Tip for financial success in 2014: Develop an estate plan
The definition of financial success is different for everyone. Although the requirements may vary, some key components should include a budget, a savings account with enough to cover three to six months worth of bills, a retirement account, proper insurance coverage and an estate plan.
A recent article in Forbes discussed these components, noting an estate plan is a key factor to achieving financial success. When it came to an estate plan, the article touched on two important elements: make sure the plan is complete and double check beneficiary designations.
What is a “complete” estate plan?
The answer will vary for every individual and will likely change through the years. Basic components include a will, powers of attorney documents, living wills or healthcare directives and possible trusts. Here are the basics for how each tool works:
- Will. Essentially, a will is a legal document that allows an individual to distribute assets that are held in their name alone when they die. These assets can include property, personal items and family heirlooms. A will appoints and executor to wind up one’s estate when they die. The document can also be designed to help avoid unnecessary estate taxes.
- Powers of attorney. These documents are used to put another individual in charge of financial decisions. This individual is given the power to manage finances. This can be done in a variety of ways, including paying bills, paying taxes and managing investments.
- Living will. Also called healthcare directives, these documents provide directions on healthcare treatments that a person wishes to receive. This can range from a statement that an individual wishes to receive all interventions available to help sustain life to a request that treatment be withheld.
- Trust. Some estates could also benefit from the use of trusts. Trusts are legal tools that allow an individual to manage property during life and can also transition assets to other individuals without the need for probate (i.e., a court proceeding). When properly established, trusts can help reduce estate taxes and provide a certain level of privacy not present with a will. Wills are documents that become public record, while trusts do not. As a result, those with businesses or matters they would prefer not be disclosed to the public may prefer the use of a trust. A trust can also be used to protect assets from creditors and the high cost of long term care.
It is important to revisit these documents and make adjustments when needed. Some key life events that could result in changes are the loss of family members or loved ones through death or divorce or the addition of family members or loved ones through birth or marriage.
Why are beneficiary designations important?
The term beneficiary designation refers to the individual named on documents like insurance policies or retirement accounts who is to receive the funds in the event of the owner’s passing. When invoked, the money is automatically transferred to the beneficiary, outside of probate. In cases of divorce or death, it is wise to change the designation to help ensure the right person receives these funds.
These are just a few issues to consider when developing and maintaining an estate plan. Those who are looking to achieve financial success in the coming year should meet with an experienced estate planning lawyer to review their unique financial situation and develop a plan that works best for their needs.