the five most important estate planning documents

The 5 Most Important Estate Planning Documents

What are the 5 Most Important Estate Planning Documents?

Noted author and financial planner Suze Orman says, "Estate planning is an important and everlasting gift you can give your family." And she's right. But if you create one, you need to do it right. So first, talk with an estate attorney. Second, make sure your plan includes the five most important estate planning documents.

When it comes to those documents, the average person immediately thinks about a last will. And yes, that's one of the five most important estate planning documents. But unfortunately, the average person often stops at will creation.

A comprehensive estate plan considers these 5 essential documents:

  1. Last will and testament
  2. Durable power of attorney
  3. Medical power of attorney
  4. Revocable trust
  5. Living will

An estate planning attorney can assist you in drafting these crucial planning documents.

Beneficiary Designations

Another important factor when addressing estate planning is establishing who will get your assets and designating beneficiaries. Again, an estate attorney can guide you in selecting beneficiaries.

A beneficiary designation determines who will get life insurance policies, IRAs, 401(k)s, and other types of financial accounts upon your death. Once assigned, your executor or executrix, upon your death, ensures that your beneficiaries receive assets per your designations.

Beneficiaries may be different than those named in your last will and testament. You can also have multiple beneficiaries in your estate plan.

For example, assets can divide among more than one primary beneficiary. In addition, you can include multiple secondary beneficiaries if a primary beneficiary dies before you, can't be located, or refuses to accept the asset.

Beneficiaries fall into three categories:

  • Eligible designated beneficiaries (see below for types of EDBs)
  • Designated beneficiaries
  • Non-designated beneficiaries

In addition, eligible designated beneficiaries cover five individual types:

  1. The account owner's surviving spouse
  2. A child who is younger than 18 years of age
  3. A disabled individual
  4. A chronically ill individual
  5. A person not more than ten years younger than the deceased IRA owner

If a living person named as a retirement account beneficiary does not fall into these five categories, they are considered a designated beneficiary.

Now that you understand beneficiary designations, let's move on to the five most important estate planning documents.

1. Last Will and Testament

So, let's start with the most obvious document, your last will and testament. It states who receives your assets after death. It also assigns the person managing the will (an executor or executrix), your beneficiaries, and guardians for your minor children, if any. To that point, you need to take the time to determine your executor or executrix, as they will handle everything associated with your estate.

Where assets are concerned, your will determines where your assets will go. These assets can be money, real estate, possessions, or anything else you want to designate a beneficiary.

Your will also presents how your estate pays off debts. That relieves the burden on your loved ones. A common concern of clients during the initial estate planning process is what happens with debt from the estate. We've addressed that answer here.

Keep this in mind. Your will must be executed properly and based on state laws. It must also clearly state how you bequeath your assets. Otherwise, someone could contest your will, or your assets will wind up in probate court. So rather than taking the do-it-yourself approach with a web-based template, you might consider using a will lawyer or estate planning attorney.

2. Durable Power of Attorney

A durable power of attorney (POA) document, also referred to as financial power of attorney, assigns someone to manage your finances should you become incapacitated or suffer memory loss. Apart from finances, a POA designates someone to handle your legal and business matters.

The person you appoint is known as your agent or attorney-in-fact. They can be a friend or even an attorney. Your agent handles any number of affairs:

  1. Buying and selling property
  2. Managing finances, including bank accounts, bills, and investment
  3. Tax matters
  4. Applying for government benefits

A power of attorney document saves your family from petitioning the court to become your conservator. So, this simple estate planning document saves time, money, and hassles.

3. Medical Power of Attorney

Although a chief consideration of any estate plan focuses on your finances and assets, a good estate planning document addresses medical or healthcare decisions. A medical power of attorney document determines who makes medical care decisions on your behalf should you become incapacitated.

Typically, a healthcare POA gets created in conjunction with a living will. Indeed, they can be in the same document as both focus on your medical care. Both documents classify as advanced healthcare directives that address your medical care.

As with a POA, that person is known as an attorney-in-fact. Generally, you assign it to a family member such as your spouse or adult child. But you can elect to give it to anyone.

Similar to a durable power of attorney, without this estate planning document, your family faces court time and costs to petition for guardianship so that they can make medical decisions for you. Your estate planning attorney can ensure this document gets executed properly to address your wishes.

4. Living Will

A living will document presents another advanced healthcare directive that addresses your end-of-life treatment and care. Specifically, it outlines the procedures, medications, and treatments you want, or don't want, to prolong your life if you're incapable of addressing those issues with your doctor.

Your living will addresses numerous considerations:

  1. Tube Feeding: Do you want to be tube fed to prolong your life? If so, for how long?
  2. Resuscitation: What happens if your heart stops? Do you want medical staff to conduct CPR? Or do you want a do-not-resuscitate (DNR) order in your living will?
  3. Intubation: You can determine if and how long you want to be intubated and placed on a mechanical ventilator.
  4. Pain Management: Your living will presents what pain management and medications you want. You can also determine whether you wish to die at home.
  5. Organ Donation: You can elect to donate organs for transplant following your death in your living will.

Without this document, your loved ones will have to determine your treatment, which burdens them with difficult choices.

You can access living will templates on the web. But considering the importance of this document, it's worth talking with an estate planning attorney to ensure you capture all the details correctly. And that the document is legally sound.

5. Revocable Trust

That brings us to the last of the five most important estate planning documents – a revocable trust. Unfortunately, these documents can be a bit more complex.

At its core, a revocable trust allows you to pass your assets over time. Best of all, a trust avoids probate. Equally important, because it's revocable, you can change or terminate the trust anytime.

You become a grantor, trustor, or settlor by creating the trust. As the grantor, you are also the trustee and primary beneficiary during your lifetime. Although it offers no tax benefits, it does accomplish several things:

  1. Privacy: As mentioned above, the primary purpose of a revocable trust is to avoid probate, where our assets get distributed at death. However, the probate process is public. So, by avoiding probate, you maintain privacy.
  2. Aligns with Your Wishes: Similar to a will, a revocable trust distributes assets. But you can amend limitlessly. So, you can change your asset distribution at any time.
  3. Beneficiary Protection: A revocable trust provides creditor protection as long as the assets remain in the trust upon death.
  4. Estate Tax: A revocable trust may reduce state estate taxes if you live in a state with an additional estate tax. Fortunately, Pennsylvania has no extra state tax.

Estate Planning isn't Easy

Creating an effective estate plan is complex. That's why you should enlist the support of an estate planning attorney. They'll ensure you have the proper documents, that each gets appropriately executed, and that each complies with state laws.

High Swartz has experienced estate attorneys versed in advanced healthcare directives, inheritance tax, probate, estate litigation, and more. We have law offices in Bucks County and Montgomery County, PA.

We'll make sure your estate plan covers all the bases, so you know all your wishes will be met.

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