meet with new clients we always talk about the importance of having the right estate planning documents in place. Even if you are not living like Lord and Lady Grantham of Downton Abbey fame, there are a few documents everyone needs to include in their estate plan.
Basic will. At a minimum you need a basic will. This is the document that tells the state who is to receive your assets when you die. Dying without a will is called dying “intestate”. When you die intestate the state determines who gets what. For example, in Minnesota if you are married and have children with your spouse and your spouse has no other children, your spouse will inherit your probate assets. Non-probate assets like IRAs and retirement plans typically pass via a beneficiary designation. More on that below.
What if you have no spouse and no children? Or you and your spouse have children from other relationships? For a brief summary of what happens when Minnesota residents die without a will, click here.
If you have a living trust, a basic will serves as a catch-all for anything that the trust may not have accounted for. For example, a brokerage account or other property that was never properly retitled in the trust name may be distributed upon your death according to the provisions in your will.
A basic will can also determine who will be the guardian of your children, if you die before they reach the age of majority. If you have no assets, but have children under the age of 18 you may want to get a will for this reason alone.
Power of Attorney. Power of attorney grants another person power to act on your behalf during your lifetime. It can be especially helpful in situations where you become incapacitated and can’t act on your own. Disability, mental incapacity, dementia all are situations in which a person may no longer be able to act in their own best interest.
Power of attorney can take effect as soon as the document is signed (durable power of attorney) or only when you are declared mentally incapacitated (springing power of attorney). It is used primarily in situations where financial decisions or other non-medical decisions need to be made.
Health Care Directive. This document names another person to make health care decisions for you if you are unable to speak or decide for yourself. With a written health care directive you can determine not only who makes these decisions, but you can put your wishes in writing. For example, the type of health care treatment you would want (or not want), where you would like to receive care, and other instructions can be clearly indicated through your health care directive.
The Minnesota Department of Health website offers a nice Q and A about health care directives that answers many of the questions people commonly have about health care directives.
Updated beneficiary documents. Not all assets pass via your will. Some, like IRAs and retirement plans, will pass to your beneficiaries via the beneficiary documents on file with your IRA custodian or retirement plan administrator. In fact, even if you have a will, your IRA and retirement plan beneficiary forms will supersede your will. For that reason, it’s always a good idea to make sure your beneficiary documents are accurate and up-to-date.
What happens if you don’t name a beneficiary for your IRA or retirement plan? In most situations, your estate becomes the beneficiary. In the case of a retirement plan like a 401(k), your plan document many have a specific protocol in place. If not, your estate generally becomes your beneficiary and after the government takes its cut in the form of income taxes, the remaining balance is distributed according to the terms of your will.
Get professional help. Many of the documents listed above can be done on your own. However, if they are not done correctly, they are worthless. Worse yet, they can lead to questions and conflicts among your surviving family.
With few exceptions, I always recommend consulting a qualified estate planning attorney to draft your documents. It costs more, but I think it’s worth it to be sure everything is done right. If you already have documents created and want a second opinion, an attorney can let you know if any changes need to be made.
For 98% of us, estate planning doesn’t have to be complicated, but it is important. Make it a priority for the second half of 2015.