What are the most important estate planning documents I should have?
Estate planning isn’t necessarily something most of us want to do, but it is something you should do. Not only will it allow you to get your affairs in order and make your preferences known, but it will also help your friends and loved ones to navigate an already stressful and painful experience.
Although it may seem intimidating, estate planning isn’t as complicated as you may think. In fact, it’s made up of a few straightforward documents that are relatively simple to work through.
Estate Planning Documents You Should Have
Each document that you use to plan your estate serves a specific purpose. While you may not need every estate planning document out there, chances are at least a few are relevant to you and your personal situation.
Customize your estate plans to reflect your personal finances, assets, beneficiaries, and preferences to ensure that your wishes are followed and that you have a say in how your affairs are managed after you die or become incapacitated.
The most common estate planning documents to consider include:
1. Last Will and Testament
A last will and testament is a document you use to distribute your assets and personal belongings to beneficiaries, such as individuals or even charities. In it, you also name an executor, who is responsible for closing your estate according to your wishes.
For example, if you leave a specific heirloom to a family member in your will, it is your executor’s duty to ensure the item is given to the beneficiary you named.
A will is used by an estate attorney, executor, and your loved ones after you pass away.
Anyone who has a preference about how their assets are distributed after death should create a last will and testament.
2. Revocable Living Trust
A revocable living trust is an estate planning document you use to name a trustee to manage specific assets you own. For example, you can put real estate property, investments, and bank accounts into a trust for a trustee to oversee.
It can be used both while you are alive and after you pass away. Before you die, you can use a revocable living trust to name a trustee to manage your assets. The trustee can oversee any assets within the trust, and you retain the right to amend or change your living trust at any time.
In addition to naming a trustee to handle any assets within the trust upon your death, a valid revocable trust helps your estate to avoid having to go through probate court.
You should create a revocable living trust if you would like to name someone to manage specific assets that you own while you are alive and after you die or if you’re looking for ways to skip the probate process.
3. Beneficiary Designations
Beneficiary designations are documents you use to name beneficiaries for assets such as life insurance policies and individual retirement accounts (IRAs). They are used to designate a beneficiary in the event that you die and are unable to claim these assets yourself.
Beneficiary designations are typically available through the company that manages the asset, such as the life insurance provider or the bank or brokerage your financial account is with. However, you can also specify beneficiary designations for these assets in your will.
You should ensure any assets you own that are held or managed by a third party include a completed beneficiary designation so that the individual of your choice can access your accounts after you pass away.
4. Letter of Instruction
A letter of instruction is an estate planning document you use to:
- Leave instructions about how to access your assets
- List all of your assets and debts
- Detail where to find important documents like property deeds or a marriage certificate
- State your funeral or burial preferences
- Document online passwords and account information
Although not a legal document, a letter of instruction helps your estate planning attorney, executor, and loved ones to execute your estate. It can include a variety of information, such as social media logins, instructions for memorial donations, and what you’d like written on your headstone.
Virtually everyone can benefit from having a letter of instruction because it can be used to provide instructions and guidance to those who are responsible for closing your estate.
5. Advance Health Care Directive
Depending on which state you live in, an advance health care directive may be made up of two parts. The first lists your personal medical care preferences, such as whether you want to be resuscitated or kept on life support. This is called a living will.
The second names a personal representative to make and enforce health care decisions on your behalf. This is often referred to as a medical power of attorney or health care proxy.
Unlike other estate planning documents which are meant to facilitate the distribution or management of your assets, an advance health care directive only addresses medical decisions.
It can only be used while you are alive and outlines medical directives for medical technicians and health care providers to follow in the event of an emergency where you are unable to communicate your wishes due to incapacity.
For example, if you are in an accident that leaves you seriously injured, emergency responders and doctors can use your advance health care directive to inform your treatment plan.
Anyone who has specific health care wishes should create an advance health care directive.
6. Power of Attorney
A power of attorney or POA is an important legal document you can use to name someone (called an attorney-in-fact) to manage your financial affairs, including real estate, businesses, and bank accounts.
You can choose to give your attorney-in-fact either general powers or limited powers. For example, you can allow your attorney-in-fact to manage all your assets, or grant them specific powers like permission to cash checks in your name but not to withdraw funds.
In estate planning, there are two main types of power of attorney: durable and non-durable.
A durable power of attorney remains in effect even after you lose capacity.
A non-durable power of attorney becomes invalid if you become incapacitated or die.
For example, if you gave someone durable financial power of attorney to run your business, they would continue to be able to do so after you died. On the other hand, if you gave them non-durable financial power of attorney, their ability to act on your behalf would cease once you pass away.
Power of attorneys are useful in many different situations, and you should include one in your estate plans if:
- You have been diagnosed with a serious or terminal illness
- You are having surgery
- You have a dangerous job
- You want a specific person to manage your finances
7. Guardianship Designations
Guardianship designations refer to naming guardians for minor children. While this can be addressed in a last will or power of attorney, you can name guardians in a separate document as well. If you die without designating a guardian for your dependents, the court will appoint one for you.
You can even specify guardianship for pets if you have any.
You should use a guardianship designation if you have minor children, pets, or dependents and guardianship is not addressed in your last will and testament, or power of attorney.
Estate planning is made up of more than just the distribution of your assets. From naming a guardian for your children to making your medical preferences known, it encompasses many important decisions.
Whether you use an online estate planning service like Trust & Will or an estate attorney, your estate plans should reflect your personal situation and wishes.
Once your estate plans are good to go, keep your documents safe and accessible by:
- Notifying your executor, attorney-in-fact, and estate lawyer of your documents and where they are stored
- Updating and reviewing your estate plans each year and after major life events
- Keeping a copy of the documents in a secure location, like in a safe deposit box or at your lawyer’s office
The more comprehensive and complete your estate plans, the easier it will be on your loved ones when it comes time to use them.