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MarketWatch and Learn: 6 essential estate planning documents every adult needs

Many people might think that estate planning isn’t for them.

They don’t have wealth like Bill Gates or Jeff Bezos, they don’t think of their belongings as an “estate.” And they might not even have much in the way of assets save an insurance policy, a retirement account or two, and maybe a house.

But no matter how much or how little you possess, there are six estate planning documents that every adult should have.

Read: 12 questions you should ask your parents before it’s too late

Durable power of attorney

Your durable power of attorney permits you to choose who will make financial and legal decisions should you ever become incapacitated, said Harry Margolis, author of Get Your Ducks in a Row: The Baby Boomers Guide to Estate Planning and founder of the ElderLawAnswers website.

“This can save considerable trouble, avoiding family disputes and financial and legal roadblocks,” he said. “Without it, there may be no one to pay your bills and make decisions for you in the event of incapacity. Plus, family members may have to go to court to get appointed conservator, a time-consuming, expensive and cumbersome process. And usually, these added burdens come at the worst time when they are already having to spend a lot of time caring for you and dealing with healthcare issues.”

A durable financial power of attorney can either be effective immediately or a spring power of attorney, which means it is only effective upon incapacity, said Michael Burns, an attorney with Scroggin & Burns. State laws vary on this as some states, such as Florida, require the financial power of attorney to be effective immediately, he said.

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Health care directive or medical power of attorney

Like a durable power of attorney, a healthcare proxy or durable power of attorney for healthcare allows you to appoint an agent to make healthcare decisions when you are not able to do so, said Margolis.

“It also permits your agent to communicate with healthcare providers,” he said. “And, depending on your state, without this document there may be no one able to step in or state law may choose someone other than who you would want to take care of you.”

In the absence of a healthcare directive, Margolis said your family may have to go to court to have someone appointed as guardian with the same costs and delays as having a conservator appointed for financial and legal matters. 

“Ultimately, choosing your agent and providing him or her with guidance could well save your family time, trouble, and expense,” he said.

Another type of advance directive necessary is a living will, which is where individuals can provide guidance as to end-of-life decisions, Burns said.

Read: 10 ways to improve your health and live longer

Will

Your will disposes of probate assets, assets that are owned individually and that do not have a beneficiary designation, said Burns. “This is a common misconception for the general public as many individuals believe the will governs all assets,” he said.

According to Burns, the will names an individual to administer the estate — often referred to as the executor or personal representative; dictates how the probate assets are distributed; provides for simplified administration of the estate; and, where applicable, names a guardian for any minor children. 

“You choosing that person—the guardian or guardians—rather than leaving it up to chance can prevent disputes and make sure the right person fills this role,” said Margolis.

In addition, the executor or personal representative pays your outstanding bills, collects anything you might be owed, files your final tax return, prepares an estate tax return, if necessary, said Margolis.

What’s more, as part of the will, Burns said some states permit a tangible personal property memorandum, which is a method for an individual to dispose of tangible personal property without the formalities of a will signing, which is often two witnesses and a notary public though it varies by state. “This helps to minimize conflict among family members,” he said. 

Revocable trust

Depending on state law, probate can be a time-consuming and expensive process, said Burns. “The idea of the revocable trust, or what is also called a living trust, is that to the extent the revocable trust is funded, it can avoid probate upon passing,” he said.

Plus, the grantor may amend or revoke the trust during his or her lifetime, said Burns.

According to Margolis, while you’re alive and competent, you can serve as your own trustee. You can also name a co-trustee or successor trustee to step in if you become incapacitate or just want assistance.

The main benefits, according to Burns, are avoiding probate; privacy (the will is a public document whereas the revocable trust is generally private); and disability management. “This is especially important where there is out-of-state real estate that is owned individually,” he said. Out-of-state real estate would require probate not only in the home state but also in the state where the real estate is owned) or there is a small business that would require immediate attention, said Burns.

A revocable trust essentially does what a durable power of attorney does but more easily, said Margolis. “It’s easier for a successor trustee to step in and manage a trust than it is for an agent under a durable power of attorney to step in and manage your finances because many financial institutions put up roadblocks to honoring durable powers of attorney,” he said.

Margolis also noted another benefit of a revocable trust. “While a guardianship for a minor child ends at age 18, you can set out whatever ground rules you choose for distributions to or on behalf of your children,” he said. “Many parents keep funds in trust for their children completely until age 25, and often after that making partial distributions over a number of years. During the intervening years, the trustee will spend the trust funds for the children as needed but won’t distribute their shares outright.”

Also of note, many state courts are experiencing significant delays due to COVID. “As a result, the use of a revocable trust is more prevalent than ever,” said Burns. 

Beneficiary designations

Retirement accounts and life insurance death benefits are distributed not through a will but by something called a beneficiary designation.

And as part of your estate plan, it’s important to review and update your retirement account and life insurance policy beneficiary designations at least annually, and certainly when life events—death, divorce, remarriage and the like — occur. “Outdated or missing beneficiary designations are one of the biggest mistakes I see in my practice,” said Burns. “Every estate planning attorney has stories of a divorced former spouse being entitled to life insurance proceeds from the deceased individual due to a failure to change the designation.”

Burns also noted for retirement accounts, the beneficiary designation will have important implications from a tax standpoint under the SECURE Act. Under the SECURE Act, some beneficiaries will no longer be able to distribute the retirement account assets over their lifetime.

Guidance letter to family

Burns also recommended that individuals prepare a guidance letter to the family regarding everything from funeral arrangements to assets to family memories and/or future guidance. “Family conflict generally stems from each family member having a different idea of ‘what Dad would have wanted,’” he said. “If the individual provides clear guidance, this can often be avoided.”

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