What’s your favorite Prince song? “Little Red Corvette”? “Purple Rain”? “When Doves Cry”?
Prince was a cultural icon, someone whose charisma was only rivaled by his virtuoso guitar skills. It would be easy to imagine he had a legion of people working for him, organizing his finances and protecting his wealth.
Yes, this wasn’t true. Prince died in 2016 without a will. Years later, his heirs still have yet to receive their due, all the while the attorneys, bankers, and consultants have siphoned off millions from his considerable estate.
No one likes to think about the end, but by ignoring the inevitable, you can put your loved ones at risk. What would happen to your spouse or children if the worst happened? Are they protected?
Estate planning also involves more than just the negative. If you want to craft a legacy that extends past your life, have you built a plan to make that happen?
This estate planning guide will help you understand all the important components of an estate plan and answer common questions about the estate planning process. This way, you can best protect your family’s future and build your personal legacy.
What’s in an Estate Plan?
Your estate plan should protect your assets and your heirs, ensure your final wishes are fulfilled, and minimize your tax bill. To accomplish these important goals, you need more than just a final will. Let’s break down what encompasses a complete estate plan.
Last Will and Testament
A last will and testament allows you to control what happens to your estate (your investments, real estate, and other assets) after your death. A will allows you to define assets, name beneficiaries, assign guardians for your minor children, and appoint an executor to carry out your wishes. If you die without a valid will, the fate of your estate is put into the hands of the probate court.
Writing a will is likely insufficient. To make your will valid and binding, you will likely need to sign in front of witnesses. However, state laws vary with respect to how many witnesses are required, whether oral wills are considered valid, etc.
Durable Power of Attorney
A durable power of attorney (POA) gives permission to another individual or entity (your agent) to act on your behalf in legal matters. You can allow your agent to write, sign official documents, or handle other financial or legal affairs.
A durable power of attorney can be general, which grants broad powers over your affairs, or it may be special, which allows your agent power only over specific situations. A general power of attorney typically ends when you become incapacitated. However, a durable power of attorney contains specific language which maintains your agent’s authority even if you are unable to communicate or make decisions for yourself.
Healthcare Power of Attorney
A healthcare power of attorney differs from a durable power of attorney in that the healthcare power of attorney exclusively focuses on medical decisions on your behalf. Healthcare power of attorney documents are used to assign a person to make medical choices for you if you become incapacitated. This document helps ensure that the healthcare choices made align with your wishes and are in your best interest.
Your healthcare power of attorney, also called an agent, will be able to make choices for you such as whether you should be admitted into hospice or a care facility, what treatments you’ll receive, whether you’ll receive experimental treatments, or if your medical providers will be allowed to connect you to machines to keep you alive.
Advance Directory or Living Will
A living will is an important complement to assigning a Healthcare Power of Attorney. The living will is a legal document that outlines your preferences in regard to what lifesaving measures medical staff are allowed to perform on you to save or prolong your life. It also states what end-of-life pain management and other comfort measures you want to be administered as part of end-of-life care. Additionally, you may be able to specify your healthcare power of attorney within the living will.
Using trusts as part of an estate plan requires a comprehensive and individualized approach. Please consult with your legal, tax, or financial advisors to determine whether trusts fit your estate plan.
While there are many different types of trusts one may utilize as part of an estate plan, revocable living trusts are a common structure used to remove assets from probate while also allowing control “beyond the grave” Revocable living trusts are fairly simple: assets are placed into a trust and a trustee manages those assets on your behalf. The trustee could be you while you are alive or another appointed person. You can even designate a paid professional executor to manage the trust. Those who are designated to benefit from the trust are called beneficiaries.
Letter of Intent
A letter of intent, while not a legally binding contract like a last will and testament, is a supplementary document given to your executor, trustee, or beneficiary that states your wishes for certain assets should you pass away or become incapacitated. Letters of intent can also provide other details that are important to you, like funeral arrangements or other special end-of-life requests.
As our lives move more and more to the digital realm, so does the complexities for planning for digital assets. What is a digital asset, you may ask? Well, what about all of your backed-up photos from your phone, or your social media profiles, or your login credentials for websites? What happens to those when you pass?
Digital assets are still a relatively new phenomenon and the laws that deal with them are changing rapidly. Speak with your attorney about the steps you can take now to ensure your estate plan is digitally savvy. For instance, in your estate planning documents, you may be able to specifically allow your fiduciaries to bypass, reset, or recover your passwords.
Estate Plan FAQs
Now that we’ve outlined the basics of a comprehensive estate plan, let’s tackle some common questions we get about the components and the process.
How Does a Trust Work?
While there is a near limitless number of trust structures that could fit your estate plan (bypass trusts, dynasty trusts, charitable trusts, ILITs, etc.), the basics of using a trust are fairly easy to comprehend.
A trust has three main roles: the settlor, the trustee, and the beneficiaries. The settlor is the person who creates the trust, and the beneficiaries are the people (or person) who will receive whatever assets are in the trust. The trustee, meanwhile, is simply the person or institution that holds the property until the trust’s conditions are met. This can be after death or, sometimes, when the beneficiaries become legal adults or other conditions are met.
What’s Better: A Will or a Trust?
The answer, as expected, is that it depends. Further, you may need both to accomplish all of your estate planning needs. A will is typically a simpler and less expensive option, but it may prove inflexible if you are trying to plan for care for your minor children, if you have a special needs situation, or you want to protect individuals who may not yet be mature enough to handle a financial windfall.
What Should I Include in My Will?
While an estate plan is more than just a will, there are important items to cover in the will directly. The first is guardianship: If you are a parent, this is likely the primary reason you are looking to create an estate plan. A will allows you to name a legal guardian for your minor children.
Determining what to do with your assets is another important component of a will. Last wills and testaments allow you to specify how you would like to distribute bank accounts, heirlooms, and other assets.
It’s important to note, though, that some assets fall outside of probate and are not covered by your will. For instance, retirement accounts (like 401(k)s and IRAs) are distributed based on the beneficiaries you list on the accounts, so make sure you have up-to-date beneficiary forms for these accounts!
What Does an Executor Do?
An executor is arguably the most important person you’ll name in your will. Your executor will be responsible for resolving a number of issues, from paying down your debt to distributing your assets in accordance with your wishes.
An executor can be heir, as well. In fact, this is fairly common since those who you trust enough to manage your assets are likely those who you want to receive those assets. Further, while you may set aside funds to compensate executors for their services, it’s much more common for an executor to take care of your estate for free.
What Do I Do After I’ve Written My Will?
Your last will and testament won’t do you any good if no one can find it. This happened to Olympic athlete Florence (Flo-Jo) Griffith Joyner, and it took years to finalize the financial and familial issues that arose from her missing will.
Make sure you distribute legal copies to your attorney, executor, spouse and other close family members. It’s also a good idea to keep a copy in a safe place at your house.
Estate Planning with Harbor Crest Wealth Advisors
Estate planning sounds complicated but ignoring it doesn’t make the issues go away. You aren’t alone in this feeling — a full 61 percent of Americans and an astounding 71 percent of families with children under 18 do not have a will.
Spend time with your legal, tax, and financial advisors to craft a comprehensive estate plan that protects your assets and heirs, reduces your final tax bill, and builds your legacy for future generations. If you would like to learn more about estate planning, sign up for our newsletter.