If there is one topic that people resist discussing more than their money, it is their own mortality. That aversion is clear in the statistics-one-third of Americans have no financial plan; more than half have no will.
I have found that people are generally unaware of what goes into estate planning or what purpose an estate plan has for families that are not “rich.” That lack of awareness and the general difficulty of discussing death with family members combines too often to make planning for the financial needs and impacts of one’s death a low priority.
This column presents a few of the core concepts and value propositions of basic estate planning.
Please note that, as always, this column does not provide formal advice; prior to making legal arrangements, you should consult an estate planning professional or attorney.
Even if a majority of people do not have one, most people have heard of wills.
A last will and testament is a formal document that lays out a person’s wishes for how they want to distribute their property at death, as well as their specific preference for burial, memorials, etc.
Although some states allow for a “holographic” will, where the person handwrites their instructions, it is more common to have an attorney draft the documents and have the will signed in front of witnesses.
If a person dies without a will, it is likely that their possessions will be distributed per the default laws of the state. Even in a case with a valid will, there is still a process called “probate” in which the court considers the will’s instructions before any possessions are distributed.
Powers of attorney
It is common for an estate plan to involve granting one or more people powers of attorney to act on behalf of the grantor.
These powers can be limited or broad, and there is typically one for financial concerns and one for health care. There are many reasons a person might need or want to grant a power of attorney; a simple example would be if they were temporarily incapacitated, as may occur with a bad car accident.
A trusted friend or family member with a power of attorney could access financial accounts or make medical decisions during that period of incapacitation.
Living will or advanced medical directive
These are documents that capture how a person wants to manage their health care in very critical situations or at the end of their life.
They serve two main purposes: They give a person some measure of control over their own experience, and they can spare family members some of the difficult decisions that arise when their loved one cannot make a decision for themselves.
For an in-depth and moving look at some of the issues that inform these end-of-life decisions, check out Atul Gawande’s book “Being Mortal.”
These are legal arrangements that can serve a variety of purposes, and there are two main types: revocable trusts, which are sometimes called “living” trusts and can generally be modified or undone up until the trust grantor dies; and irrevocable trusts, which effectively transfer ownership of the assets placed into the trust from the grantor to the trust itself.
Trusts can be useful in some similar ways to a will; because the trust can name one or more beneficiaries and can hold specific assets or possessions, they can help manage the transition of those assets to heirs in a straightforward way, and may avoid the cost and complexity of probate.
Trusts can also be used to manage some more complex charitable giving strategies, as well as some sophisticated tax planning.
Guardianship of minor children
For a family with kids, a robust estate plan should likely contain provisions on what the parents would like to happen if they both die while the kids are young and dependent.
An estate plan can name specific people that the parents would like to serve as guardians for their kids, and can contain specific instructions on how assets and insurance proceeds could be available for the children’s support.
Insurance and investment planning
Insurance products, in particular life insurance policies, are often central to an estate plan, as they provide financial liquidity at death for things like funeral expenses, medical costs, the support of minor children or a surviving spouse, or an inheritance.
Through the estate planning process, existing insurance policies should be reviewed and any gaps considered for potential new insurance needs. Similarly, investment portfolios may be tweaked or realigned with the overall estate plan to make them fit the needs and intent of the estate plan.
David Wattenbarger plays trivia at bars and Boggle at home when he is not out exploring Chattanooga with his wife and two sons. He is president of DRW Financial and can be reached at [email protected], on Facebook or on Twitter. This column is not intended as formal financial advice. Consult a financial or tax professional before taking action. The opinions expressed in this column belong solely to the author, not Nooga.com or its employees.