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Estate Planning

Components of Estate Planning: 6 Things To Consider

Ty McDuffey

December 29, 2022

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Many individuals assume that creating estate plans simply entails writing wills and establishing a trust.

Nevertheless, there is more to do in estate planning to ensure that your belongings are easily handed to your beneficiaries following your passing. 

An effective estate plan contains measures that enable your family to manage your assets if you become incapacitated.

Key Takeaways

  • Creating estate plans isn't just for the rich; everyone may benefit from guaranteeing their possessions and money are appropriately cared for when they die.

  • Courts might decide on an unanticipated distribution of your belongings in the absence of wills.

  • If you are disabled, estate plans are highly beneficial.

  • A complete estate plan includes a will.

  • Estate plans are critical because they name guardians for your kids if your partner cannot look after them once you pass.

What Happens If I Pass Away Without a Will?

If you die without a will, your estate will be probated, and the courts will determine who gets your property and assets.

An estate plan can help you avoid this.

What Exactly Is an Estate Plan?

A will, guardianship designations, healthcare POA, beneficiary designations, durable power of attorney, and personal intent letters expressing your desires should you die or become incapable are all part of an estate plan.

Is an Estate Plan Necessary?

Although not everyone needs an estate plan, everyone should have a will. A will is a document that expresses your final wishes upon your death. 

In the will, you can designate guardians for your minor children and ensure your assets go to your specified beneficiaries regardless of your financial situation.

However, if you want to make it easier for your loved ones to take care of the things you leave behind, creating an estate plan can help your family in their time of need.

What Are the Essential Estate Planning Components?

The list below should be included in most estate plans:

Trusts and Wills

A trust or a will may seem costly or difficult or like they are just for the rich. 

This is not true.

Regardless of whether you have a limited amount of money or a large fortune, wills and trusts are the most critical elements of your estate plan. 

Wills ensure the property is dispersed according to the wishes of the person who wrote it (if written per state regulations), while many trusts reduce legal difficulties or inheritance taxes.

Example

Assume you've previously designated your brother as the beneficiary for an insurance policy or retirement account (assets that commonly pass outside the will to beneficiaries). 

You shouldn't leave the same insurance policy or retirement account to a third cousin in your will since it might result in a court battle.

Always specify a backup and primary guardian for minor children in your will.

If you don't choose a guardian, a court may leave your kids with the family member they choose or place them in state care.

Durable Power of Attorney

If you're found to be mentally unfit and don't have a power of attorney, the court can determine where your belongings go after your death.

This court judgment may delegate power to your agent to sell real estate, engage in legal decisions, and make financial transactions on your behalf. 

As the principal, you can revoke this type of POA anytime.

In some households, couples establish a reciprocal POA.

Nevertheless, having another friend, family member, or trusted adviser function as an agent may make more sense in other circumstances.

Beneficiary Determinations

Some of your goods might transfer to your beneficiaries absent specification in your will (for example, 401(k) plans). 

A beneficiary on these accounts is essential because insurance policies may pass outside your will.

Without identifying a beneficiary, the future of your money may be decided by a court, and a judge might make a different choice than you would.

Intent Letter

An intent letter is a document mailed to your beneficiary or executor. 

The objective is to define what you want to happen to a particular asset after your passing or incapacity. 

Many intent letters contain funeral info or other individual requests.

Even though such a letter isn't legally binding, it notifies the probate court about your preferences. It may help in distributing your belongings if your will is invalid.

HCPA

In the case of incapacity, a healthcare power of attorney, or HCPA, appoints another person (usually a partner or member of your family) to make essential healthcare judgments for you.

If you're considering an HCPA, choose a person whom you trust. Choose a person who would make the same choices as you. 

Lastly, you should select a second agent if your first choice is unreachable or cannot serve at the required time.

Guardianship Appointments

Although many trusts and wills include these provisions, some don't. 

Guardianship is critical if you are thinking about having kids. 

Make sure that the individual or family you chose shares your views, is financially secured, and is happy to raise kids. 

A contingency guardian should also be designated, as with other designations.

Without these appointments, a court could order your kids to move in with a distant family member.

In extreme cases, the court may order that your kids are state wards.

When Would I Need to Use Other Estate Planning Components?

If you have extremely detailed medical care instructions, your estate plan should include a living will or other medical directives. 

If you do not wish to be placed on life support in an emergency, you must specify this in a living will. 

Many individuals have strong feelings in these circumstances, and if you are one of them, you should ensure that no risks are taken and that your desires are granted. 

If you are unable to make these choices for yourself at the time, this legal document will be in place to guide your doctor.

A living trust is not for everyone, but if you wish to keep some items out of your will for tax considerations, a trust is an excellent choice. 

Before establishing a trust, consult with an attorney to discuss your alternatives and determine that a trust is the best option for you based on your assets, desires, and requirements. 

There are several advantages to establishing trusts, but depending on your assets and aspirations, they may or may not be beneficial to include in your estate plan.

Related: Questions To Ask An Estate Attorney After Death (Checklist)

In Conclusion

Estate planning is more than just selecting how to divide your assets after you pass. It's about ensuring that your family and other heirs are taken care of and can access your assets in the event of your incapacity.

A will is an excellent starting point, but it is just the beginning. You need to be able to share and edit all of your estate planning documents with the help of your family, friends, and attorney. 

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