The beginning of a new year is a great time to reevaluate your estate plan and make sure it’s up to date. Fewer than 50% of people have any estate planning documents set up at all, and many of the documents that do exist are woefully out of date. The planning you did when your children were born decades ago must be updated as your family and financial situation evolves.
To create an effective estate plan, you need five documents.
#1: The Durable Power of Attorney
When it comes to taking care of you and your family during life (as opposed to after death), the most essential estate plan document is the durable power of attorney. In the event you are incapacitated, this document appoints one or more trusted people to handle your affairs for you.
In the absence of this document, family members must go to court in order to be appointed conservator, which can cause delays, legal fees, and all manner of inconvenience. Additionally, it can cause tension and fighting among family members.
#2: Health Care Proxy
Similar to the durable power of attorney, a health care proxy appoints a person who makes health decisions for you if you are unable to do so yourself. However, a doctor must determine that you are incapable of making your own health care decisions, and you can only appoint one individual to this task. However, you can – and should – name an alternate in the event that your first choice cannot fulfill this role.
To avoid any confusion or uncertainty as to what you would want your health care agent to decide on your behalf, you can set up a medical directive and/or have a conversation with the person you will appoint as health care agent so that they know what your wishes are ahead of time.
#3: HIPAA Release
The HIPAA law prevents medical professionals from releasing medical information to anyone without a HIPAA release. Why isn’t this addressed in the health care proxy? First of all, in order for a health care proxy to be put into effect, you must be declared incapacitated. Secondly, while you can only appoint one health care agent at a time, you may want more than one person involved in your medical situation. Your health care agent may not always be available.
Additionally, your family members may have essential information about you that your health care agent does not have – what medications you are taking, allergies you have, mental and physical conditions that aren’t publicly known. While HIPAA does not prevent medical professionals from listening to information from other people, it can be interpreted that way sometimes, so it’s best to avoid the whole issue with a HIPAA release.
#4: Your Will
Your will determines who will get your belongings after you die, who will pay your bills, who will file your tax returns, etc. But even though you hear a lot about wills, most assets actually pass outside of probate these days. The will’s instructions don’t always apply, specifically in situations like joint accounts that pass to the other joint owners, retirement plans / life insurance policies that pass to beneficiaries, and property in trust that passes to beneficiaries. Only the things you own, in your own name, pass under the will.
Wills are important when it comes to passing on your tangible personal property, such as furniture, jewelry, tools, clothing, boats, and cars. Your will also names your executor or personal representative, who will carry out your wishes. It also appoints guardians for minor children. It can also serve as a safety net in case your other methods of passing property are not successful.
In general, wills are not as effective as a Revocable Living Trust, detailed below.
#5: Revocable Trust
Generally speaking, Revocable (“Living”) Trusts are better than wills. With this type of trust, one or more people (the trustees) manage property and/or investments for one or more beneficiaries. In the beginning, usually, the same person acts as the trust’s creator, grantor or donor, trustee, and beneficiary. But it’s useful in avoiding probate because it appoints successor beneficiaries after the first one passes away, and because of the flexibility in how they can be drafted, the options are pretty limitless as to how revocable trusts can distribute property.
A trust is also an excellent way to intervene in the event of incapacity. Some financial institutions are hesitant to accept durable powers of attorney, but they are more open to with trusts if there is a successor trustee named. It’s even more effective when a parent appoints one or more adult children as co-trustees. This allows the child to participate in financial management without the parent losing any autonomy or rights. Senior citizens are often the victims of scams, and so having an adult child with their eye on the accounts can provide a significant amount of damage control.
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