In my previous article, I introduced you to the problems you and your family will likely face if you become disabled or pass away without an estate plan. Today, I’m going to show you exactly how an estate plan can protect your family and what should be in your estate plan.
What Exactly Is It?
Your estate plan is a set of legal documents that will help you and your family prevent all the scenarios I mentioned before. These legal documents will contain your specific instructions on what you would like your family to do when you become disabled and when you pass away. It provides certainty, peace of mind, and a clear action plan for your family to follow. Typically, an estate planning lawyer helps you put together this plan.
What Should Be In It?
The five most important things in your estate plan are:
1. A Healthcare Directive
First, your estate plan includes what’s called a “healthcare directive.” In this document, you can appoint someone you trust to make your medical decisions and to take care of you if you become disabled. No one else but your medical agent can make those sensitive and important decisions for you. If you don't have a healthcare directive, a judge will decide who can take care of you (and it may not be the person you trust or want).
2. A Durable Power of Attorney
Also, your estate plan will include what’s called a “durable power of attorney.” In this document, you can appoint someone you trust to manage your assets and finances so that you and your family will be taken care of financially during your disability. If you don't have a durable power of attorney, a judge will pick one for you (and sometimes judges can be deceived by those who just wants to have access to your money).
As you can see, the beauty of a healthcare directive and a durable power of attorney is that you can choose a person you trust to take care of you and your money during disability. And even better, that person will not need to spend time and money in court to obtain a conservatorship to do that. This person can be your spouse, your child, your best friend, or a professional such as an attorney or CPA.
3. Life Insurance
And when you pass away, your spouse will have enough money to pay the bills and maintain the family home if you obtain adequate life insurance. Every family (big or small) should have a financial advisor who can help them determine which type of life insurance policy is best for them.
4. A Living Trust
Your estate plan will also include a legal document called a “living trust.” A trust is like a safe. You can put all your valuable possessions in there: your money, your stock portfolio, your house, your collectibles, or anything else you own.
Inside your trust will also be a set of instructions of who you want your things to go to when you pass away. As long as you’re alive and mentally stable, you hold the key to your trust and you can take things in and out of your trust at any time as you wish. When you become disabled or when you pass away, the key to your trust will then be passed on to a person that you choose to manage your things. That person is called your “trustee.”
Your trustee will follow the instructions that you left in your trust and distribute the things inside your trust as you wish. For example, you may want to give most of your money and house to your wife, your stock portfolio to your children, your collectibles to your best friend, and some of your money to your charity and even your pet.
The best part about a trust is that you get to control where your things go and your loved ones will receive them without going to probate court, saving everyone a lot of time and money.
Also, if you have doubts about your children’s ability to use your money wisely, you can dictate under what circumstances your children can use your money. For example, you can say that your son can take out money from your trust only to pay for his education and living expenses.
With a trust, you can control how your money is spent even after you’ve left this world by leaving these specific instructions for your family to follow. So in a nutshell, that’s what a trust does.
5. A Will
Your estate plan will also have a will that works together with your trust. This will is called a “pour-over will” that covers any small personal belongings that have not been transferred to your trust, such as your clothing and furniture.
One of the most important components of a will is that you can designate a guardian to raise your young kids if something happened to both you and your spouse. The last thing you want is to have your kids in foster care because you didn’t plan ahead.
As you can see, your estate plan provides clarity, certainty, and protection for your family.
An Estate Plan Provides Peace Of Mind
When you complete your estate plan, both you and your spouse will feel relieved knowing that you have a plan in place if one of you becomes disabled or passes away, and you’ll have a living trust to provide for your children if something happened to the both of you.
It Saves You Time And Money
People say estate planning is complicated, takes a lot of time, and is only for the ultra high-net-worth. As I showed you in this article, estate planning solves problems that the average family faces. And it’s not only for ultra-high-net-worth. In most cases, estate planning is even more important for the average family because dealing with death and disability without an estate plan is substantially more expensive than having one. And it’s not complicated if you have the right person to guide you along.
Remember, probate is a very expensive court process that families go through if someone dies without a living trust. If your estate is worth $1,000,000, probate fees and costs will be a minimum of $40,000. Avoid probate by creating an estate plan today at a fraction of that price.
Stay Tuned For More
You should now be familiar with the basics of estate planning. If you want to learn more, I invite you to check out my other articles and videos on topics that will affect you and your family. I promise you that the more you know, the more prepared you’ll be to protect your family’s future.
And please, don’t procrastinate. That’s one of the biggest reasons why more than 60% of Americans don’t have an estate plan and why the probate industry is a $2 billion industry.
Sadly, it's hard to predict how long we will live and thrive in this world due to illnesses and accidents that could happy to anyone at any age. So plan today to prevent the costs and stress that your family would have to deal with if something happens to you tomorrow. If you live in Southern California, you should contact a wills and trusts lawyer in Los Angeles.
Okay, that’s all I have for today.
See you in the future.
- Edmund Yan, Los Angeles Estate Planning Lawyer