You probably already know about financial planning—the importance of drawing up a budget, saving money, planning for retirement—as a way to manage your money, but did you know estate planning is an important component of the financial planning process, too?
Estate planning can give you great peace of mind, knowing that the people you choose will be in charge of your affairs after you're gone and that your wishes will be followed.
Moreover, a comprehensive estate plan can designate whom you would like to have making financial and health care decisions on your behalf, as well as specifying the types of medical treatment you do and don't want if you become incapacitated. Your loved ones also will appreciate not having to make difficult decisions during an already stressful time.
A solid estate plan, therefore, is actually an integral part of personal financial planning.
Below you'll find some financial planning tips regarding getting your estate in order, including brief descriptions of some of the most common legal documents you might want to draw up.
Creating an Estate Plan
Estate planning doesn't have to be complicated, and, in fact, in just a few steps you can be off to a great start.
First, you should take an inventory of your assets and figure out whom you would like to get what. Think, too, about your personal preferences regarding medical care should you become incapacitated and about whom you would like to handle your affairs, in the event of either your death or incapacitation. If you have minor children, consider potential guardians for them.
Now it's time to decide which documents you should include in your estate plan. Here are some of the most likely candidates:
Wills and Trusts
Wills and trusts give you a way to make your wishes known for after your death. A last will and testament allows you to name someone to handle your affairs after your death (executor) and state to whom you would like certain property to go. You also can name a guardian for minor children in a will.
Without a will, you will die intestate, which means that the government will distribute your assets according to your state's law—and things may not end up where you would have liked.
A living trust, on the other hand, allows you to place your assets in a trust for your benefit during your lifetime and then have those assets transferred directly—without going through probate—to your chosen beneficiaries upon your death. A living trust can make the transfer of assets faster and avoid the added expenses of probate.
Advance Health Care Directives
A living will or advance directive gives you the chance to provide instructions regarding the medical care you wish to receive should you become unable to communicate your wishes yourself. In both, you can include instructions regarding life-sustaining measures such as breathing and feeding tubes. A living will generally does not include a health care power of attorney, while an advance directive functions as both a living will and a health care power of attorney.
Power of Attorney
A power of attorney (POA) gives someone of your choice the authority to handle your affairs. A durable power of attorney gives that person the legal authority to do so even if you become incapacitated. A financial power of attorney would handle only financial matters, while a health care power of attorney would be in charge of health care decisions.
Life insurance can help make sure your loved ones are taken care of after your death. Parents of minor children, homeowners, and those who anticipate their estate's owing a large amount of estate taxes or having to pay off a large debt, in particular, should look into life insurance protection.
Drawing Up the Documents
Now that you have an idea of which documents you want in your estate plan, it's time to get down to business. In the same way that you may benefit from having a financial advisor or getting professional financial advice while coming up with your personal financial plan, it is a good idea to get professional guidance during estate planning.
The bottom line: your financial plan should include more than just provisions for budgets, savings, and retirement; it should also address estate planning concerns.
LegalZoom can help you set up an estate plan. If you're not sure which documents you need, our estate planning tool can help you decide. You can also talk to an attorney who can point you in the right direction when you sign up for our personal legal plan.