Estate planning is one of those things that is just never going to be fun to think about. First of all, it sounds like it’s something only really rich people do, and then, when you realize you need one too, it’s all about the worst case scenario.
What happens to my finances if something happens and I can’t speak for myself? Who pays my bills, manages my investments, keeps up my financial life?
Who talks to the doctors and the hospital and makes medical decisions for me if I’m incapacitated?
What happens to my stuff when I die? Or my debt for that matter?
This is all pretty much the last thing anyone wants to really think about ever. That’s estate planning in a nutshell.
Does it suck to go through the process? Yes, totally. You’re going to be forced to answer some tough questions and make decisions you hope will make just as much sense in the moment as they do now.
Does it feel amazing once it’s done? It’s pretty much the best feeling in the world when you finish signing those documents.
Here are the main three documents you need to consider when starting to put everything together:
Health Care Proxy/Living Will: You all need a health care proxy. Each state has a different version so you can literally google your state + health care proxy. You’ll find it called different things like health power of attorney or health care agent. Your proxy is someone you name to speak on your behalf for any medical decisions in case you can’t speak for yourself.
If you don’t have a health care proxy specifically named, then there is a default order to who the doctor seeks direction – first it’s your spouse, then your parents, then siblings, then other relatives. If there’s a disagreement on what should be done, then it’s goes to a court to decide. Not pretty.
You also need a living will. Sometimes this is a separate document and sometimes it’s included in the health care proxy form. This is where you list your wishes, like whether you should be resuscitated, put on life support, or given a blood transfusion. Even if you’ve had these conversations with your proxy, this document will help eliminate any confusion, especially when emotions are high.
Power of Attorney (POA): A power of attorney gives someone the authority to manage specific financial matters on your behalf. You don’t have to be incapacitated for a POA to go into effect. Your accountant may have you sign an IRS POA so they can speak about your taxes for you. You an also have a general power of attorney for your spouse or family member to manage financial matters for you. There are two kinds:
- Durable POA: this goes into effect as soon as it’s signed. The person you listed as your POA can technically attempt to access your financial stuff immediately.
- Springing POA: this goes into effect when a named event happens, usually when you are not able to manage your own finances.
Just note that many banks and financial institutions may also require you to sign an internal POA specific to that institution. Check with your bank or investment company to see if this is the case.
Will: A Will is a document that carries out your wishes after you die, including where you want your stuff and money to go. Not everyone needs a Will yet. Here’s when you need one:
- If you have kids, having a Will is a MUST! If something were to happen to both parents and there were no guardians named, it would be left up to the state to decide who takes care of your kids. It’s usually next of kin, but it’s out of your control either way.
- If you own a home, you should have a Will. Even if you own a home jointly, again, worst case scenario – what happens to the house if something happens to both of you?
- If you have significant assets outside of your retirement accounts, you should have a Will. This includes bank accounts, investment accounts, personal property, etc. You’ll want to have to say in who gets what or the state courts will divide up your estate for you.
Estate planning BONUS! (because when you say bonus, that automatically makes it fun, right?) Here are two other important things to think about:
What about debt? Your creditors will be the first people who will be able to access the funds in your estate. All personal debts you owe, including mortgages, student loans, and credit card debt, will be paid off using the assets in your estate.
What happens if you have more debt than assets?
For things like mortgages and auto loans, the property will have to be sold to pay off the debt.
For credit card debt or personal loans, any unpaid debt is basically wiped off the books, as long as there is no joint owner or co-signer.
For student loan debt, weeeeeellll, of course it’s trickier. All federal student loan debt is forgiven and most private student loan debt is too, but there are some companies where they will go after your family to collect the remaining balance.
Horrible? Yes. So check with your student loan servicer to find out what their policy is. And if your family would be liable, this might be a good reason to take out some life insurance.
Beneficiary designations: If you have a retirement account (which basically just means the account gets special tax treatment and you can’t touch it until you’re 59.5), like an IRA, 401k, 403b, pension, profit sharing plan, etc. you have the option to list a primary and secondary beneficiary. DO IT! Two awesome reasons:
- The money passes directly to the beneficiary and doesn’t have to go through probate court, which means your heirs received the money right away.
- Because the money bypasses the Will, creditors aren’t allowed to access the money to pay off your debt. The money goes straight to your heirs. Whaaaatt?? Yes, as MC Hammer would say to your creditors:
Stop! Planner time!
All of January on Bondfire Radio, we went into serious detail about the guts that go into making a financial plan. It’s definitely a pen and paper kind of month because we’ll be going over tons of info.
Then, in April (financial literacy month!), we’re going to kick off a huge, year long event – The 52-week Financial Plan! I’m going to spend a year with you to help you put together and implement your financial plan! Most of it will happen right here in this newsletter!
Changing your money habits takes time. Real time. Time to have set backs and bounce back from them. Time to let new ideas sink in. Time to experiment and see what sticks.
Please feel free to share it with someone who you know is ready to tackle their finances and wants some guidance and support. It’s going to be one awesome year! #MoneyNeedsMe