The idea of needing a will and powers of attorney can seem outlandish if you’re young and in good health. I’ve written a good bit about cognitive biases, and although it’s not technically a bias, our intuitive feel for probability is overly reductive.
We assume high probability events are certain, while low probability events aren’t going to occur. If you’re young and healthy, the chance that you’ll die prematurely or be disabled is low, but it’s not zero, so you should have a plan, particularly if others depend upon you.
Estate planning isn’t glamorous, and it’s not nearly as satisfying as preparing to buy a home, saving for retirement, or stashing funds for your next vacation. But a clear and well-thought-out estate plan is one of the greatest gifts you can give your family should something happen to you.
While you’re in good health and of sound mind, review these estate planning must-haves with your spouse and loved ones.
Start With Living Documents
Estate planning encompasses more than just preparing for your passing. If you become incapacitated, others need to know how to proceed in a way that respects your wishes.
A power of attorney (POA) is a legal document that allows someone else to make decisions or take action on your behalf should you be unable to do so. There are a few types of POAs to consider:
Medical Power of Attorney
This is a limited power of attorney, which allows the designated individual to decide what type of medical treatment you’ll receive if you’re incapacitated. This person can decide on your end-of-life care, treatment plan, medication, and other healthcare-related issues. In Georgia, the legislature adopted a standard template called the Georgia Advance Directive for Healthcare. The Advance Directive can be thought of as a combination of a healthcare power-of-attorney and a living will.
Financial Power of Attorney
Another limited power of attorney, this document enables someone to manage your financial affairs on your behalf. When granting a financial power of attorney, you decide specifically what rights to grant.
For example, you may limit the power so your agent can pay bills or taxes on your behalf but not make decisions about investments or distributions from your accounts. Or, you can grant more expansive powers and allow the agent to do everything from buying and selling homes in your name to managing your retirement accounts.
Durable vs. Springing Power of Attorney
As you look into estate planning, you may hear the terms durable and springing when it comes to powers-of-attorney. A durable power of attorney is a power of attorney that goes into effect when it is executed, while a springing power of attorney takes effect only when a specific condition or conditions are met. Typically, the condition will be your incapacity, and only when you are incapacitated (based on whatever conditions you stipulate) will your agent have the right to act on your behalf.
While a springing power may initially seem preferable, don’t overlook the fact that it does add complexity – particularly if a situation arises and your agent needs to act on your behalf. As an example, if the condition that triggers the power of attorney is your incapacity, who certifies that you are incapacitated? Remember, your agent will be using the document in interacting with financial institutions, and those institutions will want to be sure your agent clearly has the ability to act on your behalf.
Create a Will
While the powers-of-attorney grant power to your agent(s) if you are mentally or physically incapacitated, the agreements are void at death.
After your passing, your will outlines your final wishes. While not all assets are necessarily distributed according to your will (more on that below), some assets likely will be distributed according to your will. Moreover, if you are a parent of minor children, you can name a guardian in the will for your kids and potentially establish a trust for them as well.
Guardian
A guardian has legal responsibility for your children’s care. He or she provides day-to-day care and makes critical decisions on their behalf. Choosing your guardian can be a challenge, particularly if you don’t have a family member that could fill the role. A few things to consider in this instance include the age of the potential guardian, to what extent the guardian’s values match yours, and what choice would minimize further disruption for your children.
Trustee
A trustee makes financial decisions on your child’s behalf and funds any needs from a trust, which we discuss below. The trustee can be the same person you name as a guardian but bear in mind that the trustee can be a contentious position.
As an example, the trust might allow funding for the purchase of a car for the beneficiary. The beneficiary might hear “car” and think “Mercedes,” while the trustee might look at the trust balance and think “Ford.” As you determine who could best fill that role, don’t overlook the fact that from time to time, the trustee might have to rein in the spending plans of the beneficiary.
The Importance of a Trust
If you have young children, a trust can be a useful tool for managing their inheritance.
The idea behind a trust in this situation is straightforward. Instead of leaving assets to your child or children with no instructions, a trust allows you to provide very specific instructions as to how the funds should be used. You could, for example, stipulate that funds can be used to purchase a vehicle, fund education or a business start-up, and so on.
Beyond that, though, a trust can ensure that your child doesn’t have unlimited access to everything you’ve left them when the state deems them to be an adult (typically between age 18 and 21). Instead, you can stipulate that they receive the funds over time when you’re more certain they’ll make good decisions with what you’ve left them. Until that happens, the trustee will oversee the trust in accordance with the directions you’ve provided.
Ensure You Have Enough Life Insurance
Determining the amount of life insurance you need can be a complex topic, and there are different reasons people purchase life insurance. The most common reason is that someone’s financial well-being is dependent on your income, and if that’s the case, you should confirm that you have sufficient life insurance. The amount you need can change, as well and marriage, divorce, blended family, or new baby are all reasons to review your current coverage.
Review Your Beneficiaries
In the section on will above, we mentioned that not all assets are passed down according to the will – and that’s the case when you name a beneficiary. You can name – or designate – beneficiaries on a number of different financial vehicles, including retirement savings accounts, annuities, and life insurance policies.
The person you name as beneficiary will receive the asset(s) in the event of your death regardless of what you outline in your will. Further, any assets that pass by beneficiary designation avoid the probate process, which is the process of administering your will. Bypassing probate often means the assets can be distributed more quickly and at a lower cost.
While beneficiary designations can be very useful, don’t overlook the fact that they supersede the will, so you’ll want to make sure to keep these up-to-date and confirm they continue to reflect your wishes.
Your Estate Plan Should Change Overtime
An estate plan, like a financial plan, is meant to be dynamic. The plan that works for you in your 40s may not fit once you reach your 60s. Growing assets and net worth, changing goals, and changes to your family are all reasons you might alter your estate plan.
We recommend reviewing your plan every few years or when you experience a significant life change like marriage, a death in the family, or a divorce. If you haven’t reviewed your plan in a while and want to do so as part of a review of your overall financial picture, we can help, and you can book an introductory call with us to learn more.