In this video, I am talking about estate planning and 5 most important estate documents that every adult must have in place. These documents can protect you, your loved ones, and your assets from an unnecessary risk. Putting off adopting these documents can result in taking on additional risk and irreversible negative consequences for you and loved ones.
When I talk to a prospective client, I usually begin with identifying existing risks which directly expose either them or their family members to an unnecessary risk that easily could have been mitigated. By disrupting the client’s complacency, my goal is to show the devastating effect that inaction can have on them and their families. A good example of such risk is estate planning.
In 2017, one study found that only 42 percent of U.S. adults have estate planning documents. In 2020, an online estate planning company Trust and Will partnered with Caring.com to provide an updated survey on estate planning 2020. Unfortunately, this number has decreased to 32 percent – and this is happening during the coronavirus pandemic when everyone is so vulnerable.
Reasons People Put Off Estate Planning
Before I share with you a list of the most essential estate documents that every individual must have, let’s quickly review common reasons for human inaction:
- I haven’t gotten around to it – this cop-out applies to many areas of our lives as it is natural to postpone dealing with something that you don’t want, such as estate planning. But the problem is that the longer one waits, the more risk one accumulates. In the event of an unexpected death this can lead to terrible and costly consequences for you and your loved ones.
- I don’t have enough assets to leave anyone – this is a common misperception among many people. In some cases, one doesn’t need to have any assets. For example, there are some estate documents that are solely about expressing your wishes or acting on your behalf when you are no longer capable to due incapacitation.
- It is too expensive – well, not necessarily true. Drafting trust documents can be expensive depending on complexity. But other documents can cost just a few hundred dollars. And some documents can even be drafted for free specialized software.
- I don’t know how to get a will or trust – this one is easy – talk to your estate planning attorney first. And if you don’t have one, your financial advisor can connect you with the right person.
I understand that estate planning is a sensitive topic but that is not a valid reason to put off dealing with it and expose yourself and your family members to an additional risk. The sooner one faces the inevitable the more protected you and your family can be.
Now let’s take a look at four must-have and one optional estate documents that every individual must have.
5 Most Important Estate Documents
Last Will and Testament
Last will and testament, also known as a will, is a legal document that states your final wishes and provides instruction on how to distribute your assets after your death. A person who will be distributing your assets is called an executor and is appointed in the will. What is extremely important to know about a will, and what many parents with kids do not understand, is that the will allows you to appoint legal guardians for your kids in case of an accidental death of both parents.
Health Care Proxy
Health care proxy, also known as a medical power of attorney, is a type of health care advance directive that allows you to appoint an agent who will be able to make medical decisions on your behalf when you are no longer able to make them for yourself. Along with health care proxy, it is important to sign a HIPAA release form to grant your appointed agent access to health and treatment information.
Putting off drafting a health care proxy can become an emotional (and financial) disaster for your loved ones when you become incapacitated. They would need to make choices about your life without being clear whether the choice they make aligned with your wishes or not.
A living will is another type of health care advance directive that explicitly states your wishes about medical care and treatment to be performed when you become incapacitated. Specifically, you can outline which medical procedures you would want to take – or not to take – to keep you alive when you become terminally ill. A living will is a particularly important document to have as it clearly communicates your last wishes to your family members or appointed health care agent regarding medical care.
Durable Power of Attorney
A durable power of attorney allows you to appoint an agent who will be able to act on your behalf regarding your financial affairs. You can appoint your spouse, a sibling, or another trusted person to conduct financial transactions on your behalf when you become incapacitated. Some examples of such transactions include paying bills, accessing bank and other financial institutions accounts, or getting loans.
You must be legally competent to assign your agent – so don’t wait too long to have your power of attorney ready.
Revocable Living Trust (Optional)
A revocable living trust is a legal tool for bypassing probate court after your death to save your family time and money. In addition to that, a living trust is a clever way to protect your assets if you have minor children.
Since probates can be very time consuming and costly, especially if you own assets in multiple states, you will transfer your assets into the trust and assign a trustee – which is usually the grantor. After your death, the successor trustee will distribute the assets in accordance with your wishes.
The reason I say that revocable living trust is optional is because you need to get to a certain financial level first. Ideally, you would want to own a large amount of assets and properties first before setting up your living trust. Otherwise, there won’t be that much benefit of having living trust as it is expensive to set up and requires some ongoing maintenance.
End-of-life planning isn’t the most joyful topic to talk about, but there is simply no avoiding it. By adopting the above documents, you will be able to create the foundation of your estate plan. And when you do that, not only will you ensure protection and distribution of your assets in accordance with your wishes, but you will also provide your loved ones with a well-defined action plan and peace of mind when they need it the most.