As you work on your personal finances, you may track expenses, budget, pay down debt, save for emergencies, and invest. You’ll want to put the pieces of an estate plan together too.
While it feels good to have a better handle on managing your money, it may also feel like it’s ‘one step forward, two steps back’ at times.
Growing the gap between what you own and what you owe boosts your overall net worth. Still, it may take several years, and your goal is to acquire more assets as you pay down your liabilities.
You also need to protect those assets. (And other things too.)
Today, we’re here to share essential moves you’ll want to make to safeguard your growing nest egg. We’ll also discuss some of the basic legal documents you need to protect yourself and your loved ones should anything terrible happen to you.
What You Need to Start Your Estate Plan
First of all, let’s debunk the myth that estate plans are only for wealthy, old, or sick people. That just isn’t true. It might surprise you, but almost everyone over the age of 18 should have some parts of an estate plan in place.
Without completing certain legal forms, you give up control over who can make medical and financial decisions for you. This includes how your healthcare and money are managed if you become incapacitated or pass away. If you have minor children, you’re also giving up the chance to name a guardian for them.
We all hope to live a long and healthy life! But keep in mind that people of all ages face severe illnesses and injuries every day.
While we’re not suggesting you need to rush to set up a trust, there are essential estate planning documents worth completing.
3 Important Estate Planning Documents
Advance Healthcare Directive (aka Medical Power of Attorney and Living Will). Your medical power of attorney form lists the person (and alternates) you’ve chosen to make healthcare decisions for you if you’re deemed unable. Your living will describes your preferences for treatment options and end-of-life care decisions such as pain management, life support, and organ donation.
Financial Power of Attorney. This document lists the person (and alternates) you’ve chosen to manage your finances during a time when you’re unable. This could happen during a period of incapacitation, during an overseas deployment, or when another matter prevents you from taking care of your financial affairs.
Last Will and Testament. Unless you are single, childless, have very few assets to distribute to heirs, and have an uncomplicated family life – you should also have a will. Your will states how you want your assets distributed, who you want to serve as guardian of your children, and how you’d like your pets cared for after you pass away.
Other Essential Tools That Protect You, Your Finances, and Your Family
Along with completing the estate planning documents above, consider the tools below. They can protect you and your loved ones, along with guiding the division of certain assets after you’re gone.
Insurance. Both life and disability insurance should be on your radar. Many people choose term life insurance policies that provide a payout to beneficiaries after their death. Consider buying enough life insurance to replace your income for a certain number of years and cover significant debts such as a mortgage. If you’re not able to work due to an illness or injury, short or long-term disability insurance can provide you with some level of income protection.
Beneficiary designations. In addition to a will or trust, various policies and accounts ask you to name beneficiaries. Examples include life insurance policies and retirement accounts. When you choose beneficiaries (family members, friends, or even charities), you list what percent of the particular asset you want them to have in the event of your death.
Payable or Transfer-on-Death (POD or TOD) designations. You’re allowed to designate someone as the payee of savings/checking accounts when you pass away. Your investment accounts and assets such as stocks, bonds, or real estate can also be transferred to beneficiaries of your choice when TOD is an option.
Estate Planning Considerations as You (and Your Family) Age
You now have a better understanding of the legal forms you need to get in place and other instruments you should review that protect you, your family, and your assets.
But your estate plan isn’t static either. You’ll need to review and make changes to key documents over time and after certain life events.
Common Times to Make Changes
Your documents likely need to be amended if you have a child, get divorced or remarried, become widowed, or suffer the loss of a close family member.
Middle age can be a challenging time when it comes to estate planning. You’ll need to monitor your plan and ensure it protects you and your loved ones. You may also be serving as executor or agent of an aging parent or relatives estate and need to monitor theirs too.
If your parents were initially assigned major roles in your estate plan, you might have to consider changing that. You may need to remove them from positions of responsibility in your plan as they age.
Parts of your plan need updating as your children become adults. You need to think about your young adult child’s ability to handle money if they would get an inheritance. Something to also consider is naming an adult child the executor of your will and agent on your power of attorney documents, as many other parents do.
Review Your Need For a Trust
Finally, you may want to review your need for a trust. That is a legal tool that could help with some of the life changes mentioned above. You may pay a little more to have one set up, but it can provide more protection for those you leave behind.
A living trust lets you control your assets while you’re alive and direct how and when heirs receive them after your death.
Consider a trust if you want more control. For example, you may not want a 21-year old getting a lump sum of money from a life insurance payout. Or you may want to make sure children from a previous relationship get part of your estate.
Another bonus? Trusts don’t become public record like probate proceedings from your will.
Estate Planning Issues for Women
It’s essential for women to be financially literate and to be engaged in their estate planning. Whether a woman is single, married, or in a committed relationship – they must understand their financial situation and be an active participant in retirement and estate planning.
Women have longer life expectancies than men. Longer life spans impact financial planning in many ways.
For example, women must prepare for a longer retirement and the potential for more years of long-term care.
Women may also have fewer savings and get lower Social Security benefits. This is due to issues like the gender pay gap or taking time off to care for children or aging parents.
Estate planning for women is a case where the “oxygen mask” analogy when flying really fits. Women have to put themselves first, so they address their needs and then help others later.
Final Thoughts on Getting Started With Estate Planning
You should take pride in all your efforts to secure a financially stable future. But do take the extra steps to make sure all your hard work is protected if something happens to you.
Don’t assume your loved ones know what your wishes are. Or that they’ll all get along to handle your affairs if you become incapacitated or pass away.
It’s your responsibility to get your affairs in order. Don’t leave your loved ones with extra work to do during a time of crisis or grief.
If you don’t have any estate planning documents, it’s time to begin. Try not to get overwhelmed by the process. Start with your advance directives and consider adding a financial power of attorney document and a will.
If you already have parts of an estate plan, review them to ensure they’re up-to-date and reflect your wishes.
Where to Find More
For more information on “life planning” and getting started with estate planning, check out our new book Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning.