7 Core Concepts Everyone Should Know About Their Estate Plans

Estate planning is a critical component of a well-rounded, comprehensive financial plan. But with so much paperwork, legal jargon, and complex dynamics, people tend to put off creating and maintaining their estate plans. Our goal in this estate planning series is to make this area of your financial plan accessible so you feel comfortable and confident crafting a plan that suits your needs. Today, we’ll dive into the core concepts you need to know to understand your estate plan better.

1. Will

A will or living will is an official legal document that expresses your wishes after you pass away. Your will contains a lot of important information, like,

• Your personal information and intent

• Key people to help carry out your wishes, like an executor or guardian and trustee for minor children (if you have them). 

• Personal property, which helps streamline the transfer process. 

It’s important to note that wills don’t avoid the probate process. Probate (if applicable in your state) is a legal proceeding that disperses someone’s assets after they pass. It’s to ensure the right assets go to the right people. Many people like to structure their estates so that most of it doesn’t have to go through probate since it’s a costly, public, and lengthy process. To avoid probate on assets outside your will, property title those assets, like your house or car, and clearly name official beneficiaries on applicable accounts, like retirement accounts, life insurance, bank accounts, etc. 

2. Beneficiary

A beneficiary is a person or entity who receives an asset from another person (after they pass away). If you own a 401(k), IRA, or life insurance policy, you’re likely more familiar with the process than you realize! When you establish or update the account, your service provider likely cued you to add or edit the beneficiary of that account. You may have the option for both a primary and contingent beneficiary—the latter being the person/entity that receives the asset if both the account owner and the primary beneficiary pass away. Beneficiaries are perhaps one of the most critical tools at your disposal. Why? Because official beneficiary designations supersede what’s in your will. Yep. So, if you named your ex-spouse as the official beneficiary on your life insurance policy and your sister in the will, the money will legally go to your ex. As you can see, it’s essential to name these people carefully and update them after any significant life change (marriage, divorce, job change, children, etc.). While you legally have to name beneficiaries for your retirement accounts and life insurance policies, you can name beneficiaries on other policies. For example, you can list a Transfer On Death (TOD) designation with brokerage accounts, which act like a primary beneficiary. You can also assign a Payable On Death (POD) designation to your checking and saving accounts. Keeping your beneficiaries up to date expedites and streamlines the wealth transfer process.

3. Springing Power of Attorney

A Power of Attorney is a legal document that enables another person to make financial and legal decisions on your behalf should you become incapacitated. These decisions could include bills, taxes, investments, trusts, etc. While there are different powers of attorney, we typically recommend “Springing Power of Attorneys” because it only goes into effect if you become incapacitated.

4. Healthcare or Medical Care Directive

Another critical estate planning document is a Healthcare Directive (also known as a Medical Directive or Medical Power of Attorney). This legal document permits someone to make medical decisions on your behalf should you become incapacitated, like carrying out your DNR (Do Not Resuscitate) provisions or different medical procedures. Be sure to choose a like-minded person who will truly respect your wishes (as outlined).

5. Executor

Your executor is the person in charge of carrying out your wishes as outlined in your will or other documents. Their job is to ensure assets go to the right people. An executor typically ensures all estate debts are paid. Select a reliable, organized person who you trust. 

6. Trust

You might be thinking that trusts are only for the ultra-wealthy, but that couldn’t be further from the truth. Trusts are an accessible and effective estate planning tool to help you pass your wealth to heirs or charitable institutions in a controlled, streamlined, and tax-friendly way. Trusts come in all shapes and sizes but often fall into two broad categories:

• A Revocable Living Trust

• An Irrevocable Trust

There are three parties involved in trusts.

1. The Grantor: the person who creates the trust.

2. The Trustee: the party that manages the trust.

3. The Beneficiary: the person/entity that receives the assets from the trust.

With a revocable living trust, you can make changes to the terms of the trust (while alive). However, with an irrevocable trust, you can’t make changes to the terms of the trust while alive. A revocable living trust is an efficient estate planning vehicle for directing assets for family members (or charitable organizations) while also avoiding probate (if applicable in your state of residence). Here are a few examples of households that may benefit from a trust:

• Families with special needs children or loved ones. You can create a special needs trust to help your child with living costs without interfering with their eligibility for government aid.

• Individuals who want more control over the distribution of their assets. Perhaps you’d like to ensure your adult children don’t receive a significant sum upfront. 

• Parents with minor children. That way, the trustee can use the funds in the trust to pay for education, housing, and living expenses.

With a trust, you can stipulate your wishes and desires for your assets and income that could go to loved ones. 

7. Record All Assets

While it’s easy to get deep into the weeds regarding estate planning, try keeping things simple (when you can). A great way to do that is to keep thorough records of all your assets (physical and digital), account types, logins/passwords, institutions, etc. It’s so easy to overlook this area, but knowing your brokerage account institution and log-in information will save your family time and stress. A proper estate plan is all about making things as clear and straightforward for your loved ones as possible. When you build a comprehensive estate plan specific to your needs, you ensure your assets go to the right people in the most efficient way possible. Are you feeling more comfortable with your estate plan? Stay tuned for part two, where we’ll dive deeper into the world of trusts. We’d love to help you craft an estate plan that honors your legacy. Reach out today.