7 Things to Know About Estate Planning

man and woman couple getting real estate planning advice seated at a table

Planning what will become of your assets after you're gone may not be an exciting task, but it's a critical one. To ensure your wishes are carried out and loved ones are cared for, it's best to start estate planning early.

Because estate planning can be complex, it's a good idea to familiarize yourself with common terms you'll come across, as well as some of the processes involved with handling your estate when you die. Here are the answers to several common questions so you know what to expect.

1. What Is a Power of Attorney?

When you set up a power of attorney, you're providing legal authorization for someone else to act on your behalf and make decisions regarding your finances and medical care. A general power of attorney gives your designated agent the authority to act on your behalf in any matter allowed by state laws. In contrast, a limited power of attorney allows the agent to only act in specific matters that you determine.

There's also a durable power of attorney, which allows the agent to remain in control of any matter spelled out in your agreement, even in the event that you're mentally incapacitated.

Designating a power of attorney can provide you with the peace of mind that, even if you cannot make decisions for yourself, someone you trust is making them according to your wishes.

Note that a power of attorney differs from a living will, also sometimes called an advance directive, which allows you to spell out your wishes regarding your end-of-life care in the event that you can't communicate.

2. What Is a Beneficiary?

A beneficiary is someone who has been designated to benefit monetarily from a trust, will or life insurance policy. You can also name beneficiaries on individual financial accounts in the event that you die.

Only the owner of the account, will, trust or policy can designate a beneficiary, and it's possible to designate more than one. You can even name an entity, such as a charitable organization, as a beneficiary.

3. What Does a Trustee Do?

When you set up a trust for your children or someone else, you'll need to designate a trustee. This person or entity is responsible for managing the assets in the trust and administering distributions based on your wishes, as outlined in the trust documents.

For example, you can set up a life insurance policy for your children and put a trust as the beneficiary. Then, you can set up the trust to distribute assets to your children for specific reasons or at certain times in their lives, and the trustee will ensure that happens.

Depending on your situation and preferences, you can have a family member or friend act as a trustee, or you can ask an attorney, trust company or even bank or credit union. Just keep in mind that if you have a professional managing your trust, there may be fees involved.

4. What Is an Executor?

A last will and testament lays out how you want your assets to be handled after you die. That may include distributing property, assets and money; divvying up inheritances; establishing guardianship for minor children and more.

An executor is a person you appoint to administer your last will and testament, according to your wishes. They'll make sure that all of your assets are accounted for, your debts are paid in full and more.

It's best to choose someone you trust to act as the executor of your estate. If you don't have family members or friends that you can trust—or if you're concerned about avoiding contention between your loved ones—you may choose a professional executor who can have a more objective viewpoint.

5. How Is Life Insurance Paid Out?

When you set up a life insurance policy, you'll want to name a person, entity or trust as your beneficiary. Life insurance payouts typically come in the form of a lump-sum payment or a monthly installment, but other options may be available.

Beneficiaries can do whatever they want with the life insurance death benefit.

If you've set up a policy, include documents in your estate plans so the executor can find them. The executor can help the beneficiaries file a claim and provide the insurance carrier with a death certificate and other necessary documents. After that, the money should be paid to the beneficiaries within a few weeks.

6. How Do I Plan My Funeral in Advance?

If you have specific ideas about how you want your funeral to be held, now is the time to write them down. For example, maybe you want to be cremated rather than buried, or you want to avoid a traditional service.

Whatever it is, write out a funeral plan and share it with your loved ones. You may also include it with your last will and testament, trust and other documents. Additionally, you may choose to make financial arrangements to pay your funeral costs. This may come from your life insurance death benefit or other assets. Think about your funeral plan and do some research to figure out how much that costs, then set up directions for how your loved ones should handle it using your assets.

7. What Are the Benefits of Estate Planning?

The sooner you start the estate planning process, the better. It may even be worth it to begin estate planning in your 20s to avoid procrastinating the process. Some of the primary benefits of estate planning include:

  • Minimizing the probate process, which can be costly and time-consuming, and also makes your estate a matter of public record
  • Giving you peace of mind, knowing that your assets will be handled according to your wishes and that your financial and medical matters will be handled if you can no longer make decisions for yourself
  • Minimizing estate and inheritance taxes
  • Protecting your loved ones, particularly young children

Work With a Professional on Your Estate Plan

If your finances are simple, you may think that you can get away with doing it all on your own. However, it's best to consult with an estate planning attorney first to determine the best approach to your estate planning needs. During the course of the consultation, you may even discover things that you hadn't thought about before.

Depending on your situation and what you want to do, an estate plan could cost you anywhere from a few hundred dollars to several thousands of dollars. Try to find the right balance between your current budget and your long-term goals for yourself and loved ones.

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