Estate Planning

5 Key Elements of an Estate Plan

Did you know that the number of American adults that have a will has dropped from 42% in 2017 to 32% in 2020?1 Although estate planning is an important part of personal financial management, it isn’t something most people think about every day.

In broad terms, the goals and objectives of estate planning involve maximizing the benefits of wealth. This includes thoughtful consideration of how you wish to provide for your family, other individuals, or your community – now or following your death.

While you may be tempted to tackle this on your own using one of the free do-it-yourself legal websites available to create a will, durable power of attorney, or other critical components of an estate plan, working with a financial professional and an attorney to oversee this process can help you avoid any misunderstandings later.

Here are 5 key components of a comprehensive estate plan:

1. Beneficiary Designations

Many people don’t realize that some assets such as life insurance, annuities, qualified plans and IRAs pass by contract to a beneficiary chosen (or not chosen) by the contract owner, and not through an estate plan (such as a will or trust). Beneficiary designations (primary and contingent) should be coordinated with your estate plan to help ensure that your distribution objectives are met.

2. Last Will & Testament

After you die, a will distributes your assets after all expenses and taxes are paid. The assets are generally distributed through a specific bequest or as part of your estate. A specific bequest may be to a particular individual or charity. For example, “the sum of $5,000 to my niece Joanna” or “the sum of $5,000 to Alex’s Lemonade Stand for its unrestricted use.” The remaining estate assets are then distributed, which could pass outright to the named beneficiaries (such as a spouse, children, or heirs), to the custodian of a minor child, or in a trust.

Your will also nominates your personal representative, the trustee of any trust created under your will, and the guardian(s) of your minor children. In the absence of a will, the court determines who assumes these important roles. If you die without a will, the laws of the state in which you live determine how your assets are distributed.

3. Durable Financial Power of Attorney

A durable financial power of attorney allows you to appoint someone to make financial decisions on your behalf if you become incapacitated. The primary purpose of this document is to prevent the appointment of a conservator by the court to manage your finances if you become incapacitated.

4. Health Care Proxy/Declaration

The Health Insurance Portability and Accountability Act (HIPAA) provides safeguards to protect the privacy of personal health information and the disclosure of such information without proper authorization. A health care proxy/declaration allows you to appoint someone as your health care agent, to be informed of your medical condition and make medical decisions on your behalf if you’re unable to do so. All members of your family who are over age 18 should execute one of these documents, especially before leaving for college or moving out of the home.

5. Living Will

A “living will” informs your family, doctors, and others concerned with your care about your desire to withhold certain medical procedures if there’s no reasonable expectation of your recovery or regaining a meaningful quality of life.  If you feel strongly about these issues, you should include a living will as part of your overall plan.

Create or Update Your Plan Today

Now is a great opportunity for you to review your estate plan with your financial professional and personal attorney to make any needed changes. It is a good idea to review your estate plan every two years and whenever there have been any significant changes in your family relationships (such as birth, adoption, divorce, death), your employment status or your assets. If you don’t already have a plan, you should consult with a qualified attorney to create your estate plan today.

Note: State and federal laws change frequently and the information above may not reflect recent changes in the laws. You should consult with your tax and legal advisors regarding your personal situation.

The material contained in this document is based on Penn Mutual’s understanding and interpretation of current law. Penn Mutual and its financial professionals and representatives may not give legal or tax advice. Any discussion of taxes in this document is for general information purposes only and does not purport to be complete or to cover every situation. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

1Source: https://www.caring.com/caregivers/estate-planning/wills-survey

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