Financial planning can be most concisely defined as the act of evaluating your future goals and putting a plan together to ensure you achieve them. Do you want to retire early? How about travel? Maybe get that vacation home you’ve always wanted? These are all common goals for the future, but what about further down the road? Do you want to leave something behind for your family or heirs? What happens to your assets when you’re gone?

No financial plan is truly complete without an estate plan. Everything you own—your house, your car, your possessions and your money—is part of your estate, and you need to plan for what happens to your estate when you pass away. No one likes confronting their own mortality, but without a carefully constructed estate plan, transferring your assets could come with some unintended negative consequences.

That’s why it’s so important. However, it can also be somewhat confusing. From the complex legal documents, to the challenges of maximizing the legacy left to your heirs, it can be hard for many people to fully wrap their heads around what’s needed in their estate plan.

To help make some sense of it all, here are five key documents you’ll want to have when preparing your estate plan.

1. Will

A last will and testament—more colloquially known as just a “will”—is probably the first thing that comes to mind when you start thinking about this whole process. This is the document that lays out who you want to give your assets to when you die and helps ensure that your assets are distributed properly when the time comes.

A will is also something that can be drawn up at any time—it could actually be a mistake to put this off until you’re older. If you currently have young children or pets, your will should define who you would like to serve as their guardian in the event that you become incapacitated. For this reason, drawing up a will is something that you’ll likely want to think about sooner rather than later.

2. Power of Attorney

A power of attorney—often abbreviated as just POA—allows you to designate someone to step in and manage your finances if you are unable to. There are a few different kinds of POA, but they all fall under two main types: general power of attorney or limited power of attorney.

General power of attorney designates an individual to act on your behalf on all matters, including medical, legal, financial, etc. Limited POA designates someone to act on your behalf only in specific matters or events.

A POA is especially important for singles, since there is no spouse to immediately jump in to serve in this role. If you are single and don’t have a power of attorney designated, a court will decide who should serve as your guardian, and it’s possible that the court may select someone that you may not view as the ideal candidate.

3. Health Care Directive

A health care directive functions similarly to a power of attorney. The difference is that while a power of attorney traditionally handles your financial decisions, a health care directive handles your medical decisions.

There are two main documents in this category. A living will is a written statement that provides instructions for your health care should you become incapacitated. For example, if your personal or religious beliefs are such that you can’t or don’t want to have some type of care, your living will can dictate that to medical personnel.

The second document designates a medical power of attorney, also known as a health care proxy. This person makes medical decisions on your behalf if you become incapacitated. If your family members are unaware of your true wishes or disagree about your care, it’s good to have these documents in place to ensure you are cared for exactly as you intend.

4. Beneficiary Designations

Beneficiary designations are found on many types of life insurance or retirement accounts like 401(k)s, 403(b)s, IRAs and more. These designations are filed with whichever financial institution is holding your account, and they dictate who will receive the benefits in the account when you pass away.

The important thing to remember about beneficiary designations is that they actually supersede what’s in your will. So, while your will might name Person A as the beneficiary of these accounts, if Person B is the name listed on the beneficiary designation, Person B will be the one to receive the benefits.

That’s why it’s important to review your designations on a regular basis, because ignoring these designations or making other mistakes can be costly. We recommend reviewing your beneficiary designations at least once a year. This is especially important in 2020 and beyond, since the SECURE Act eliminated the “stretch IRA” for non-spouse beneficiaries.

5. Trusts

While not exactly a document, per se, trusts are still firmly rooted in the estate planning process. A trust is a legal entity created to hold assets on behalf of a beneficiary or beneficiaries—you quite literally “trust” them with your money. There are three primary types of trusts, and the person setting up a trust can dictate exactly how and when beneficiaries receive the assets in the trust.

Revocable trusts, also known as living trusts, can help your estate avoid probate, which is the legal process of distributing your estate. Probate can be a lengthy, expensive and public process, making it a hassle for your heirs when administering your estate.

Irrevocable trusts can also be beneficial, as they can help limit your exposure to estate taxes. Once assets have been placed in the trust, they can’t be removed or altered. In essence, they’ve been taken out of your estate, which can protect you from estate taxes on those assets.

It’s also possible to create a trust inside your will, known as a testamentary trust. However, the assets inside a testamentary trust aren’t exempt from probate.

Trusts can be complicated and aren’t appropriate for every situation, so talk to your advisor about your specific circumstances.

Next Steps

It isn’t enough to simply incorporate these elements into your estate plan—you’ll also need to review them on a regular basis to ensure your needs are met as your life changes. Members of the LGBTQ community have even further considerations when crafting an estate plan, so it’s important to know your options and get your ducks in a row.

Estate planning can be confusing. Many of these elements involve complicated legal documents, so it’s a good idea to take the time to work with an estate planning attorney and your financial advisor. That way, you can ensure everything is completed accurately and all your wishes will be carried out according to plan when the time comes.

Edwina Allee

Edwina Allee

Senior Vice President, Financial Advisor

Series 7 & 63 Securities Registrations,1 Insurance License Edwina has more than 27 years of experience in the financial services industry. She has a strong background in retirement and values-based financial planning. She has a passion for helping people understand what they truly value in their lives and how their values are intimately connected to their goals. She enjoys helping people understand how they are positioned financially with respect to important life goals,...Read More