6 Estate Planning Must-Haves

The Importance of Estate Planning

Many people believe that having an estate plan simply means drafting a will or a trust. However, there is much more to include in your estate planning to make certain all of your assets are transferred seamlessly to your heirs upon your death. A successful estate plan also includes provisions allowing your family members to access or control your assets should you become unable to do so yourself.

The Estate Planning Must-Haves

Here is a list of items every estate plan should include:

1. Will/trust
2. Durable power of attorney
3. Beneficiary designations
4. Letter of intent
5. Healthcare power of attorney
6. Guardianship designations

In addition to these six documents and designations, a well-laid estate plan also should consider the purchase of insurance products such as long-term care insurance to cover old age, a lifetime annuity to generate some level of income until death, and life insurance to pass money to beneficiaries without the need for probate.

Does your estate plan measure up? Let’s examine each item on this checklist to make sure you haven’t left any decisions to chance.

Wills and Trusts

A will or a trust may sound complicated or expensive—something only rich people have. That is an incorrect assessment. A will or trust should be one of the main components of every estate plan, even if you don’t have substantial assets. Wills ensure property is distributed according to an individual’s wishes (if drafted according to state laws). Some trusts help limit estate taxes or legal challenges. However, simply having a will or trust isn’t enough. The wording of the document is critically important.

A will or trust should be written in a manner that is consistent with the way you’ve bequeathed the assets that pass outside of the will. For example, if you’ve already named your sister as a beneficiary on a retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary), you don’t want to bequeath the same asset to a second cousin in the will because it could lead to a will contest. Not to mention that both individuals could become bitter toward each other (and you) during a legal battle.

Durable Power of Attorney

It’s important to draft a durable power of attorney (POA), so an agent or a person you assign will act on your behalf when you are unable to do so yourself. Absent a power of attorney, a court may be left to decide what happens to your assets if you are found to be mentally incompetent, and the court’s decision may not be what you wanted.

This document can give your agent the power to transact real estate, enter into financial transactions, and make other legal decisions as if they were you. This type of POA is revocable by the principal at a time of their choosing, typically a time when the principal is deemed to be physically able, or mentally competent, or upon death.

In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases, it might make more sense to have another family member, friend, or a trusted advisor who is more financially savvy act as the agent.

Beneficiary Designations

As noted earlier, a number of your possessions can pass to your heirs without being dictated in the will (e.g., 401(k) plan assets). This is why it is important to maintain a beneficiary—and a contingent beneficiary—on such an account. Insurance plans should contain a beneficiary and a contingent beneficiary as well because they might also pass outside of a will.

If you don’t name a beneficiary, or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge who is unaware of your situation, beliefs, or intent is unlikely to make the same decision you would have made.

Note: Named beneficiaries should be over the age of 21 and mentally competent. If they aren’t, a court may end up getting involved in the matter.

Letter of Intent

A letter of intent is simply a document left to your executor or a beneficiary. The purpose is to define what you want to be done with a particular asset after your death or incapacitation. Some letters of intent also provide funeral details or other special requests. 

While such a document may not be valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will is deemed invalid for some reason.

Healthcare Power of Attorney

A healthcare power of attorney (HCPA) designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity.

If you are considering executing such a document, you should pick someone you trust, who shares your views, and who would likely recommend a course of action you would agree with. After all, this person could literally have your life in their hands.

Finally, a backup agent should also be identified, in case your initial pick is unavailable or unable to act at the time needed.

Guardianship Designations

While many wills or trusts incorporate this clause, some don’t. If you have minor children or are considering having kids, picking a guardian is incredibly important and sometimes overlooked. Make sure the individual or couple you choose shares your views, is financially sound, and is genuinely willing to raise children. As with all designations, a backup or contingent guardian should be named as well.

Absent these designations; a court could rule that your children live with a family member you wouldn’t have selected. And in extreme cases, the court could mandate that your children become wards of the state.

The Bottom Line

There is more to estate planning than deciding how to divvy up your assets when you die. It’s also about making certain your family members and other beneficiaries are provided for and have access to your assets upon your temporary or permanent incapacity.

A will is a great place to start, but it’s only the beginning.