You may be young and healthy, but that doesnâ€™t mean estate planning should be ignored until youâ€™re old, wealthyÂ and have a family. You don’t have to be rich to have an estate plan. Even if youâ€™re young with relatively little assets, certain estate documents willÂ ensure the assets you do posses end up where youâ€™d like them to go ifÂ you pass away. They can also provide directionÂ as to what sort of medical care decisions you would like to be made on your behalf if you become incapacitated and are no longer able to make decisions on your own. Dying isÂ the last thing on any healthy, young individual’s mind, but itâ€™s a fact of life.
It’s the job of a financial advisor to consider these things when theyÂ advise clients. Planning for yourÂ future means planning for all possibilities and risks, death included. The definition of estate planning is, â€śthe preparation of tasks that serve to manage an individualâ€™s asset base in the event of their incapacitation or death.â€ťÂ That â€śasset baseâ€ť could include any item of significant, tangible value, such as a house, investment accounts, cash, you name it.
The estate planning process culminates in a written document called a will. In essence, a will provides instructions for how your asset base is to be distributed upon your death. Distributing the assets from the will occurs through a legal process called probate, where the authenticity of the document is proven to be valid by the court. The court then officially appoints the executor named in the will.
This person is entrusted with distributing your assets according to the instructions left in the will. They also bear a number of other responsibilities, including:
Being an executor is no easy task. Before you name an executor of your own estate, make sure you have a conversation with that person to ensure they are willing to bear the responsibility and you fully trust they will honor your wishes. (For related reading, see: 4 Things to Consider Before Becoming an Estate Executor.)
Power of Attorney:Â This is a written authorization that allows another person to act on your behalf for legal, business, financialÂ or health care matters. There are three main powers of attorney: special, generalÂ or temporary. A special power of attorney may only act on your behalf in specific matters, while a general power of attorney may act on your behalf in nearly any capacity. A temporary power of attorney only allows said privileges for a specified period of time.
A power of attorney can also be specified as â€śdurableâ€ť. By default, a power of attorney is considered null and void if you become incapacitated, either due to physical injury or mental illness. However, a â€śdurableâ€ť power of attorneyÂ would remain intact.
Beneficiary Designations:Â The majority of retirement accounts, annuitiesÂ and life insurance products let you decide who receives the assets when you pass away. That person is designated as a beneficiary. Beneficiary designations take precedence over anything stipulated in your will. They also typically avoid probate court and are received as soon as the beneficiary is made aware.
Living Will:Â Also known as an advanced health care directive, a living will provides instruction for whether youâ€™d like to be kept on life support if you became terminally ill or fall into a permanent vegetative state. It also details which life support measures youâ€™d like taken, if any, such as a feeding tube or pain medications. Living wills take effect once you have become incapacitated, terminally ill andÂ cannot communicate your desires on your own. (For related reading, see: 5 Reasons to Update Your Living Will.)
Health Care Proxy:Â A health care proxy is similar to a power of attorney in that it allows someone else to act on your behalf, butÂ only as it pertains to healthcare matters. A living will stipulates your wishes for end-of-life medical care. The individual names in yourÂ health care proxy is in charge of carrying out your wishes in your living will, but they can also make all other medical decisions on your behalf if, for example,Â you are not terminally ill but temporarily incapacitated.
Living Trust:Â Also known as a revocable trust, a living trust is created during a personâ€™s lifetime and is designed to be used for your benefit while you are aliveÂ and canÂ be easily transferred to your beneficiaries upon your death without having to go through probate court. A living trust designates a trustee who holds legal possession of any assets or property transferred into the trust. In most cases, the trustee of a revocable trust is also its creator.
However, because the trustee doesnâ€™t give up control of the ability to make changes during their lifetime, the trustâ€™s assets are included in their gross estate at death, meaning they could potentially owe estate taxes. (For related reading, see: Establishing a Revocable Living Trust.)
If you have assets you care about that donâ€™t have their ownÂ designated beneficiaries, such as a rare coin collection or valuable vehicle, a will is always a good thing to have so you can specify who those assets should go to when you pass away. If you have kids,Â are marriedÂ or both, a will also allows you to specify who should raise your kids andÂ how your money is allocated if something were to happen to you. A living will and health care proxy are also good documents to have regardless of your age.
Life is highly unpredictable. We know illness or injury can afflict us at any time. These documents provide peace of mind for not only you but your family and loved ones as well. You can rest easy knowing your wishes will be carried out as they pertain to your health care decisions if you canâ€™t make them on your own, andÂ your loved ones can rest easy knowing they donâ€™t have to make difficult and/or contentious decisions on your behalf.Â
Lastly, make sure any retirement accounts or life insurance policies you own have beneficiary designations on them so the funds can be easily transferred upon your death. If you have a parent or family member who co-signed on any debt obligations, it may make sense to have that person listed as a beneficiary for your accounts to lessen any financial burden they might bear if something were to happen to you. This is a simple form you usually fill out when you open a retirement account or take out a life insurance policy.
If youâ€™re young, chances are you donâ€™t have a very complexÂ financial picture, so any estate planning you engage in now is likely to be fairly simple and straightforward. For a will, living willÂ and health care proxy, you can use Nolo.com or Legalzoom.com, which are both easy-to-use online services that will allow you to create these documents on your own for less than $100.
Your beneficiary designations should be set up from account inception, but itâ€™s important to keep your beneficiaries current so your 401(k) doesnâ€™t go to your sister if you have a major falling out with her or you decide the funds should go elsewhere. If you have no one youâ€™d like to list as a beneficiary, you can always pick your favorite charityÂ to inherit any funds left after you die.
Estate planning can be a relatively complex process with many different moving parts.Â If you donâ€™t feel comfortable handling itÂ on your own or need to make sure special parameters are included beyond just the basics, consult withÂ an estate attorney to assist you in the process.
(For more from this author, see: 5 Ways You Can Be More Financially Responsible.)