Ask a Planner: Make your wishes known while you can

Everyone needs an estate plan, but many fail to create one. This is surprising because it’s your chance to say how you’d like your person and property managed if you’re incapacitated or you die. If you don’t create one, your state will do it for you, but it may not meet your or your family’s needs.

A basic estate plan has four parts:

Durable power of attorney for property management. In this part, you authorize a person or financial institution to manage your property. This may become effective immediately or triggered by a condition. For example, it may be triggered if a physician certifies you can’t manage your finances. A durable power gives your appointee a lot of power, so he must be trustworthy and have the skills needed to manage your finances. A durable power becomes void if you revoke it or die.

Last will and testament. Your will becomes effective when you die. In it, you appoint a personal representative to settle your estate, according to your will and state law. This is not an honorary job, it’s time-consuming and a big responsibility. For example, your personal representative must gather your property and manage it until your estate is settled. He must collect income and pay bills, creating clear records of these activities. He must file income and estate tax returns, if needed. Then, after settling all claims against your estate, he must distribute property to your heirs. Again, your personal representative must be trustworthy and have the necessary skills.

Durable power of attorney for health care. In it, you authorize a person to manage your health care if you can’t. Your incapacity may be temporary, such as general anesthesia, or permanent, like Alzheimer’s disease. Also, your durable power should authorize health care providers to fully discuss your health care with your attorney-in-fact so he can make informed decisions for you.

Health care directive. Here, you authorize a person to make end-of-life decisions if you cannot. Specifically, it authorizes him to remove some or all life-sustaining treatments. Your appointee must understand your wishes and have the strength to honor them in what may be an emotionally charged situation.

In addition to these basic documents, it may be desirable to use “will substitutes,” such as account titles and beneficiary designations. Therein lie traps for the unwary. Let’s say you have two children and want them to inherit equally. For help with bill paying, you add one to your bank accounts. Then you die. Most bank accounts are set up “joint with right of survivorship,” which takes precedence over your will. So the child on the accounts inherits them and the other is out in the cold – an unintended consequence.

A qualified adviser can help you create a comprehensive plan to manage your estate during your lifetime and after you are gone. Also, he can help you avoid mistakes that can be costly in terms of personal relationships and money.