More than half of all American adults don’t have a will, and that can cause all kinds of problems if tragedy strikes.
The death of both parents in an accident can leave their children’s fate up to a judge. Assets in a blended family may not end up being distributed the way you would like. And, if you’re incapacitated but not killed, the choices made about your medical care may not be those you would want.
Estate planning can save you from all those unfortunate outcomes. Nearly everyone should do some basic estate planning, even those with few assets.
“Spending a little time to get all your affairs in order is one of the best gifts you can give your family,” says Stephen White, regional leader of wealth planning for BMO Wealth Management in Milwaukee.
[Read: Estate Planning Is Important for People Without Children.]
If you die without a will, state law determines who gets your assets. If you’re single and childless, that may mean your estate goes to your parents or your siblings. If you’re married, your assets may all go to your spouse, or be split between your spouse and children of another marriage. If you’re part of an unmarried couple, your estate goes to your biological family, not your partner. In many cases, this may not be what you want.
“I think it’s important for people to think about what happens if they don’t have a will in place,” says Bob Phillips, managing partner of Spectrum Management Group in Indianapolis. “There’s one written for you by the state.”
Estate planning is especially important for unmarried couples and blended families. State law awards assets to biological relatives if there is no will and an unmarried partner will be shut out. Blended families may want to split assets between current spouses and children of previous marriages, or they may not. “There’s always a way to find a way to have the assets flow the way you want to if you plan it in advance,” Phillips says.
Even after you’ve put together an estate plan, you should review it from time to time based on changes in your life, but everyone should check at least every five years. Heirs may have died or remarried, or the person you chose to administer your estate may no longer be capable. If you marry or divorce, you should review your estate plan, too.
Once you’ve created a plan, make sure your heirs know where to find the documents. You can keep them in a strongbox at home or in your lawyer’s vault, or both.
“One place you should not keep these is in a safe-deposit box in a bank,” says E. Richard Baum, partner at Anchin, Block & Anchin in New York. Your heirs may not be able to get to them immediately. “Death freezes everything,” he says.
Exactly what you need in your estate plan depends on your assets and your family situation. Business owners will need a succession plan, and parents of children with special needs may need to set up a special needs trust. But options exist for people of all income levels, no matter how you would like your assets distributed after your death.
[Read: 5 Mistakes Can Implode an Estate Planning Strategy.]
“I like to say that a will is a blank canvas, and you can really craft it to meet your needs, your values, your wishes,” Baum says.
Here are 10 essential elements for estate planning:
Guardianship plan for minor children. Who will raise your children if both parents are killed in an accident? It’s also important to plan for how any life insurance payouts and money you leave to your children will be handled for their benefit. “Unless you’ve got a very savvy sibling, it’s better to have the money placed in a trust,” Phillips says. “We all like to think the best of everybody, especially our siblings, but there have been many cases historically when money wasn’t used the way it was supposed to be used.”
Will. A will determines where your assets that are outside a trust and don’t have beneficiaries will be distributed. That could be your home, your car, your bank accounts or your personal possessions.
Executor. When you draw up your will, you need to choose someone who will carry out your wishes. A simple estate can be handled by a friend or relative, with the help of an estate lawyer, but a more complex estate may require professional management.
Trust. A living trust serves two purposes: It allows you to pass on assets without going through the public probate process, and it allows someone else to manage your affairs if you become incapacitated. Your trust can own your house, your car, your bank accounts and other assets. You make yourself trustee, but you also appoint a successor trustee who will take over if you die or can’t manage your own affairs. “While you’re alive, it’s essentially an extension of you as a person,” Phillips says.
Medical power of attorney. This names someone to make medical decisions for you if you’re unable to make them yourself. “Doctors want to be able to deal with the family and know who has the power to make decisions,” White says. “It avoids the threat of people having conflict over what you may have intended.”
Living will. This is also called an advance directive. It provides guidance to the person making medical decisions about what you would want in certain scenarios. Under what circumstances would you want to be kept alive with a ventilator or a feeding tube, for example? It’s wise to discuss these issues with your family and with whoever has your medical power of attorney, so they will understand your wishes.
Financial power of attorney. This allows someone to manage your financial affairs. You can limit it to certain functions or make it all- encompassing. A couple may want to sign such documents designating each other to act at anytime. Or, you may want what is called a springing power of attorney, which only takes effect if a doctor declares you incapacitated. “The power of attorney is frequently overlooked,” Baum says. “These documents avoid significant disruptions in their financial lives.”
Tax planning. People who are wealthy enough to face federal and state estate taxes may need plans to minimize their tax bite, and those plans are best structured by a professional. Federal estate taxes kick in at estates values at $5.45 million, but some states have lower thresholds. For the less wealthy, remember that your heirs will have to file your income tax return, so make sure they can find the information.
[Read: The Tipping Point: When Should You Write Your First Will?]
Beneficiaries. Retirement accounts, pensions, life insurance and brokerage accounts are passed through beneficiary designations, not a will. It’s important to keep these current, or you ex-husband may end up inheriting.
How you hold assets. Some joint assets pass automatically to the surviving partner upon death. Others may not. Make sure you’re holding title to homes, bank accounts and other possessions the way that will benefit the two of you.
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10 Essential Estate Planning Tips Everyone Should Know originally appeared on usnews.com
