5 essential estate planning documents

5 essential estate planning documents 

06.11.2024

A third of Americans (32%) plan to leave an inheritance, even if it’s small, according to Empower research.

Whether you’re 80 or 30 years old, it’s valuable to have a plan in place for your assets in case you pass away. Important estate planning documents like a will and a trust can ensure the fulfillment of your final wishes.

Your estate plan doesn’t only direct what happens if you pass away: It also directs who will make important decisions and manage your finances if you’re incapacitated.

Estate planning can be a complex process, especially because the process looks a bit different for each person. For that reason, it’s important to consult a professional estate planning attorney to help you get your estate plan in place.

Importance of estate planning

For many people, estate planning is an afterthought when they’re putting together their financial plan. They might assume that because they’re unlikely to die soon or don’t have any significant assets, they don’t need an estate plan.

The truth is that estate planning is important for more than just the elderly and the wealthy. If you have any financial assets at all — even if you don’t think they are significant — an estate plan can ensure your property management after you pass away.

Yes, an estate plan ensures your assets go exactly where you want them to after you die. But it can also be a gift to your loved ones. Estate planning, especially without a will, can add additional stress and responsibility to what is already a difficult process.

An estate plan includes more than just a will. Though the will is the core document that prescribes where your assets will go if you pass away, your estate plan may also include a trust to hold and distribute your assets or power of attorney documents to dictate who will be responsible for certain matters if you’re still alive, but incapacitated.

Finally, estate laws vary from state to state, so it’s important to have an estate planning attorney advise you on the laws for your specific state.

5 essential estate planning documents

The estate planning process may look a bit different for everyone, depending on their financial situation and lifestyle. However, there are five key documents you’ll find in many estate plans.

Last will and testament

A will is perhaps the most important document in your estate plan, and it’s the one that most people think of when they imagine estate planning. Your last will and testament prescribes what should happen to your assets after you die. Some wills are very simple, while others are more complicated. Generally speaking, they should all include the following information:

  • An executor: This is the person who will carry out your will and ensure your wishes are met. An executor is often a loved one or an attorney.
  • Assets: Your will should outline what you want to happen to each of your assets after you die, including both your financial assets and your real property. Some people leave all of their assets to one person. If you have multiple beneficiaries, you can either evenly divide the assets among them or allocate certain assets to each person.
  • Final arrangements: Many people include their final arrangements in their will. This means you would outline what you want to happen to your body after you die, as well as what type of funeral arrangements you want.

If you have children, your will should also outline guardianship in case you and your partner or co-parent also pass away. In most cases, if you pass away, your children’s other parent will simply get custody. But a will is important to dictate what happens if you both pass away or, if you’re the only parent, what happens if you pass away.

If you die without a will — this is known as dying intestate — then your assets will be distributed based on your state’s laws. Because estate laws vary from state to state, it’s important to consult an estate planning attorney to learn what would happen to assets in your state.

It’s important to note that having a will won’t help your assets avoid probate, which is the legal process assets must go through to transfer to your beneficiaries. Probate can be a lengthy and expensive process. However, as we’ll discuss in a later section, there are other ways to avoid probate.

Read more: How to make a will in 9 steps

Trust

A trust is an estate planning tool that makes it easier to transfer assets to your loved ones. While the term brings to mind the idea of a “trust fund” that a wealthy child might receive from their parents, trusts can be valuable legal tools no matter your income bracket.

Read more: Estate planning primer: Trusts and estates

A trust is a fiduciary arrangement. Your assets are transferred into the trust and are held and typically managed by a third party until it’s time for them to be distributed to their beneficiaries.

Trusts have three key parties: the grantor, the trustee, and the beneficiaries. The grantor is the person who creates and funds the trust. The trustee is the person (or organization) who manages the trust, while the beneficiary is the person (or people) who benefits from the trust.

Trusts have some important benefits. First, unlike a will, a trust can help your assets avoid probate. This saves your beneficiaries money and ensures they’ll receive their assets more quickly. A trust also gives you more control over the distribution of your assets — not only who they’re distributed to, but also how and when they’re distributed. Finally, a trust can help you reduce certain taxes.

A trust can be a valuable tool to provide long-term support for a loved one. For example, suppose you have significant assets you’d like to pass down to your children. Your children are still minors, so you don’t want them receiving a large sum of money now.

