What do Aretha Franklin, Prince and Sonny Bono have in common? Not only were they famous musicians, they all famously died without a will.
Without proper estate planning documents in place, your estate could go through the difficult probate process, which is often expensive and time consuming. It can place a lot of stress on your loved ones.
Despite the importance of an estate plan though, more than 60% of Americans say they don’t have any essential estate planning documents in place, such as a will or living trust, according to a survey by Caring.com.
An estate plan isn’t only for the rich and famous, nor is it something that can wait until later in life. The size of your estate, be it a single bank account or home, does not matter. What matters is that the right decisions are made on your behalf and your wishes are fulfilled. Further, tragedy can strike at any moment.
One of the best things you can do for your loved ones is to have a plan in place in the event of your sudden passing. Here’s what you should do.
CREATE A LIVING TRUST
Most people already understand they should have a will, but it’s also important to consider setting up a living trust. A living trust is created while you are alive with instructions on how your assets are to be managed and then distributed by a trustee upon your death. Any asset you own can be placed in a trust, including investments, banks accounts, real estate and vehicles.
Trusts generally cost more to create than wills. But, a will may have to go through the probate process while trusts pass outside of it, saving your heirs time and money.
NAME BENEFICIARIES TO YOUR ASSETS – AND KEEP THEM UPDATED
All the benefits you have earned and accumulated — pension plan, life insurance, 401(k) and IRA accounts, etc. — can be passed on to a beneficiary after you pass away. Beneficiary designations are particularly useful in probate avoidance. In fact, they even override your will. That’s why it’s important to keep them up to date. Naming the wrong person(s) or failing to update your documents can create a mess for your heirs and leave your wishes unfulfilled.
For non-retirement investments accounts, you can register them in transfer-on-death (TOD) form. Not to be confused with TOD deeds, but they work the same way in that the beneficiary you name will inherit the account automatically upon your death.
DESIGNATE YOUR BANK ACCOUNT AS PAYABLE ON DEATH
You can also designate beneficiaries for your bank account. Called a payable-on-death (POD) designation, you can name a beneficiary who has no rights to the money while you’re alive but who can claim the money directly from the bank once you pass away.
USE JOINT OWNERSHIP WITH “RIGHTS OF SURVIVORSHIP”
Assets under joint ownership avoid the probate process provided this ownership includes the “right of survivorship.” Under this arrangement, the surviving owner automatically owns the asset – be it a bank account or investment account or real estate – when the other owner dies, completely bypassing probate. Types of joint ownership with rights of survivorship are “joint tenancy” and “tenancy by the entirety,” which is for married couples.
ESTABLISH A DURABLE FINANCIAL POWER OF ATTORNEY
You should designate a durable financial power of attorney, which gives someone the legal authority to help manage your assets in the event you are unable to properly handle them yourself. This document can prevent the probate court from having to appoint a conservator to handle your affairs. Further, a durable financial power of attorney, who may access your financial information, could help monitor your finances and protect you from becoming a victim of financial fraud or scams.
SET UP A TRANSFER-ON-DEATH DEED FOR PROPERTY
A transfer-on-death (TOD) deed is a legal document that allows real estate owners to name who they want to inherit their property once they pass away. Further, it allows the real estate described in the deed to be transferred to the named beneficiaries outside of probate. To go into effect, the deed must be properly signed and recorded.
Different states have different rules, and not all states recognize TOD deeds. For example, Michigan recognizes what is commonly referred to as a “Lady Bird Deed.” This is an enhanced-life-estate deed, which works in a similar fashion as a TOD deed. Consult an estate attorney to learn what deeds are recognized in your state and if one is right for you.
WORK WITH A PROFESSIONAL
Estate planning is not easy. Each document needs to be written and filled out properly. Then there are taxes and other laws to navigate, which can vary from state to state. Further, there are several less-than-obvious situations to plan for, such as what happens if your beneficiary passes or becomes incapacitated. That’s why you should seek the help of an estate attorney, with input from your financial adviser. A good estate plan will allow you to give your loved one’s peace of mind during a difficult time.