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What Estate Planning Documents Do I Need

What Estate Planning Documents Do You Need? These are the essentials that everyone should have regardless of net worth

No matter what your current financial circumstances are, you should have an estate plan.  This is often one of the most overlooked aspects of financial planning, but by having a proper plan in place you can gain peace of mind while living, and save your loved ones a lot of heartache after you pass away.  This article will focus on the basics because sadly, the majority of Americans don't have a basic estate plan in place.  This is true even though most of these people who don't have a plan would probably tell their financial advisor that one of their top priorities is making sure their family is taken care of if something happens to them.  Take a look at these eye-opening statistics from multiple studies by caring.com, AARP, and Merill Lynch on estate planning and wills.  It appears the lack of estate planning is increasingly getting worse.

The Core Estate Planning Documents

Last Will and Testament

There are a few key documents you will want to have drawn up to formulate your estate plan and we will get into  them.  But one of the first steps in solidifying your estate plan is to simply make sure all of your beneficiaries are updated on all of your accounts.  By keeping beneficiaries properly updated on your financial accounts such as your 401k or 403b, and life insurance policies, if you pass away, the money inside of them gets transferred to who you want without your loved ones having to go through the probate process.  Probate can take months or even years and cause a lot of stress for whoever is in charge of your estate.  Probate is the court-supervised process of authenticating a last will and testament if the deceased made one.  It includes locating and determining the value of the person's assets, paying their final bills and taxes, and distributing the remainder of the estate to their rightful beneficiaries.

Healthcare Advance Directives

These outline how you want medical decisions to be made should you not be able to make them yourself and/or they can express your wish to make an anatomical donation after death.  There are a few different types of advance directives and each state may label them differently but generally speaking you will want to set up the following:

  • Living Will:  This is a written or oral statement of the kind of medical care you want or do not want if you become unable to make your own decisions.  It is called a living will because it takes effect while you are still living.  You may wish to speak to your healthcare provider or attorney to be certain you have completed the living will in a way that your wishes will be understood.
  • Healthcare Surrogate Designation/Healthcare Power of Attorney:  This is a document naming another person as your representative to make medical decisions for you if you are unable to make them yourself.  You can include instructions about any treatment you want or do not want, similar to a living will.  You can also provide them instructions on what your wishes are when it comes to organ donation and burial.

Financial Power of Attorney

This is usually a separate document from your healthcare power of attorney.   A financial power of attorney permits someone you have designated (your agent) to oversee your finances.  Typically, it is used so the person can step in and pay your bills or handle other financial matters.   It can be a designation for a financial professional acting on your behalf or it may be used when you cannot physically or mentally handle your affairs.

Digital Estate Plan

This is a list of your digital assets, including everything from social media accounts to online banking accounts to home utilities that you manage online.  In your last will and testament you may name a "digital executor" who may or may not be the same as your normal executor.  Sharing your logins and passwords with them is essential to the continuity and responsible management of your digital estate.   While this may not be legally binding in some states, it can still be extremely helpful in making sure your digital assets are handled the way you want them to be.  If you use a password manager program, you can simply share your access information to that account.  If not, it's important that you record the login and password information for key accounts. 

If you have computing hardware, such as computers, external hard drives or flash drives, tablets, smartphones, digital music players, e-readers, digital cameras, etc., you'll want to record where those items are located, as well as any passwords that are required to access those devices.  No matter how you decide to securely store your digital estate plan, it's generally a good idea to tell one or two people who you trust—your spouse, your adult children, or your Digital Executor, for example—where the plan is located and how to access it.  This means giving the person you trust the name of your attorney, the name of the online storage company you've used, or the location of keys or the combination to your safe.  This way, when the time comes, the people who need to access the plan you've made can easily locate it.

How to create your will and other legal documents

You have a few options for creating your estate planning documents.  The first and most obvious is to hire an attorney.  It's common for a lawyer to charge a flat fee to write a will and other basic estate planning documents. The low end for a simple lawyer-drafted will is around $300. A price of closer to $1,000 is more common, and it's not unusual to find a $1,200 price tag.  The more complex your situation, the more you will find value in paying for an attorney.  If your situation is simple, meaning you don't need a trust, you don't own a business, you aren't part of a blended family, etc, an online will maker or will maker software may suffice.  The cost is typically much less.  For example on Legal Zoom the starting price for an estate plan is $179.  The drawback is you may not be able to customize them as much as you please because they are template based.

Do you need a trust? It depends.

A living trust (sometimes called an "inter vivos" or "revocable" trust) is a written legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to designated beneficiaries at your death by your chosen representative, called a "successor trustee."  Think of it as a special kind of fund that can own someone’s stuff while they’re still living.   Almost anything of value can be placed into a living trust including real estate, vehicles, jewelry, intellectual property, etc).

Benefits of a Trust

The main benefit is that property in a trust will generally avoid the probate process which makes it easier for your assets to be distributed as needed after you pass away.  They also can provide for more specific rules with regard to how the property is distributed than a simple will can.  Trusts are less likely to be contested than a will.  This can be useful if you want to disinherit a child or leave more to one child than another.  Some examples of situations where you may want to add a living trust to your estate plan include having a blended family, owning a business, owning multiple real estate properties, and having special needs children.  You would also want a trust along with some other more sophisticated estate planning tools if you are fortunate enough to have enough assets that the estate tax becomes an issue (for 2020, estate taxes kick in when your assets exceed $12.92 million).  

Drawbacks of creating a trust

Just keep in mind that including a trust as part of your estate plan may cost you from $1,200- $2,500 for married couples.   As mentioned earlier, you don't need a trust for retirement accounts, and life insurance since you are able to name beneficiaries on those assets which avoids the probate process anyways.  Properly setting up and funding a trust requires more effort on your end.  You’ll need to re-title or re-deed property and other items.   If you don’t do this, you have paid extra money for a trust that is essentially useless to your beneficiaries.  Unsurprisingly, based on the above statistics proving the amount of apathy people have when it comes to setting up their estate plan, many people end up paying to set up a trust, but never end up taking the steps to properly fund it.  

Key Takeaways

Everybody in every stage of life needs an estate plan.  It doesn't matter how wealthy you are.  We get it.   It can be easy to put it off.  Especially if you are young and have other items in your financial plan that are competing for your attention.  I know this from personal experience.  But once you have a plan in place, the peace of mind you gain will be well worth any of the time it takes to complete it. 

*This information is not legal advice and is meant to only be educational in nature. Everybody's circumstances are unique and we always recommend you consult an attorney for questions about your estate plan or help with creating legal documents.