Summary/TL;DR
A will and/or living trust, and medical and durable power of attorneys are estate planning documents needed by every adult. Not having these can cause your loved ones and your legacy a world of heartache and confusion. State law surrounding these documents varies widely and can often change. These documents should therefore be reviewed regularly and be updated or redrafted as needed. Finally, these documents should only ever be drafted by a professional attorney who understands your circumstances inside-and-out.
Introduction
Estate planning is about so much more than “where your money goes when you die”. It also addresses issues such as who will take care of your children or pets or who will care for you in the event of incapacitation. While this is not an exhaustive list, the four documents discussed below are the bare necessities – the things that you absolutely must have, no matter what! So much pain and heartbreak can be spared by just getting your ducks in a row.
Will/Living Trust
Wills
A will is essentially a list of instructions used to guide the probate process. Having a will, however, will not avoid probate! Your loved ones will still need to go to court, pay some fees, and oftentimes hire a lawyer to settle your estate. Having a will just makes this process a whole lot easier.
State law varies widely when it comes to what is sufficient to be considered a “last will and testament”. However, even if you live in a state with loose definitions, you risk a lot by complacently providing the bare minimum requirements. Even if it is drafted by a specialized attorney, a will is relatively inexpensive to obtain. There is really no excuse for putting your loved ones through the frustrations of probating an intestate estate.
Finally, in states where the probate process “isn’t that bad” and the only property you own outside of assets with beneficiary designations is real property within the state, a will is often sufficient. In other circumstances, or if you want to avoid probate altogether, a living trust will likely be necessary.
Living Trusts
Having a living trust is the only way to avoid probate, which can be advantageous for multiple reasons. I mentioned above that many accounts you own will allow beneficiary designations, and it is only property without beneficiary designations that is probated. Think of a living trust as a way to add a beneficiary designation to everything else that you own – your home, vehicles, vacation home, boat, private equity – everything! Anything owned by the trust at the time of your passing is distributed exactly as specified by your living trust without any input from a court.
Even in cases where one’s estate is relatively small or simple to settle, a living trust can save your loved ones a lot of headaches. My wife and I, for example, have a living trust even though it is totally unnecessary. But our daughter is only 9 months old, and her and our future children will still be minors for the foreseeable future. The thought of their guardians having to wait months for things to get settled, and our children having to witness the stress and headache that comes with the probate process immediately after our passing is heartbreaking to us. If you find yourself in the same boat, then the additional cost of a living trust is more than worth it, in my opinion.
Finally, most attorneys will tell you that if you have a living trust, you still need a will. In this case, the will is known as a “pour-over will”, and it exists for the sole purpose of redirecting any property that might not have been placed in your living trust during your lifetime into it upon your death. In other words, it serves as a sort of estate planning “net”, catching anything that you might have overlooked.
Power of Attorneys
A power of attorney is a document that designates someone other than yourself to be a “decision maker” on your behalf. There are two types of power of attorney documents that absolutely everybody needs – a medical power of attorney, and a durable power of attorney. While it is common for the same person to be named as both your medical and durable power of attorney, this is not required.
A medical power of attorney designates someone who will make medical decisions for you in the event of your incapacitation. Often paired with this document is a HIPPA Release, which gives this person access to your medical records so they can make well-informed decisions.
A durable power of attorney designates someone who will make financial decisions for you. The range of authority that can be given to this person can vary widely and should be thought out well in advance, as stories of “loved ones” misappropriating and outright stealing the assets to which they have been entrusted are rampant. Durable power of attorneys can be effective either immediately upon signing the document, so that your power of attorney can exercise control over your financial affairs immediately, or upon your incapacitation.
The importance of having power of attorneys cannot be understated. Chances are that someone will be making these decisions for you at some point in your life. Either you can decide who those people will be, or someone else will. As with dying intestate, there is no excuse for not having power of attorneys. Finally, as mentioned with wills above, state law also varies widely when it comes to power of attorneys.
Review Everything
Like any part of your financial plan, estate planning documents are not a box you check once and forget about for the rest of your life. All documents should be regularly reviewed and will likely need to be modified or redrafted throughout your lifetime.
Generally, having a will slightly modified is relatively easy, and they only need to be redrafted in the event of major life changes. You and your spouse should review your wills regularly and promptly address any out-of-date information. I find it very helpful to have a brief, one-page summary of the major points of your will and other estate planning documents outlining who serves what role along with other key facts and features of the documents.
Power of attorneys should be reviewed, and often redrafted, regularly. Attorneys often recommend that these be reviewed every 5-7 years to make sure they are up to date and align with any changes in state law. This is essential, as one of the most common reasons for power of attorneys to be denied by a judge is apparently that they are too old.
Finally, please do not use an online service or template to draft your estate documents! Only an attorney, who knows you and your circumstances thoroughly, should be creating and modifying these documents for you. Think about what you risk putting your spouse, children, or even parents and siblings through by skimping on such important matters. Is that really worth risking in order to save a few hundred dollars?
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