First, the trust can be set up so your children’s guardian receives a monthly stipend to pay for all of the children’s care and expenses. Then, you could designate certain amounts in the trust for certain ages or purposes. For example, maybe you set up a trust to distribute a large annual sum starting the year your child turns 18 to help them pay for college. You could also designate that they’ll receive other large sums at specific milestones, such as age 25, 30, etc.

It’s important to note that a trust isn’t an alternative to a will. Instead, they’re best used together. That being said, you may not need a trust if you have minimal assets, your estate won’t be subject to any taxes, and you aren’t worried about your loved ones receiving assets more quickly after your death.

There are several different types of trusts:

Living vs. testamentary trust

A living trust is one a grantor sets up and transfers assets into while they’re alive. A testamentary trust, on the other hand, is set up in the grantor’s will and isn’t created or funded until after the grantor’s death.

While a living trust may help the assets in the estate avoid probate, a testamentary trust doesn’t. The assets will go through probate before being transferred into the trust.

Revocable vs. irrevocable trust

A revocable trust allows the grantor to maintain control during their lifetime. They can deposit and withdraw assets into and out of the trust, change its terms, and even dissolve it. It’s not until the grantor dies that the trustee takes control of the trust.

An irrevocable trust, on the other hand, immediately takes the assets out of the grantor’s control and into the trustee’s. The downside of an irrevocable trust is that the grantor loses all access to the assets in the trust. However, the assets are also protected from creditors both during and after the grantor’s life, and they aren’t subject to estate taxes when the grantor passes away.

Other types of trusts

In addition to the primary types of trusts, there are also other types you may consider.

For example, some trusts allow assets to be split between your loved ones and a charitable organization you’re passionate about. This type of trust can also reduce your estate tax burden. Other types of trusts skip a generation, distributing the assets to your grandchildren instead of your children while helping reduce your tax burden. If you’re considering a trust, an estate planning attorney can educate you about the types available.

Read more: How to set up a trust fund

Durable power of attorney (POA)

A durable power of attorney (POA) is a legal document that designates someone as your agent to make decisions on your behalf if you’re incapacitated or declared mentally incompetent. In many cases, your POA agent can handle your finances and make medical decisions for you.

Some people choose a loved one as their POA agent, while others designate their attorney. It’s common for spouses to name one another as their POA agent. No matter who you choose, make sure it’s someone you trust because they’ll have access to your finances and the ability to make important financial decisions on your behalf.

The difference between a durable POA and an ordinary one is that an ordinary POA expires if you become mentally incompetent. A durable POA, on the other hand, can remain effective even if — or only if — you become incapacitated.

If you have appointed someone as your POA agent, you can revoke that privilege and designate someone else as long as you’re of sound mind. You can also impose limitations on the responsibilities of your agent under the POA.

Healthcare power of attorney (POA)

A healthcare POA — also known as a medical POA — is a legal document that designates someone specifically to make healthcare decisions on your behalf. In this arrangement, the principal is the person who executes the POA, while the healthcare agent is the individual they designate.

Generally speaking, a healthcare agent would only be able to make medical decisions if the principal is incapacitated, whether mentally or physically. The agent can make important decisions if the principal is either temporarily or permanently unable to make their own decisions due to an accident, illness, or other cause.

When you’re designating someone as your healthcare agent, it’s important to choose someone you know will carry out your wishes, especially when it comes to end-of-life care or if you have certain personal or religious beliefs that may impact your healthcare. It’s also helpful to have conversations with your healthcare agent while you’re still healthy so they know what your wishes would be in certain situations.

It’s possible to appoint more than one healthcare agent, but know this could create conflict and delay care. For example, if you have several adult children and name them all as joint healthcare agents, a disagreement about the best course of treatment could delay your treatment and affect the quality of care you receive. Not to mention, it could cause long-term rifts within the family.

Living will

A living will, which is a form of advance directive, outlines your wishes for medical treatment in the event you can no longer make them in the moment. Like a healthcare POA, it usually comes into play when you’re incapacitated.

A living will has several purposes. First, if you feel strongly about certain medical decisions, such as how your end-of-life care will be treated, then a living will can ensure those wishes are carried out. Additionally, a living will can relieve your loved ones from having to make difficult and emotional decisions.

A few decisions you might address in your living will include whether you want to be kept alive by a ventilator (and for how long), whether you are okay with a feeding tube, whether there are any medications or treatments you don’t want, what your palliative care wishes are, and what you’d like done with your body after death.

