Estate Planning 101 (Relationships & Finances)

Meet Sophie. Sophie has been working at Corporate Co. for the past six years. Sophies happy, and thinks she has everything she needs: a great job, a loving husband, and an adorable puppy named Luke. However, unbeknownst to Sophie, she’s actually missing one thing: an estate plan. Sophie is stunned. What on earth is an estate plan? Well, you should think of it as a collection of legal documents that specify things like: How your property will be divided once you die.

Who will take care of your spouse, children and pets? And perhaps most importantly, who will make medical and financial decisions on your behalf should you become incapacitated? Now, I know what most of you are thinking. I don’t need any of this! And for the most part, you’re right. If you’re a single individual with few assets, you probably don’t need an estate plan. However, if you’re married, have children, or possess significant property, then the benefits of an estate plan are just too important to pass up. Sophie is clearly convinced but still has one last question.

How does an estate plan work exactly? Well, it generally operates through five components. The first one is the will, which covers things like what property you’re leaving to whom, and who will be your children’s guardian. As for who actually carries out these tasks, since you’re um…dead, you’ll nominate a trustworthy individual to be your executor. Thus, a will has powerful advantages, but it also has serious limitations, most prominently, any financial account with a named beneficiary, like a 401K or IRA, will supersede the claims of your will. However, don’t worry, you easily change these beneficiaries to the right person, if you haven’t already. So that’s the first component.

The second component of an estate plan is a living will aka as a Healthcare Directive, which dictates your preferences for end-of-life care, should you be unable to communicate them. This document is then generally paired with the third component, a healthcare proxy, aka a Medical Power of Attorney, which names a trusted individual to make medical decisions on your behalf. Both documents are critically important, as without them, your doctors must follow state-defined hierarchies, which could leave you and your loved ones with a very unfavorable outcome.

Then, we have the fourth component, the assignment of the power of attorney, which names a trusted individual to manage your financial affairs should you be incapacitated. And no, these powers are not automatically assigned to your spouse. In fact, without this power, your spouse could have significant limitations on selling even jointly-owned property! Finally, should Sophie have a net worth of more than $100,000 or substantial real estate assets, she may want to consider the fifth component of an estate plan, a trust. Think of a trust as a legal box which you can fill with assets, like a house, to be passed down to a specific individual, called a trustee, once you die.

This has two major advantages: One: It allows you to minimize your estate taxes. And Two: It keeps your larger assets out of probate, which is the pricey, time-consuming way the court that distributes your property and pays off your debts, as outlined in your will.

Finally, as for actually making the estate plan, while you can technically use a cheap, DIY online resource, we don’t recommend it. Its just too easy to make a costly legal mistake. That’s why instead we recommend hiring an experienced estate planning lawyer. Hopefully you and Sophie now better understand estate planning.

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