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Parts of an Estate Plan and How to Determine What’s Right for Your Situation.

Parts of an Estate Plan. 

Image of a lawyer speaking to clients about their estate plan.

An estate plan usually comprises a set of documents that address different circumstances. Your specific situation will determine whether you need one estate planning document or all of them. While you may already have one component in place, such as a will, it may not be sufficient to guarantee that all of your intentions are carried out. This article will assist you in creating a good estate plan that you can update as your life circumstances change.

The estate planning process is usually divided into two parts. 

1. Financial planning

2. Directives and administration.

Financial planning. 

The financial part of your estate plan concerns all aspects of your money and property. In this section, you’ll think about “how much money you have in all your accounts?” “What do you require?” “Do you have enough money to provide for your heirs?” To accurately assess your financial condition, your attorney will advise you to create a list of all your assets.

The financial component of your estate plan will also outline your debts and other critical costs after reviewing the cash you have on hand.

After subtracting your debts and costs from your overall assets, you’ll see what you’ve left for your heirs. With a comprehensive understanding of your financial situation, you can establish targets and begin the planning process to fill up the gaps.

You may wish to get extra life insurance, raise the premium on an existing policy, add assets such as CDs, equities, and money market funds, or increase the amount you save from your paycheck each month. Take into account the consequences of inflation on the assets you will leave to your family.

Estate taxes are the last component of financial preparation. There are several methods to avoid paying excessive estate taxes; nevertheless, you should consult your estate attorney about your decisions. Your attorney will examine your case and provide methods and legal papers that can assist you in reaching your objective.

Directives and Administration.

Your estate plan’s administrative component includes drafting wills and trusts, appointing powers of attorney, and establishing medical directives. You’ll also make some critical decisions throughout this stage of your estate planning process. First, you will decide who will serve as your estate executor, the person who will carry out your last wishes. Furthermore, the administrative part of your estate plan is where you will decide what medical treatments you wish to pursue if you become disabled.

This part of your estate plan will also include different aspects of your asset distribution. You can choose whether you want your assets divided before or after you pass on. Whatever you decide, your estate attorney will assist you in devising an effective asset distribution strategy. Whether through joint ownership of assets, asset gifting, or trusts. The details in each of your estate planning documents will be designed to cover your specific situation. Your estate attorney will take you through them one after the other. 

Why do you need an estate plan?

Sometimes the process of starting or updating your estate plan may seem daunting, and you may be tempted to procrastinate. Remember that your estate plan is vital to ensure that your assets provide for your loved ones if you pass on or become disabled. When you don’t have an estate plan, your family and friends will be unclear about your preferred decisions about your money, medical care, and other issues. Not having an estate plan can burden your friends and family, especially since they will have to manage your health and finances without knowing your wishes.

Who needs an estate plan? 

It’s a common misunderstanding that estate planning is for rich people and those with children. However, that’s not true; estate planning is for everyone. People of all economic levels, single or married, can plan for what will happen to their estate if they pass on or become incapacitated.

Your estate plan will let you choose the beneficiaries for your accounts and other belongings. You can give certain items to your nieces or nephews. Also, you can decide to give money to your church or a charity. If you are married with children, your estate plan is the only area where you can appoint your closest friend to care for your children rather than your brother.

Essential estate planning document.

Parts of an estate plan.

Your attorney will use many estate planning documents like a POA or a Trust to ensure that your last wishes are fulfilled. Although every situation is different, this part of the article will describe each estate planning document to give you an idea of what to expect.

 A Last Will and Testament

A will may seem complicated or costly as if only the wealthy had one. That is an inaccurate evaluation. Even if you don’t have considerable assets, a will should be one of the primary components of your estate plan. Wills guarantee that property is distributed according to a person’s intentions if made in accordance with state law.

Draft your will according to the disposition of assets that pass outside the will. Suppose, for instance; you have previously designated your sister as the beneficiary of your retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary). In this instance, you should avoid leaving the identical asset to a second cousin in your will since doing so might result in a will contest. Both parties might grow bitter toward one another (and you) during a court struggle.

A Living trust.

A living trust is a legal document created between three parties, the grantor, an intermediary like a Law firm or a bank, and a beneficiary. A living trust is designed to facilitate the transfer of the grantor’s assets while avoiding the typically lengthy and costly legal process of probate.