Other key considerations

As you’re putting together your estate plan, there are several other things to consider, including the type of property ownership and your beneficiary designations.

Types of property ownership

The way your real property is owned will impact what happens to it when you pass away. There are four different ownership types, each of which transfer to beneficiaries in different ways:

  • Sole ownership: If you’re the sole owner of an asset, you have full control over how it’s transferred after your death. You should outline to whom the asset should be distributed in your will. If you don’t have a will, the asset will be transferred based on your state law. The asset will usually have to go through probate.
  • Joint tenancy with right of survivorship: This ownership structure means you and the co-owner (usually a spouse) fully own the asset together. When one of you passes away, the other party automatically inherits the deceased person’s ownership. This form of ownership fully avoids the probate process.
  • Tenants in common: Like joint tenancy with the right of survivorship, tenants in common means multiple parties own the asset together. The difference is that, with tenants in common, when one owner passes away, their ownership interest is transferred to their heirs. That won’t necessarily be the other owner. The deceased’s interest in the property will go through probate.

The right ownership structure for you depends on your situation. If you’re married and want your spouse to get everything when you die, it makes sense to title your assets as joint tenancy with rights of survivorship. However, there are situations where this won’t make sense.

For example, suppose you’re married, but you have adult children from a previous relationship. You might choose tenants in common so you can leave a share of your assets to your adult children rather than leaving them entirely to your spouse, who may not ultimately leave them to your adult children when they die.

The importance of beneficiary designation

Another important factor to consider when setting up your estate plan is the beneficiary designation on your accounts.

First, each of your personal accounts, including your bank accounts, investment accounts, retirement accounts, and life insurance policies, should have a beneficiary designated. This designation helps your assets avoid probate and allows your loved ones to access them right away.

There are several different ways you can set up your beneficiaries. First, you can have just a single beneficiary, meaning one person would inherit all of the money in your financial accounts, as well as your entire life insurance payout. You can also designate multiple beneficiaries. For example, if you have three adult children, you might designate them all as equal beneficiaries to all of your accounts. Finally, you can have a primary and contingent beneficiary. The primary beneficiary is the person who you’d like to receive your assets, but the contingent beneficiary will receive them if the primary beneficiary has passed away.

For example, suppose you’re married with one adult child. You want your spouse to get your life insurance death benefit when you die, so you designate them as your primary beneficiary. You designate your adult child as your contingent beneficiary. Assuming your spouse is still alive when you pass away, they’ll get the life insurance benefit. But if they passed away between the time you designated your beneficiaries and the time you died, your adult child would get the benefit.

Payable on death vs. transfer on death

When you set up your beneficiaries on your accounts, they may be either payable on death or transfer on death. Payable on death means the account should be paid to your beneficiary at the time of your passing. Because the assets don’t have to go through probate, there is no delay. The beneficiary simply has to contact the financial institution to get the money.

Transfer on death is a similar concept, but instead of referring to money, it refers to assets, including stocks, bonds, and other brokerage account holdings. Ownership of those assets would simply be transferred to your beneficiary.

Per stirpes designation

Another important concept to consider when crafting your estate plan is a per stirpes designation. This designation dictates how your assets should be distributed in the event one of your beneficiaries passes away before you.

For example, let’s say you have three adult children, each of whom has one child of their own. In your will, you’ve designated that each of your three adult children should inherit one-third of your estate. If your estate is set up to distribute assets per stirpes and one of your adult children passes away before you, their child would inherit their share of the estate. If you don’t have that designation, then your deceased child’s inheritance would be evenly divided between your two living adult children.

The bottom line

Having an estate plan in place can ensure your assets are properly distributed, and your loved ones are taken care of after your death. Though each person’s estate plan will look a bit different, there are some key documents that can be found in many estate plans.

It’s valuable to seek professional guidance when setting up your will and other estate planning documents. Though there are online tools to draft these documents for a small fee, it can be helpful to at least get a consultation from an estate planning specialist to learn about your different options and what’s best for your situation.

Finally, remember that estate planning is just one aspect of your overall financial plan. You can provide the most benefit to both yourself and your loved ones by having your finances in order.

Read more: Financial planning for your life

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Matt Carey, CFP®

Contributor

Matt Carey, J.D., is a Senior Estate Planning Strategist at Empower. A CERTIFIED FINANCIAL PLANNER™ professional, he analyzes current estate plans, wills, and trusts in order to help clients identify inefficiencies and opportunities.

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