Estate planning basics: The 3 documents everyone needs

A common misconception of estate planning is that it’s a process reserved for the rich and famous. The truth is that while you may not be planning for a $100 million estate, what you are planning for is far more important – a spouse or partner, a child, a business with employees, and even the community in which you live.

What is estate planning really all about?

An estate consists of a person’s money (bank accounts, investments, retirement plans), property (car, home, and personal effects), and other assets (like a business). Estate planning is the process of taking proactive steps to protect these items and ensure that someone can make critical medical decisions for you should you become incapacitated or pass away. It’s about ensuring the people you care about most are cared for if something happens to you.

Estate planning can be a challenging topic to discuss, but it’s a critical step in the broader financial planning process to take care of everything and everyone you have worked so hard for.

Why is estate planning important?

At its core, estate planning helps you answer one critical question, “If something happens to me, will the people I care about be OK?” The peace of mind that comes with a proper estate plan is priceless.

The three essential estate planning documents everyone needs

1. A will

The cornerstone of any estate planning process is a will. It states how your money, property, and other assets will be distributed if and when you pass away. Without a will, your family will have no control, leaving the courts to determine who receives your assets (based on state law).

When you create a will, a couple of things will happen. First, you will name someone as executor or personal representative to manage or “settle” your estate. They will be in charge of filing the will with the courts in your home state in a process called probate. If you have young children, you can name someone to care for them. This is called “naming a guardian.” If you are married, it is typically the surviving spouse. If you don’t name someone, the court can decide for you.

Knowing what a will does not cover is just as important as what it does. Jointly owned accounts or assets, like a bank account or a home, pass to the surviving owner. Accounts that have a beneficiary named—a 401(k), IRA, or Roth IRA—or a life insurance policy will pay to the beneficiary. In these instances, your will does not impact where the money goes.

Keep in mind there is a lot more to creating a will, so it’s important to work with an estate planning attorney to get the right advice. But this will get you started.

2. A power of attorney

The second key document is a durable (or financial) power of attorney (FPOA). With a power of attorney, you name an “agent” to handle your financial matters if you become incapacitated. The FPOA is limited to financial affairs. The agent will be able to handle most of your financial tasks like paying bills and debt payments, making investment decisions, and filing taxes, among other things.

There are two types of FPOAs to know. The first is effective the day you sign the document, and your agent can use it even if you are still capable of making financial decisions. The second is called a “springing power.” It “springs” or goes into effect after an event that causes disability or incapacity.

3. Advance medical directives

When it comes to your healthcare, the documents you need can vary from state to state. However, all documents are referred to as advance medical directives. In some states, the advance directives are part of one document. In others, there could be two. Regardless of the state requirements, here are two issues you need to address:

• Healthcare Power of Attorney (HCPOA) or healthcare proxy: Like a financial power of attorney, an agent acts on your behalf for healthcare decisions if you cannot make them on your own. Without an HCPOA, medical facilities have the right to make decisions for you instead of listening to a family member. If you have one, your agent can present the document and be in control of your medical care.
• A living will: The living will allows you to make decisions regarding end-of-life medical treatment. Suppose you are facing a terminal illness or injury and cannot express your desires to the medical staff. In that case, your living will provide instructions on whether you want life-sustaining medical care.

Final word

Planning for your estate and the people you love is a fluid and dynamic process. As you navigate life—marriage, children, divorce, or even a death in the family—you need to revisit your plan. Even something like moving to a new state can create the need for new documents.

An estate plan is an essential part of the financial planning process for everyone, but it’s not just about planning for your money. It’s about protecting what matters most. Done right, you’ll create peace of mind knowing that your health, wealth, and the people you care about will be OK should the unexpected occur.

Estate planning can be a confusing process, but it doesn’t have to be. A CFP® Professional at Facet can help you create a personalized financial plan and navigate the estate planning process more clearly and confidently.