Even if you do not have a lot of assets, you should still have an estate plan in place. It doesn’t have to be complex; you can limit it to simple, basic documents if that is appropriate for your situation. There is some overlap between the functions that estate planning documents perform. At the same time, each has its limitations. Financial advisors often recommend a comprehensive estate plan that contains multiple documents. Here is an overview of a few of the most common estate planning documents, including their functions and limitations.
Also referred to as a last will and testament, the will is an estate planning document that most people are familiar with even if they do not know about the others. The two main functions of a will are to give instructions for the distribution of your property after you die and to name a guardian for your minor children, if you have any. The will only takes effect when you die. Assets contained in a will must go through the probate process, which means it can take time before your beneficiaries receive their inheritance. A will is not the place to give funeral instructions as the ceremony usually takes place before it is read. It is also not a good idea to leave money to a person with special needs in a will because bequeathing a lump sum could hurt the person’s eligibility for government benefits.
A trust allows you to set aside assets for distribution to the beneficiaries you designate according to a schedule you establish. There are different kinds of trusts, which means you can choose one that fits your specific needs. People who have to provide for the care of a person with special needs often choose a trust to do it since they can set up the trust so that it does not hurt the person’s benefit eligibility. Trusts also allow your heirs to receive their inheritance without going through probate. However, some people find that they still need a will for any assets not in a trust or for designating a guardian, which requires a will in many states.
Advance Directive and Power of Attorney
Also called a living will, an advance directive outlines the type of medical treatment you do and do not want to receive if you are no longer able to make your own health care decisions. Incapacitation can occur for many reasons, such as dementia or coma. An advance directive does not give someone else the authority to make decisions on your behalf. For that, you need a health care power of attorney.