Chapter 24 – Estate Planning

While life insurance is a good way to help protect your loved ones in case you die, it alone is rarely sufficient. Your death could cause troubles far beyond simply financial concerns.

What is estate planning?

Estate planning is the process of preparing financial and legal arrangements in anticipation of your death or incapacitation. You need to prepare a plan for what will happen to your money, your possessions, and your children in case you die or are incapacitated.

Most people have no type of estate plan in place. There are five common excuses that are offered to explain why people don’t plan for their own deaths.

1. People don’t see the need for an estate plan. They think that since they are not rich, they don’t need to prepare their estate. This is false. As we shall see, estate planning is about far more than distributing money.

2. Other’s fail to plan because they don’t expect to die anytime soon. This, also, may be a terrible assumption. Many people die completely unexpectedly from accidents or disease. These deaths come as a surprise to everyone. This means that people are rarely prepared for them. That makes these deaths even more painful because their premature death leaves a financial mess that their loves ones have to try to fix without them.

3. Some feel that it estate planning is too expensive. Estate planning often involves lawyers, and lawyers charge large fees. While estate planning can become complex and expensive, the most important estate planning you can do can be done for free or almost free.

4. Others think estate planning is simply too time consuming and difficult. Again, estate planning can be complex if you have lots of money or complicated family situation, but most people can complete the most important elements of their estate plan entirely on their own quite easily.

5. Perhaps the biggest reason, though, is that thinking about our own death is just too depressing. It is far easier, simpler, and less painful to ignore the certainty of our own death.

Your Will

Your Last Will and Testament (or more commonly just called your "will") is a statement you write that describes most of what you want to happen should you die. A standard will should cover four main areas.

1. Which people or organizations will inherit your property. This might instructions for specific assets such as "I leave my classic muscle car to my daughter Hayley". There are also likely to be general instructions, such as "I leave 25% of my estate to each of my four children".

2. Who will serve as guardian to care for your minor children. Small children need someone to take care of them and raise them. Since you have died you are no longer able to perform this function. A good will should include your wishes for who you trust to finish raising your children in your absence. Choose this person carefully and be sure to ask them first if they are willing to raise your children after you are gone.

3. Who will manage the property that you leave to your young children. This is important because young children are often ill-equipped to manage large sums of money. The person who manages the money for the children will safeguard the money until the children are prepared to take control of the money for themselves.

4. Who will serve as the executor of the estate. The executor is the person who will carry out the wishes specified in your will. They "execute" the will. Choose this person carefully and be sure to ask them first if they are willing to be your executor. Keep in mind that people often get angry with the executor they are unhappy with their inheritance. This can cause great animosity within families if the executor is a family member. Keep this in mind when selecting an executor for your estate.

A will can be as simple as a piece of paper where you have written down your wishes. You do not need a lawyer to create a will, although a lawyer can strengthen a will and make it more effective. You can also get software to help you create a will, or there are also online legal companies that can help you with the process.

Intestacy

If you die without a legal will, you are said to have died intestate, and the distribution of your estate is decided by state law. State law doesn't care what you wanted. It just follows rules blindly. This means that you may not like who the state gives your possessions to, and when they give it to them. The state will decide who will care for your young children, and you may not like who winds up raising your children. Sometimes the decision is obvious, such as a surviving parent. However, your kids might also wind up with the mother in law you hate, your deadbeat brother, or anyone else the state can find who is related, regardless of how you felt about the person. Lastly, if you are not dead but simply unconscious, then you might not like what happens to you while you are still alive. It is vital that you understand that estate planning is not just about stuff, it’s about people too!

Other Estate Planning Documents

A basic estate plan starts with a will, but there are at least three other documents that you would have as part of your estate plan when you are young. For most people under 40, these can be done on your own and for very cheap – so just go out and do it! Let’s look at these basic estate planning documents.

1. A living will is a written statement of your wishes regarding the use of life-prolonging treatment. The living will goes into effect only if you are unable to make your own decisions for any reason. It tells the doctors and your family which life saving procedures you would like performed, and which you would prefer to skip.

2. A medial power of attorney is also known as the durable power of attorney for healthcare. This document is similar to a living will, except that you use it to indicate whom you want to make medical decisions for you if you become incapacitated. If you fall into a coma, the doctors will ask this person what they should do to try to save your life. Don’t worry, though, you retain the right to make your own decisions as long as you are able. This is a difficult job to give someone. Be sure to talk to this person about your wishes and to make sure they feel up to the task.

3. A durable power of attorney is a document that permits someone to handle financial matters on your behalf. This document can be set up to only go into effect when a doctor certifies you have become incapacitated. Without this legal form, your family will have to petition a court for the right to use your money for your own care. This can be time consuming and can cause significant additional stress on your loved ones.

You can get all of these forms for free online.

It is also important to remember to update your estate planning documents regularly, generally every few years, or every time you have a major life event, such as a marriage, divorce, birth of a child, or purchase of a home or other large asset.

Getting Help

None of these legal documents necessarily require the help of a financial planner or a lawyer. However, there are many times when the services of such a professional might be very valuable.

If you ever feel uncomfortable or need some reassurance of the process, then hire a professional to help. It’s also good to hire professional help if your estate becomes complicated. This can happen when you have high value assets that need special tax, investment, and estate planning considerations. It’s also good to get some help if you have a child with disabilities who needs special attention in your estate plan. You may also want to consult a professional if you have children from a previous marriage or other kinds of complicated matters. In these cases, you can consult a financial planner or a lawyer or both.

Also remember that by refusing to create an estate plan, you are forcing your family and loved ones to make these difficult decisions for you. If you are dead or incapacitated, then your loved ones are likely to be in great emotional distress. If you also have no estate plan, then your loved ones have to make very difficult decisions while also experiencing great emotional distress. should they turn off your life support? Who will raise your kids? How will they pay your bills? They have to answer these questions without you. Help your loved ones by making these decisions yourself in advance as part of your estate plan. Plan your estate in advance and make the best of a terrible situation for them.

Lecture:

This is an excellent time to watch Lecture 15 from the course pack.

Definitions:

Estate planning is the process of preparing financial and legal arrangements in anticipation of your death or incapacitation

Living Will: a written statement of your wishes regarding the use, withholding or withdrawal of life-prolonging treatment

Medial Power of Attorney: similar to a living will, except that you use it to indicate whom you want to make medical decisions for you if you become incapacitated

Durable power of attorney: a document that permits someone to handle financial matters on your behalf

Executor: the person who will carry out the wishes specified in your will