Published by the Pioneer Press, access original article here.

Do you want to retire early? Travel? Buy that vacation home? Leave something behind for your family or your favorite charity? These are some of the questions that drive the basic of estate planning. No financial plan is complete without one. Today’s article focuses on creating one, including the five essential documents you will use to round out the planning process.

Let’s begin with some definitions. Everything you own is your “estate,” including your house, car, possessions (even pets), investments, and savings. You need to plan for how these assets are distributed after you’re gone. There are two primary ways to go about creating that plan.

Personal estate planning

This approach looks at estate planning through the prism of how it will affect your children and or other heirs. Personal estate planning often raises difficult, highly personal questions, such as: “How do I want to be remembered?” “How do I imagine my children will spend the money I leave them?” and “How much money do my children really need, and will what I give them deprive them of building their own strength and resilience?” As you can imagine, personal estate planning may challenge you to be introspective. But this is a natural part of the opportunity and burden of having money.

Tactical estate planning

This approach doesn’t involve these difficult questions. For example, you may simply want to focus on reducing your tax burden, maximizing the amount of money you leave to your heirs without consideration of any personal beliefs or values. A different set of questions apply in this case, such as: “How can I do more with my wealth savings?” “What are the tax implications of giving to my children?” or “What are the best ways to proactively manage

risk?”

Creating an estate plan begins with defining your goals, and then deciding whether a personal or tactical approach is a better fit for how you wish your assets to be distributed when you’re gone.

Five essential documents to include in your plan

Here are five common elements to include in a typical estate plan.

1.       Will. A will is your primary estate planning document. It lays out whom you want to receive your assets when you die and helps ensure that your estate is distributed correctly when the time comes. Don’t put off creating a will until you’re older, especially if you have young children or pets. Your will can specify who becomes your children’s legal guardian if you become incapacitated. A will can be changed after a marriage or divorce, the birth of a child, a change in career status, or the death of a beneficiary.

2.     Power of Attorney (POA). A POA allows you to designate someone to step in and manage your finances if you are unable to. While a so-called General POA designates someone to act on your behalf on all matters (medical, legal financial, etc.), a Limited POA designates someone to act on your behalf only in specific matters or events, such as in case of medical emergency. It’s very important to have a POA if you are single since you don’t have a spouse to jump in. If you’re single and you don’t have a POA, a court will decide who should serve as your guardian.

3.     Healthcare Directive. This works much like a POA, with an important difference. A POA is usually created to handle financial decisions, but a healthcare directive handles medical decisions. Healthcare directives usually fall under two types of documents. A living will provides instructions for your health care should you become incapacitated and your beliefs include some limitations on care that you wish medical professionals to recognize. In a healthcare proxy, you designate someone else to make medical decisions on your behalf if you are unable to.

4.     Beneficiary Designations. This important information is required on many types of life insurance or retirement accounts such as 401(k)s, 403(b)s, IRAs, etc. A beneficiary designation dictates who will receive your benefits after you pass away. It’s important to understand that your beneficiary designations supersede what’s in your will — which means they will inherit those assets no matter whom you’ve identified as an heir in your will. It’s good practice to review designations at least once a year.

5.     Trusts. Not exactly a document, a trust is a legal entity created to hold assets on behalf of a beneficiary or beneficiaries. The person setting up the trust (the “donor” or “trustor”) can dictate exactly how and when beneficiaries receive the assets in the trust. The three basic types of trusts — revocable trusts (a/k/a “living trusts”), irrevocable trusts, or testamentary trusts — generally differ based on their restrictions and rules. These include whether they allow you to make changes to the trust, to even terminate the trust, or set the timing of when trust provisions go into effect. The flexibility of many different trust structures can be a beneficial part of your estate plan depending on your specific situation. However, they can be expensive or complex to set up and maintain. Be sure to talk to your financial advisor or an estate planning attorney to ensure a trust makes sense before adding one to your estate plan.

This information is not intended as a recommendation. Discuss your specific situation with a qualified professional.