The Bottom Line

Five essential estate planning documents you need in your estate plan:

1. Will
2. Power of Attorney
3. Health Care Directive
4. Beneficiary Designations (Retirement Accounts & Insurance Policies)
5. Trusts

Estate planning can be challenging with complex legal documents, tax implications, and daunting questions. However, it is an important part of a well-rounded financial plan.

Everything you own—your house, your assets, and your investments—is a part of your estate. Although it may be uncomfortable to contemplate, you need a plan for what happens to your estate when you pass away. A thoughtfully constructed estate plan can help your heirs manage better.

What Are the Five Most Important Estate Planning Documents?

To help shed light on the complicated web of estate planning, we've highlighted five key documents you need and answered common questions about each.

1. Will

A last will and testament—typically referred to as just a "will"—is probably the first thing that comes to mind when most people think of estate planning documents. A will ensures your wishes are carried out after you pass. Contrary to popular images of elderly people drawing up wills on their deathbeds, wills can be created at any time. In fact, our estate planning advisors regularly recommend creating a will as soon as you have any significant assets, children, or even pets.

Why do you need a will?

1. It clearly outlines how your assets should be distributed after your death
2. It enables you to name an executor responsible for administering your estate plan
3. It allows you to name who should care of your children and/or pets
4.  It facilitates a smooth and efficient process for transferring your estate

Not having a will is dangerous to your estate plan. But it isn't the only document you need.

2. Power of Attorney

Often abbreviated to POA, power of attorney allows you to designate someone to manage different aspects of your life if you're unable to. There are a few different kinds of POA: general power of attorney, limited power of attorney, and durable power of attorney.

• General power of attorney designates an individual to take legal actions on your behalf, including contractual rights and financial decisions (like selling stocks or closing a bank account).
• Limited power of attorney designates an individual to act on your behalf in specific matters or events. It typically authorizes specific limited powers and expires at a predetermined time. For this reason, limited POA isn't commonly used for estate planning purposes.
• Durable power of attorney is a modifier that can be added to either general POA or limited POA, and it means the POA remains valid, even if you become incapacitated. For this reason, the durable general power of attorney is the most widely used variant for estate planning because it provides broad and comprehensive authority to the appointed agent in any circumstance.

Note: POA is especially important for single people because there is no spouse to immediately jump in to serve in this role. If you’re single and don’t have a power of attorney designated, a court will decide on your behalf. In this case, it’s possible that they may select someone you might not think is the ideal candidate.

3. Health Care Directive

Your health care directive is a collection of documents relating to medical care. With these, you appoint someone to make medical decisions on your behalf if you can't.

There are two main documents in your health care directive: living will and medical power of attorney.

• A living will is a legal document that allows you to express your medical treatment preferences in advance, typically regarding life-sustaining procedures in case you can't communicate or make decisions about your health care.
• Also known as a health care proxy, the medical power of attorney specifically names someone to make medical decisions on your behalf if you become incapacitated.

Health Care Directive Example: The Case of Terri Schiavo

You may not think a health care directive is necessary, but you need one, regardless of age. The case of Terri Schiavo brought the concept of health care directives into the national spotlight. Following a sudden instance of cardiac arrest at the age of 26, Schiavo was severely incapacitated and could not communicate her wishes. Her family members battled for years about whether or not she should be removed from life support, but because she had no living will, they didn't know exactly what she would've wanted. Because she had not appointed a medical power of attorney, nobody was directly authorized to make medical decisions for her. This high-profile case serves as a reminder that it's important to get your wishes in writing no matter how old you are.

Whether your family is aware of your true wishes or disagrees about your care, it’s good to have these documents in place to make sure you are cared for as you intend.

4. Beneficiary Designations

Beneficiary designations are official selections made by an account holder or policyholder to dictate who should receive the assets or benefits of that account or policy upon the holder's death. You'll find beneficiary designations on many common retirement accounts, like 401(k)s, 403(b)s, and individual retirement accounts (IRAs), as well as on life insurance policies.

The important thing to remember about beneficiary designations is that they actually supersede what's in your will. So, let’s say you’re married and name your spouse as the beneficiary of your retirement accounts, but you eventually get divorced. You remarry and change your will to leave your new spouse everything. However, if your ex-spouse's name is still listed as the beneficiary of your retirement accounts, your ex will receive the benefits, regardless of what it says in your will.

Why Beneficiary Designations Help Avoid Probate

Another benefit of naming your beneficiaries is that it may help you avoid probate. Probate is the time-consuming, state-supervised process for distributing undesignated assets after their owner’s death. To help bypass the process, consider naming your beneficiaries and including all of your assets in a will or trust.

It helps to review your designations at least annually as well, especially after significant life events.

5. Trusts

While trusts may not be necessary in every situation, they’re wonderful tools for both distributing assets and reducing estate taxes. A trust is a legal entity (not technically a document) created to hold assets on behalf of an individual or organization.

Here's how it works: The grantor (the creator of the trust) quite literally "trusts" the trustee (the manager of the trust) with their assets. After the terms of the trust are met, which could include the death of the grantor, the grantee (the beneficiary of the trust) receives the trust assets in some form.

There are three primary types of trusts—revocable, irrevocable, and testamentary—and the grantor can set up their trust to dictate exactly how and when the beneficiaries receive the trust assets. While the details between trusts differ, the general idea is the same: protect and manage your assets, reduce taxes, and avoid probate.

Revocable Trusts vs. Irrevocable Trusts for Estate Planning

Revocable trusts, also known as living trusts, can help your estate avoid probate by designating beneficiaries for the assets in each trust. Revocable trusts are particularly useful for individuals with assets in multiple states—because probate is governed at the state level, having a revocable trust for the assets in each state can prevent multiple simultaneous instances of probate.

Irrevocable trusts are also beneficial for estate planning because they can limit your estate tax exposure. Once assets are loaded into an irrevocable trust, they can't be removed. Likewise, after establishment, the terms of the trust can't be altered. In essence, trust assets are taken out of your estate, which can mean they don't count toward your estate's value.

It's also possible to create a trust inside your will, known as a testamentary trust. These trusts are revocable and go into effect upon your death. However, the assets inside a testamentary trust aren't exempt from probate.

Trusts can get complicated and aren't appropriate for every situation, so talk to your financial advisor about your specific circumstances before setting one up.

Protect Your Estate With a Comprehensive Plan

It isn't enough to simply draft these documents and call it a day. You need to understand how each document and action impacts the other parts of your financial plan because everything is interconnected. Additionally, you have to review these documents on a regular basis to ensure they line up with your needs as your life circumstances change.

While you may be able to figure the documents out yourself, it's a good idea to take the time to work with an estate planning attorney and an experienced financial advisor. This way, you can ensure everything is completed accurately and all your wishes will be carried out when the time comes.

Have more questions about how your estate planning decisions will impact your legacy? Download our free eBook with a guided journey on how to protect your wealth for future generations. Check it out today!