Have you been so focused on building assets that you haven't given much thought to protecting them? Naming beneficiaries, creating a will, and other estate-planning tasks can help preserve what you've accumulated and distribute it to the people and causes most important to you.
Yes, it's an uncomfortable topic, but think of it this way. Do you really want someone else making these decisions for you? Let’s take a look at some of the important documents you need to have in order should anything unexpected occur.
1. The most important tool: a will
A will is one of the most important legal documents you can create. It states who gets what after you're gone and names someone to make things happen the way you say they should. If you don't have a will, your assets will be dispersed according to state statutes—and who wants that?
"It's a mistake to think of a will as something you need only if you have millions or are over 60," says Chris McDermott, a CFP and senior vice president of retirement and financial planning at Fidelity. "A will isn't just about money."
Whether you have a will or not, your estate assets will generally be subject to a legal process known as probate. This process varies from state to state. When someone dies intestate (without a will), their assets can be tied up in the costly delay—and public display—of probate court. Without a clear estate plan, you may unintentionally trigger legal challenges among family members since it may be unclear how you really intended your assets to be passed on.
If you have minor children, it's critical that your will designates a guardian for them, and name a trustee to protect your children's inheritances. If you don't specify who is best suited to look after your child if both you and your spouse die prematurely, the state will.
2. Choose who'll act on your behalf
In addition to a will, it is important to consider a power of attorney. These legal documents allow someone you designate to step in and act on your behalf if you are incapacitated. It can take effect immediately (durable) or at the time of your incapacity (springing). It typically authorizes someone to act on your behalf with respect to your financial affairs, and is often executed by one spouse for another.
There are several considerations to keep in mind when setting up a power of attorney. Any competent adult can serve as your agent. It can be general or limited and apply only to particular assets or accounts that you own. Lastly, it can take effect immediately or at the time of your incapacitation.
A health care proxy (also called a “durable power of attorney for health care” in some states) authorizes someone to act on your behalf for your medical affairs. Unlike a durable power of attorney, before someone can act as your health care proxy, you must become incapacitated and unable to make informed decisions for yourself.
You’ll want to be specific about what decisions your health care proxy agent can and can’t make on your behalf. You may also want to draft an advanced medical directive, also known as a living will. This expresses your wishes to your agent and doctors when considering the use of life-sustaining procedures.
3. Name beneficiaries on financial accounts
Designating a beneficiary for investment accounts can be as important as writing a will. These decisions are critical but not complex. Assets in your retirement accounts pass directly to the beneficiaries you've designated with your account custodian, trustee, or plan administrator. Furthermore, your beneficiary designations can supersede any accommodation you have made in your will for your retirement account (see transfer-on death discussed below). Remember to name beneficiaries on all retirement accounts such as 401(k) plans, IRAs, Roth IRAs, and SEP and SIMPLE IRAs.
Under IRS rules, required distributions from an inherited IRA are generally based on the age of the beneficiary, not the age of the original IRA owner. So if your beneficiary is younger than you, the new rules can minimize the taxable amount that must be withdrawn each year after your death.
Employer-sponsored retirement plans. If you are married, keep in mind that most employer-sponsored retirement plans automatically designate your spouse as the beneficiary unless you name another beneficiary(ies) and your spouse has consented in writing. Remember also that your beneficiary designations will supersede any accommodation you have made in your will for your retirement account.
Non-retirement accounts. Designating a beneficiary, or beneficiaries, on a non-retirement account, such as a brokerage account, may establish a "transfer-ondeath" (TOD) registration for the account. For an individual account, a TOD registration allows ownership of the account to be transferred to a designated beneficiary upon your death. Perhaps most importantly, and in many instances, a TOD registration allows an account to pass outside probate, enabling your beneficiaries to avoid the time and expense of the probate process. As with all accounts, estate taxes may still apply. Be sure to consult your tax advisor.
4. Keep everything up to date
"Even the best plan isn't effective if it doesn't keep pace with your life," notes McDermott. He recommends setting aside a special time each year—around tax time, for example—to review not only your paperwork, but any life events that have occurred. Births and deaths obviously have a big impact.
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