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The idea of sitting down to determine who will inherit your assets after you’re gone admittedly is not as exciting as planning a vacation, but estate planning is a critical component of responsible money management.  At its core, estate planning is about protecting your loved ones, and without a plan in place, you don’t get to choose who receives the benefits that you’ve worked for all of your life. 

A common misconception about estate planning is that it is something only the wealthy need to worry about, which is simply not true. The essential point of estate planning is how your assets will be transferred to your heirs –– with as little tax ramifications as possible. 

Even if you don’t live in a luxury home, have a large retirement account, or exotic vehicles to pass along, consider these reasons for why you need to have an estate plan in place, to make for a less troublesome process for your heirs when you’re gone.  

Why Estate Planning is Important

Don’t confuse an estate plan with a will or trust. Although there can be similarities, the truth is there is much more to consider and include in an estate plan to ensure your assets are transferred according to your wishes. A well-structured estate plan will also include instructions that allow for family members to take responsibility for and control your assets in the event you’re not able to.

What to Include in an Estate Plan

There is important documentation that any estate plan needs to have, which includes: 

  • Letter of intent
  • Will/trust
  • Beneficiary designations
  • A durable power of attorney
  • Healthcare power of attorney
  • Guardianship designations

Additionally, you should consider including long-term care insurance, life insurance that will pass money to designated beneficiaries (without probate), and a lifetime annuity for income. 

Durable Power of Attorney

One of the first and most important designations in an estate plan is creating a durable power of attorney (POA). This is to assign an agent or an individual of your choosing to make decisions and act on your behalf, should you be unable to. Without this, a court can decide what happens to your assets, and those decisions may not be what you intended. Through a POA, the person you designate can make legal decisions on your behalf, including financial transactions. 

How you set up a POA is determined by you, and many married couples set up reciprocal powers of attorney. Others, however, designate another family member, friend, or advisor whom they deem trustworthy and financially savvy to handle this important role. 

Wills and Trusts

Even if you feel that you don’t have enough assets to warrant it, a will or trust is another important part of every estate plan. A will ensure that your property is handled according to your wishes (make sure it aligns with state laws), and some trusts can limit estate taxes. Keep in mind though, that how you word these documents is equally important.

Any will and/or trust needs to be created consistently with how you’ve left any assets that pass outside of the will. Here’s an example: if your wife is the named beneficiary on an insurance policy, your wife also needs to be named as the beneficiary (as opposed to your brother, who may have originally been named the beneficiary before you were married, for example) for that same asset in your will or trust –– that could lead to a contested will. So make sure your documentation is up-to-date. 

Beneficiary Designations

Since some of your possessions and/or assets can pass on to heirs without being dictated in the will, it’s important to maintain a beneficiary, as well as a contingent beneficiary on such accounts. This includes (but not necessarily limited to) insurance plans and 401(k) assets. If you don’t take the step of naming a beneficiary or contingent beneficiary, a court can decide what to do with your assets, which likely won’t be what you intended. 

Letter of Intent

In regards to estate planning, a letter of intent is simply a blueprint for the other documents included in your estate plan. These instructions are typically directed towards the executor or beneficiary and layout your preferences in regards to your estate and the assets contained within the said estate. Some may include funeral arrangements/details as well. 

Healthcare Power of Attorney

Having a healthcare power of attorney (HCPA) is another important part of an estate plan. This individual can quite literally hold your life in their hands, should you become incapacitated and unable to make your own healthcare decisions. An HCPA will designate another person to make decisions on your behalf if this becomes the case. Typically this is a spouse, but if not, make sure it is someone you trust implicitly to act in a similar way you would personally. It is important to designate a backup HCPA as well if the person you’ve identified initially is unavailable, or unable to make important decisions when needed. 

Guardianship Designations

Not every will or trust includes this clause, but if you have minor children – or even considering having children, don’t skip this. Guardianship will quite literally determine who and how your children are raised in the event of your death. You’ll want to ensure that whomever you choose first and foremost is willing to raise your children, can do so without financial burden, and shares similar views as yourself. Like with other parts of estate planning, a contingent guardian(s) should be named also. Without guardianship in place, a court can decide who your children will live with, and it may not be who you would want. If it’s an extreme case, without guardianship instructions, your children could become wards of the state.

Remember, estate planning is about protecting those that you love, and ensuring that the assets and inheritances you want to pass on, is done so with as little inconvenience and/or tax liabilities as possible. No matter what your financial circumstances, take the time to develop an estate plan so that your beneficiaries are provided for as you wish.

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