Even if you don't expect to pay estate taxes, estate planning is a vital part of any comprehensive wealth. After a secure retirement income plan, of all the financial strategies HCM Advisors help our clients design, an estate strategy may be the most important; however, it is usually the last one clients want to tackle.
So what exactly is an estate plan, and why is it so important?
Estate Plan Basics
An estate plan directs the management and organization of your assets and how they will flow when you pass away. It also includes instructions determining who can make medical and financial decisions should you become incapacitated. We realize no one likes thinking about this scenario, but it is important.
Many people assume an estate plan just includes a will, yet a surprising number of people do not even have that. While a will is an important document, other documents need to be included in your estate plan as well.
- Your will (also called a last will and testament) specifies how you want your estate to be distributed. Besides dividing your assets, a will also appoints guardianship for minor children. This is essential because no one wants a court determining who their children should live with in the event of their death. Even if your estate plan includes a revocable trust, a will is still needed. Called a “pour-over will,” the goal of this document is to cover any assets that may not have made it into to the trust before your death.
- An advanced medical directive (medical power of attorney) establishes who can make medical decisions for you should you become unable to do so. The medical power of attorney also allows you to designate a conservator should you become mentally incapacitated.
- A living will provides instruction to your physicians regarding the type of care you wish to receive at the end of your life if you face a terminal illness or are in a vegetative state. Do not resuscitate (DNR) and do not intubate orders are also listed here. While a last will and testament is designed to specify your wishes upon your death, a living will determines what will happen while you’re alive.
- A financial power of attorney, much like a medical power of attorney, appoints someone to handle your financial affairs if you become unable to do so. There are two different types of financial powers of attorney: a durable and a springing power of attorney. A durable power of attorney goes into effect as soon as it is signed, whereas a springing power of attorney only goes into effect if you become mentally incapacitated.
- A revocable living trust (RLT) is a more detailed document that specifies not just what happens after you’re gone or incapacitated but also what happens while you’re alive. At its most basic level, a revocable trust is a vehicle designed to hold your assets; meaning that until you move assets into it, it’s essentially just an empty vessel. If you have a more complicated estate, a revocable living trust can help manage a variety of assets and beneficiaries. As the trustee of your RLT, you’ll still have control over your assets. And assets held in the trust will avoid probate, something much appreciated by those who have managed an estate of a loved one through the probate process.
Estate plans are a necessary part of life, albeit one that no one really wants to think about. But having an estate plan is one of the kindest things you can do for your loved ones who survive you. You’ll gain peace of mind knowing that your family is taken care of no matter what life throws at you.
As a follow-up, our next blog will look at planning from the inheritors’ perspectives.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.