Everyone needs an estate plan. The reason? Too many people die without them.
I don't know you or your situation, but I think I can safely say that you need an estate plan. It's the only way to make sure your assets (your stuff) get passed on the way you want. I will tell you that the consequences for your heirs of not having a plan in place may be severe.
Even if you don't have kids, don’t you want to decide who gets your property when you die?
If not, your state will choose for you.
You heard that correctly.
If you die without legal documents laying out your wishes, your state decides who gets your property.
I'm quite sure that's not what you want.
Previous estate law
In the past, most people built an estate plan to avoid paying the taxes due at their death. Before 2010, you could die with $1 million or less in your name and not owe estate taxes. For a married couple, the amount was $2 million. However, if you were fortunate enough to have an estate worth more than that, you paid taxes up to 50% of the value of your property.
The amount exempt from estate tax has gone up substantially since 2010. Under the most recent tax law (December 2017 as of this writing) that amount stands at over $5.6 million per person. That means that each person can die with up to $5.6 million of stuff in their name and not owe any federal estate tax at their death. If you're married, that total is $11.2 million.
According to the Center for Budget and Policy, less than 0.20% of those who have died in 2017 paid the estate tax. So, taxes are no longer the primary reason to plan anymore.
Estate planning basics
An estate plan includes legal documents that instruct the person you name to carry out your wishes what to do. We will talk in more detail about what those documents are in a moment. Because an estate plan contains legal documents, you need a lawyer to create them.
There are federal and state laws that apply to these documents. You'll need to find a lawyer who specializes in this area of the law and practices in the state in which you own property. With that fact established, let's talk about what documents you need.
Four Documents Every Estate Plan Must IncludeWhen you begin to work on your estate plan, there are four documents every estate plan should include.
- The will
- A durable power of attorney
- A durable health care power of attorney
- A living will (advance directive)
If you have a trust-based estate plan, the fifth document required is a living trust.
This document tells your executor (the person you name to carry out your wishes) and the probate court (where estates get settled) how and to whom to distribute your property. Without a will, the probate court has a process they use to distribute your property. The court's process may mirror what you choose. However, this delays the property distribution, and usually costs more to complete. It's always better to have a proper will in place.
In the will, you name an executor (male) or executrix (female) to carry out your wishes. It is common to pay this person a fee. Often they calculate the cost as a percentage of the value of your estate (all of your property). By naming a spouse or trusted family member, you can reduce or even eliminate this fee.
If you are single or have a strained relationship with family, consider hiring a corporate executor (bank, an insurance company, trust company, etc.). You will likely pay much more for a professional executor than a family member. Many people hire the attorney that drafts your estate documents to serve as the executor. Fees vary by state. Some have a fee range based on the size of the estate. Others leave it to the judges in probate court.
A client of mine, who lived in Washington, DC, died in 2016. Her estate paid her executor attorney 4% of the value of her estate. That amounted to around $80,000 on her roughly $2 million estate value.
Here's a great article on writing a last will and testament:
How to Write a Last Will and Testament
The durable power of attorney (DPOA)
This document gives a trusted person authority over all of your financial affairs. They are called your attorney-in-fact. They can pay your bills, manage bank and investment accounts, IRAs, retirement plans, and real estate, including buying and selling any property you own.
Sounds scary, right? And it is. That's why it's critical to name someone you trust.
Like the will, you can name a family member, an attorney, or a corporate trustee. If you are married, it is often your spouse. In some cases, it might be a trusted adult child. If you have a family business where one of your children is partners with you, this is more common. He/she is familiar and often a part of the family finances.
If you become incapacitated, either permanently or temporarily, this document assures your bills get paid, and your finances get managed when you are unable to do so.
The durable medical (healthcare) power of attorney
The durable medical power of attorney, unlike the DPOA, limits the scope of responsibilities to decisions about your healthcare.
The named person (called the health care agent) has the power to make decisions about your medical care. That means they decide what type of medical treatment you receive, including medications, doctors, choosing hospitals, surgeries, rehab centers, and many other areas.
Like the DPOA, the durable medical power of attorney is a comprehensive document giving your agent broad powers over your medical care. You can set limits and be specific about the kind of care you want and the doctors who administer that care. However, as with other legal documents, each state has its own rules about the provisions available in the medical power of attorney.
Also, when you execute any legal document, you must be of sound mind at the time of signing. One of my clients, in the early stages of dementia, went to her attorney to change some provisions of her will. I attended that meeting along with one of her brothers. The attorney asked her some questions about her wishes. He did not think she was of a sound mind and would not change her documents.
The living will or advanced directiveThe living will is a document talked about a lot in conversations about estate planning.
If you have surgery or medical procedures using anesthesia, caregivers often ask if you have a living will, a.k.a., the advanced directive. Unlike the durable medical power of attorney, the advanced directive does not deal with the type of medical care you receive.
Instead, it deals with the end of life issues. Things like – do you want to be kept alive by artificial means (respirators for example)? Do you want to be fed via a feeding tube to keep you alive? Will you want cardiopulmonary resuscitation?
The advanced directive becomes effective when doctors decide you can't make decisions for yourself. It tells caregivers in advance what your wishes are. The directive also saves your loved ones from making the agonizing decisions about your wishes. Watching a loved one at the end of their life is hard enough. Asking family to discern what you might have wanted adds an unnecessary, avoidable burden. Giving them direction with an advanced directive relieves them of that incredible burden.
Like the other documents, the language required in the advanced directive is state specific.
Here's one last critical item.In our digital world, one of the things people often forget about in their planning is their digital assets.
What are digital assets? Anything you keep online.
Here's just a partial list:
- Passwords to your bank and investment accounts
- Social media login information – Do this so these accounts can be shut down
- If you use a password manager (LastPass, Dashlane, etc.), be sure you list your login information. If you use one of these services, your heirs can likely get all of your login and password information.
So many people forget about their digital assets.
Nowadays, people manage much of their affairs online. Not including these things in your estate plan can cause delays and significant problems for your executor and heirs.
It's impossible to cover everything you need to know in this post. What I'm offering here is a starting point.
The wills and trust section at LegalZoom has many helpful articles. The legal dictionary at Law.com is another useful resource. I always recommend interviewing a local attorney who specializes in estate planning. You want to build a relationship with someone who can keep your plan up to date.
You also want to choose someone who your heirs can get to know. As the relationships with your CPA and other advisors, your estate attorney should be an integral part of your financial team.
Now it's your turn. Where are you in your estate planning? Have you started? If not, why not? What motivated you to put your plan in place?
Let me know in the comments below.
I'm in no way offering you legal advice. To do estate planning properly, consult an attorney specializing in this area of the law.
Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.
In April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.