When you’re a parent, you can’t imagine a time when you won’t be around for your children. The reality is, however, that there is a possibility that during your lifetime, there might be a time when you are incapacitated or otherwise unable to make decisions about your care or your assets.
With that in mind, the best gift you can give to your children is a well thought-out estate plan.
Here are the five estate planning documents that all parents need to have available.
A will is a formal document which controls the disposition of probate assets following your death. Probate assets are those things that you own in your own name; non-probate assets, such as joint accounts or life insurance, do not pass according to your will but rather by titling or designations of beneficiary.
Wills aren’t just for the rich. In addition to the assets you associate with wills — like bank accounts in your own name — a will allows you to designate how your personal tangible property will be distributed. You can think of personal tangible property as things in your home you can touch — your jewelry, furniture, car and other personal items.
You also have the opportunity to name fiduciaries under your will. This would include an executor, who would be responsible for handling the administration and disposition of your estate — including the filing of any income and inheritance tax returns. This would also include a trustee, who would manage any trusts created under your will for your children, who might not be old enough to properly manage assets on their own. Finally, if your children are still minors, you are able to designate a guardian under your will, who would care for your children after you are deceased. The executor, trustee and guardian can be — but don’t have to be — the same person or persons. All of your fiduciaries should be a person or persons that you trust to make decisions.
General power of attorney
A general power of attorney is a document that allows you to name an agent to handle your financial affairs in the event that you become incapacitated or are unable for any reason to administer your finances during your lifetime. There are two kinds of powers of attorney — a durable power of attorney, which survives incapacity, and a nondurable power of attorney, which is generally used for limited transactions such as the sale of a home. A power of attorney can be immediate or springing — an immediate power of attorney is effective at signing while a springing power of attorney is effective only upon a triggering event, such as incapacity.
Healthcare power of attorney
A healthcare power of attorney is a document that allows you to name an agent to make health care decisions for you in the event you are incapacitated. A healthcare power of attorney only acts on your behalf if you are unable to do so and have not otherwise communicated your wishes. It’s important to keep in mind that a healthcare power of attorney does not supersede your living will (see immediately below). Your healthcare power of attorney doesn’t have to be a family member and should be someone you trust to understand your wishes and act accordingly.
A living will doesn’t involve your assets at all, but rather focuses on your end-of-life care.
Also called an advance directive, health care directive, or a physician’s directive, a living will allows the people you care about and your medical professionals to know what type of care you do (or don’t) want to receive should you be permanently unconscious. A living will is only effective when you are not able to express your own wishes.
In some states, you can also execute a temporary guardianship for your children. If you need to turn over the care of your children temporarily to another adult because you are having a medical procedure or are out of town on business, you may want to set up temporary guardianship. A formal temporary guardianship allows another person the right to approve medical treatment, sign permission slips for school or otherwise make decisions for the benefit of your children while you are not able to care for them.
Nobody wants to talk about estate planning when you’re young. But you should — especially if you have children. Do yourself and your family a favor and make sure you have your estate planning documents in place now so that you don’t force your family to worry about it later.
More about family finances
Creating accounts for kids: Practical and tax consequences
Claiming dependents on your taxes
Tax consequences of gifts to kids
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