With a living trust, you can name more than one beneficiary, and most people often do so if they have a good cause. In many circumstances, individuals opt to have one group of beneficiaries during their lifetime (typically themselves) and another after their death (usually their children) who would profit from it after they have passed on. Your trust, as long as it is well-drafted, will continue to be effective even after you pass on. A living trust has two primary advantages:

  1. The first is that it is a method of avoiding probate with goods not mentioned in your will. You can set up a revocable living trust that will end when you pass on and instantly transfer your assets to your beneficiaries. Using a trust saves your recipients a significant amount of time and money.
  1. The second key advantage is that certain trusts provide tax benefits to the grantor and the chosen beneficiaries. The trust can function as a life insurance or credit shelter trust. These trusts may be used to safeguard the grantor’s property from creditors to qualify for Medicaid. Whereas wills are legal documents, trusts are private documents that are only open to persons who have a direct stake in what is included in the trust and how assets are distributed.

A durable power of attorney

Getting a durable power of attorney (POA) is crucial; it legally permits someone you’ve chosen to act on your behalf when you are disabled. If a doctor determines that you are mentally incapacitated and do not have power of attorney, a court will be left to decide what happens to your assets. 

The durable POA delegates authority to your agent to trade real estate, engage in financial transactions and make other legal choices on your behalf. This sort of POA is revocable by the principal at any moment, often when the principal is considered physically or mentally capable or when they pass on. 

It is common for couples to establish reciprocal powers of attorney in many households. However, in other situations, having another family member, friend, or trusted attorney more financially and legally wise function as the agent may make more sense.

Beneficiary designations.

Beneficiary designations allow you to leave some of your assets like your 401(k), retirement account, and insurance policy to your loved ones without writing it in your will. When setting up these assets, you are required to designate someone who will inherit the asset when you pass on. You will also be encouraged to choose a secondary beneficiary to step in if your primary beneficiary cannot inherit the asset for any reason.  

If you pass on without naming a beneficiary for your accounts, the assets become part of your estate and are divided among your heirs. For instance, if there’s no beneficiary for your IRA, it will be added as part of your estate to be divided among your beneficiaries. The IRS demands that, once an IRA is paid to an estate of the deceased, the assets must be distributed among the beneficiaries within five years. A sizeable portion of these retirement assets will go into paying income taxes.

Additionally, assuming there is a will in the estate, the IRA paid to the estate is subject to probate to review the deceased assets and prove the will to be valid. After the will validation, the IRA is then distributed to the beneficiaries based on the terms of the will. Also, the estate will incur taxes, execution fees, and other costs that will eat into the retirement money. You can avoid this fate by regularly reviewing the beneficiary designations on your accounts.  

Medical Directives

Medical directives are documents that carry specific instructions on medical issues. You will utilize these documents if you wish to make precise medical decisions concerning your health that you would rather not leave to chance. The kind of medical directives you include in your estate plan might vary by state based on local regulations, which is why you should consult your estate attorney to clarify. Here are some documents that are commonly part of the medical directives: 

a healthcare surrogates

a living will,

a durable power of attorney (POA)

With these documents, you can designate someone to make medical decisions for you if you cannot do so yourself. You can use a durable POA or a healthcare surrogate for this capacity. You should choose someone you trust for this role and ensure they thoroughly grasp your preferences in several topics.

A living will is a legal document that instructs your healthcare practitioner on whether or not to pull life support if you are in a vegetative state or terminally sick. In addition to this extreme scenario, you can provide instructions on what to do if you are in a less critical health situation but cannot make these decisions yourself.

Guardianship designations

Along with developing a sound financial plan for children, choosing a guardian for younger children is essential. While many wills and trusts include this provision, some do not. Suppose you have small children or are thinking about having children. Make sure that the person or couple you chose shares your beliefs, is financially secure, and is eager to raise children. A backup or contingency guardian should be designated, as with other designations.

If you pass on without naming a guardian for your young children, a court may order that they reside with a family member you would not have selected. In severe instances, the court may order that your children be put in custody of a public child welfare agency. 

Choosing the right document for your estate plan. 

These six essential components are not appropriate for every person; it depends on your estate and your wishes for distribution. As a general guideline, you should have at least a will and a power of attorney. Consult your estate attorney to verify that your estate plan has all the necessary provisions. For instance, if you have little children, you should add a provision regarding their care and who will be their guardian.

If you do not have young children, you need not state any of the following. As you can see, this is an example of something you may or may not need, depending on your particular situation. In any case, there are provisions you should put in your will to guarantee that your assets are distributed according to your wishes.

The next important component is your power of attorney. This document is essential because you want to be able to choose someone who will carry out your desires and guarantee that your will is executed as you planned. As stated earlier, you should choose someone you can trust to carry out your instructions.

Keep in mind that each situation is unique. By reading this article, you’ve likely begun to consider your own needs and situations. Consult an experienced estate attorney to take you through the entire process as you consider and plan your estate. Feel free to book a free consultation with the DeVries Law Firm.

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