Estate Planning Basics: 6 Tools You Need to Know

Before you develop an estate plan, you’ll need to familiarize yourself with estate planning basics. This article will outline six of the most commonly used estate planning tools as a great place to start.

Estate planning basics

The estate planning process is used to create a blueprint for the preservation, management, and distribution of assets in the event of your death and/or mental incapacitation: thus maximizing the value of your estate while minimizing associated costs and ensuring a smooth transfer of your assets to heirs.

Everyone needs an estate plan

A common misconception is that estate planning is just for the elderly or wealthy. The fact is, however, that if you own a bank account, car, home, furniture, or insurance policy, you have assets. As a result, however modest your estate is, you’ll need to establish a plan for how they are distributed upon your death.

Estate planning tool #1: a power of attorney

This is a document that gives the party of your choosing the power to make legal decisions on your behalf when (and if) you ever become incapacitated or can’t act on your own behalf.

A power of attorney can take shape as various types and reflect a range of responsibilities. For example, you can establish a power of attorney to permit another party to act only for limited purposes—such as signing loan closing documents in the event you are unable to. Another common purpose is to entrust this person with paying your bills or managing your assets and investments.

Know that attaching the word "durable" to any power of attorney means the authority given continues after the principal becomes mentally incompetent. For example, a healthcare power of attorney is always a “durable” power of attorney.

Estate planning tool #2: living will or advanced directive

While the exact name of this document varies by state, its purpose remains the same: allowing you to specify your end-of-life medical care decisions in the event you are unable to personally communicate the same. This document also helps prevent confusion and/or disagreements, as no other party can override decisions you’ve already made.

A living will may seem similar to a power of attorney for healthcare. While some states combine the two documents, their purposes are different; while a living will reflects decisions you’ve made ahead of time, a healthcare power of attorney names someone who can make medical decisions on your behalf if you are unable to.

Estate planning tool #3: last will & testament

This is a key document that ensures an estate is settled in the manner the deceased had intended. More specifically, it communicates your final wishes concerning how assets and other possessions are distributed following your death. You can amend this document at any time while you are still living.

If you pass away in the absence of a will, this is considered “dying intestate.” In this scenario, the state becomes the executor of the estate and thus decides how to distribute your property and other assets.

Some corresponding court-made arrangements include freezing your assets until an executor is appointed and determining how to split assets among family members (which will likely vary from your desires). Consequently, the process is often very complicated, expensive, and extremely time-consuming for your living family members.

This process is also sometimes a drawn-out affair, particularly when significant assets are involved. In these situations, it’s not uncommon for months or even years to pass before any money, property, or belongings are distributed to heirs.

Estate planning tool #4: living trust

A living trust is a legal document whereby your assets (anything of value such as a business, real estate, bank accounts, etc.) are placed into a trust account established while you are still living and considered the “grantor” as you’ve personally created and funded the account. A designated person (a “trustee”) is tasked with the responsibility of managing assets for the benefit of the eventual beneficiary or beneficiaries.

There are two different types of living trusts: “revocable” and “irrevocable” trusts.

A revocable trust is the most common type of living trust. Just as the name implies, a grantor can change (or cancel) a revocable trust at any time. Conversely, nobody—not even the grantor—can change an irrevocable trust. When a grantor passes, a revocable trust automatically converts to an irrevocable trust.

One of the biggest benefits of establishing a trust is that it helps ensure a smooth estate transfer process, saving you money and the headache of probate court (the often-lengthy process used to verify a will or administer assets for those without a will).

Estate planning tool #5: beneficiary designations

You might already know that several types of assets—including retirement accounts and insurance policies—can pass to your heirs regardless of whether or not you have a will. However, what you may not know is that beneficiaries listed on these accounts supersede even your own last will and testament (the document that communicates your final wishes regarding the distribution of assets and other possessions).

Consequently, your assets can land in the hands of an unintended person: such as an ex-spouse or even a deceased relative. Other circumstances may trigger the inadvertent exclusion of a specific person—especially if you opened the account years ago (e.g., before the birth of a child or someone marrying into the family). These situations can often lead to probate and costly delays.

Therefore, the simplest action you can take every few years—and whenever you experience a life-changing event—is to update the beneficiaries on your accounts, especially those you established years ago. Ensure you choose heirs who are mentally competent and not minor children (under the age of 21) to avoid the headache of court-contested decisions. You should also consider naming contingent beneficiaries for extra protection.

Estate planning tool #6: life insurance

A life insurance policy can give you the peace of mind that your loved ones will thrive in the absence of your support.

In the context of a comprehensive estate plan, life insurance can go beyond providing cash liquidity via death benefit payments. For example, if you need to split up property or business assets across more than one heir, life insurance can help equalize the split wherein one party receives the property and the other receives equal value in the form of death benefit proceeds from the insurance policy.

The bottom line on estate planning tools

As you can see, you must consider many factors when planning for circumstances after your death. While an estate planning attorney and financial advisor can provide you with situation-specific advice, familiarizing yourself with the information shared above is a great place to start.

Also keep in mind that circumstances can (and will!) change throughout your life, so estate planning is not a “one-and-done” deal. With this in mind, be sure to review your key estate planning documents on a regular basis to ensure they continue to meet all of your objectives.

———

Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.