What Are the 5 Components of Estate Planning?

Jan 01

Planning your estate can be a daunting task. Whether you are organizing all of the documents you need, choosing the people or organizations to name as beneficiaries, or picking your end-of-life care and funeral arrangements, there are several different steps and procedures you need to take when planning your estate.

If you are unsure where to start when planning your estate, the best first step is to get an estate planning attorney to help you navigate through the process of planning your estate. At Davis Toft, we can give you the legal advice and guidance you need to create an estate plan that secures any assets you wish to give your family and provide financial stability for your loved ones upon your death.

How Many Components Are There When Creating an Estate Plan?

There are five major documents and elements that make up an estate plan. These components include documents and requests that are valid while you are still alive, as well as documents that do not come into consideration until after you’ve passed away. This collection of documents works to divide your assets among the beneficiaries you’ve designated, as well as ensure your end-of-life wishes and requirements.

Component 1: Wills and Trusts

At the heart of any estate plan is a will, which dictates how your wealth should be distributed to beneficiaries and who will receive specific assets. A will also outlines the specific wishes of the testator, or creator of the will, such as assigning guardians for any children who have not reached the age of 18 and even who will take care of your pets in the event of your death.

When creating a will, you must also name an executor to enforce your will. The executor ensures the testator’s wishes are met properly, and beneficiaries receive what is rightfully theirs according to the will. Individuals might assign an attorney to be the executor of their estate. An attorney has the legal knowledge to handle the distribution of a will, and this also takes the pressure of will distribution off family members who are grieving their loved one’s passing.

Another option is to create a trust instead of writing a will. When creating a trust, all assets of the testator will be combined into an account, meaning whoever has been named the trustee has power over the account once the testator has passed away. This is often a better alternative to a will because assets are more easily transferred to the beneficiary upon the testator’s death. Similarly, when creating a trust, you want to seek an estate planning attorney to assist with setting up the trust.

Component 2: Durable Power of Attorney

Assigning a durable power of attorney is the second component in creating an estate plan. The power of attorney can step in to manage your finances, such as paying bills, signing documents, or managing your bank account if you are ill and unable to handle these affairs. When picking a power of attorney, an individual typically names a trusted family member or friend to manage these affairs. However, a testator might hire an attorney to manage these day-to-day tasks instead.

Component 3: Medical or Healthcare Power of Attorney

Similar to the durable power of attorney, it is important to name a medical power of attorney. This gives the person you choose the authorization to make important decisions regarding your medical care if you are unable to make those decisions for yourself. Also like a power of attorney, this role is typically assigned to a loved one, be it a spouse, child, or friend.

Component 4: Living Wills

A living will is a legal document that instructs others about how you want your medical care to be handled if you are terminally ill, in a coma, or otherwise unable to make decisions based on your condition. This ensures medical professionals are following your wishes regarding the medical care you do and don’t wish to receive, and it can also keep family members from having to make healthcare decisions for you during a difficult time.

Component 5: Beneficiary Designations

When you create a will or trust, you also have to designate beneficiaries, and it’s important to keep your beneficiary information current and correct. Often, individuals will revisit their beneficiary designations when they experience a major life event, like getting married or having a child. Because beneficiaries must be named to quickly receive any benefits from retirement or insurance policies, it is crucial to ensure you have them named properly.

FAQs

Q: What Are the 5 Most Important Estate Planning Documents?

A: It is important to have a will or trust, named power of attorney, named healthcare power of attorney, a living will, and beneficiary designations.

Q: Why Is It Beneficial to Name an Estate Planning Attorney as Power of Attorney?

A: If you are in a position where you cannot handle your affairs, it is very likely family and other loved ones are more focused on your recovery or not in the best mindset to handle everything. By naming an attorney as your power of attorney, you can have a professional trained to manage your affairs and assets while you cannot.

Q: When Should I Start Planning My Estate?

A: Most Americans begin planning their estate in their 30s and no later than their 40s. However, it is wise to begin planning your estate, or at least have a will, once you reach adulthood.

Q: What Is the 5 or 5 Rule in Estate Planning?

A: This rule refers to a 5 by 5 power in trust clause that gives beneficiaries the option to withdraw some funding from their trust every year. This amount can range from $5,000 or 5% of the trust’s fair market value on an annual basis, whichever is the higher amount.

Contact Davis Toft for Your Estate Planning Needs

If you are ready to start planning your estate, get the legal help you need with Davis Toft. We have years of experience in estate planning law, and we are ready to help you ensure your wishes are carried out. Contact us today to get started.