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Estate Planning Basics Part I

Often investors tend to focus on how much they need to save in the present, in order to maintain the same standard of living in the future. While having a well formulated savings plan is essential to walking down the path towards retirement, “the unexpected” can rear its ugly head and disrupt the framework you put in place.

Below I will discuss each of the basic estate planning documents and why everyone should have them. This will be the first entry of a four part installment surrounding estate planning, trusts, estate tax, and gifting strategies for individuals of varying net worth’s.

Part 1: Estate Planning Basics

Last Will and Testament

While sitting down with an attorney and devising a Will may not be at the top of your weekend “to-do” list, this is the best way to make sure your wishes are fulfilled regarding how property and assets are passed down without leaving anything up to the courts.

Your Will doesn’t have to be complicated. You can draft a will that simply directs where (and to whom) things are passed. If you recently have had children, drafting a Will can be especially important. Within this document, you would name a guardian for them if you were to pass before they were of age.

When you draft a Will, use this as an opportunity to name the personal representative of your estate. They will be in charge of managing the estate, assisting in the distribution of assets, and paying bills after you’ve gone.

It’s okay if you would rather not divulge intimate details about the Will, but communication is crucial. Let your family know who you’ve named as the personal representative so there is no debate as to your intentions prior to your passing.

Power of Attorney

A power of attorney (POA) provides someone else authority to act as an “agent” and make legal and financial decisions on your behalf. There are several types of POAs that can be drafted, but the one you choose will depend on your personal circumstances. If you are unsure of which one is best, work closely with your estate attorney and wealth mangers to help you arrive at that decision.

Below you will find a brief description of the most common powers of attorney…

Limited: A limited POA gives another the power to act on your behalf for a limited time and/or purpose. This power usually ends at a time specified within the document.

General: A general POA is comprehensive and gives your agent all the powers and rights you would have yourself. You could use this power if you were not incapacitated but still needed help with your financial matters. This POA ends at your death or incapacitation unless you rescind the power beforehand.

Durable: A durable POA is different from others due to the abilities your agent has after you have become incapacitated. This POA can be either general or limited in scope, and allow someone to act for you even if you are of sound body and mind. If at some point you are unable to act for yourself, your agent may continue to act as your representative. Without a durable POA, power would end, and a court would have to appoint a conservator or guardian. This power will remain in effect until your death unless you rescind it while you are not incapacitated.

Springing: Much like a durable POA, a springing power of attorney allows your agent to represent you after you have become incapacitated; however, (unlike the durable) it does not become effective until you actually are incapacitated. If you chose to use this type of POA, you want to make sure that the standard for determining incapacity and triggering the POA be clearly laid out in the document itself.

This position is unlike the personal representative in the sense that it may be a continuing appointment if you are to become physically or mentally disabled (depending on the power you choose); therefore choose wisely. It is extremely important you consider naming someone comfortable with financial matters, as often times people name someone who may have their best interest in mind, but does not have the skill set for managing money.

As any wealth manager will tell you, “hope for the best, but plan for the worst”. This is why it is essential to have a backup plan. Naming an alternate appointee is important just in case something were to happen to you and your agent simultaneously.

Health Care Directive

A health care directive is a written document which allows you to outline your wishes for end-of-life care. It is important if your doctor determines you are unable to communicate your healthcare choices (because you are either physically or mentally incapacitated). It is also important if you would like to have someone else make your health care decisions. In some instances, this directive may state that you want someone other than your doctor to decide if you are of sound body/mind.

When drafting your health care directive, you may also want to consider completing a HIPAA release form. Due to the recent enactment of laws intended to protect our healthcare information, this has made things more difficult for family members to access your health records. Ideally, you want to make sure you have granted your family the ability to legally access information prior to your incapacitation so they are able to exercise their powers as intended.

Unlike the some of the POA’s listed above, the key to this appointment is selecting someone who can stay calm in a high pressure or crisis situation.

As you can imagine, appointing these individuals is not easy, but is essential to making sure your affairs are handled the way you want, which is most important. Keep these items updated regularly, and in a safe place other than a bank deposit box (which requires a power of attorney to access).

If you would like more information on how to go about having these documents drawn up, please reach out to the team at All Star Financial. We are here to serve your wealth management needs!

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