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There are 5 important documents to remember when estate planning

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William Hertzog

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Posted: Wednesday, March 7, 2012 4:00 pm

It may be the subject matter — death, incapacity and taxes — that causes us to avoid estate planning. However, the fact is that, no matter what your age or how much wealth you’ve accumulated, you need an estate plan to protect yourself, your loved ones and your assets — both now while you’re still active as well as after your death.

Having an effective estate plan is one of the most important things you can do for your family. To start the planning process, you should work with an experienced firm that will put your interests first. The first step in the planning process is to create a comprehensive net worth statement showing all of your assets, including taxable accounts, tax-deferred accounts (IRAs, annuities, retirement plans) and life insurance investments. Your financial advisor can create a personal net worth statement containing this important information.

Being organized may make your meeting with your attorney more productive and expedite the planning process. But before visiting with your legal counsel, you need a basic understanding of the documents he or she may recommend for your plan.

1. Will. A will simply provides instructions for distributing your assets to your family and other beneficiaries upon your death. Your attorney can customize its provisions to meet your needs. You appoint a personal representative (also known as an “executor”) to distribute your assets. If you have minor children, you can designate a guardian for them. To be effective, a will must be filed in probate court. Probate is a judicial process for managing your assets if you become incapacitated and for transferring your assets in an orderly fashion when you die. The court oversees payment of liabilities and the distribution of assets. Generally, your personal representative will need to employ an attorney. Because a will does not take effect until you die, it cannot provide for management of your assets if you become incapacitated. Other estate planning documents, discussed below, become effective if you should become incapacitated.

2. Durable power of attorney. A power of attorney is a legal document in which you name another person to act on your behalf. This person is called your agent or attorney-in-fact. You can give your appointed agent broad or limited management powers. You should choose this person carefully because he or she will generally be able to sell, invest and spend your assets.

A traditional power of attorney terminates upon your disability or death. However, a durable power of attorney will continue during incapacity to provide a financial management safety net. A durable power of attorney terminates upon your death.

3. Health care power of attorney. A durable power of attorney for health care authorizes someone to make medical decisions for you in the event you are unable to do so yourself. This document and a living will can be invaluable for avoiding family conflicts and possible court intervention if you should become unable to make your own health care decisions.

4. Living will. A living will expresses your intentions regarding the use of life-sustaining measures in the event of a terminal illness. It expresses what you want but does not give anyone the authority to speak for you.

5. Revocable living trust. There are many different types of trusts with different purposes, each accomplishing a variety of goals. A revocable living trust is one type of trust often used in an estate plan. By transferring assets into a revocable trust, you can provide for continued management of your financial affairs during your lifetime (when you’re incapacitated, for example), at your death and even for generations to come. Your revocable living trust lets trust assets avoid probate and reduces the chance that personal information will become part of public records.

Every revocable trust has three important components. The grantor (or settlor) — generally you — creates the trust and transfers assets to it. The beneficiary — often you or a member of your family — receives the income and/or principal according to your trust’s terms. The third component, a trustee — who could be you, a family member or a corporate trustee — manages the trust assets.

You can change a revocable trust’s provisions at any time during your life. If you act as your own trustee, you continue to manage your investments and financial affairs. In this case, your account might be titled “(Your Name), Trustee of the (Your Name) Revocable Living Trust Dated (Date).” Because this legal entity exists beyond your death, property titled in the trust does not need to pass through probate.

Once you have executed the appropriate documents for your planning needs, you should review them periodically to ensure they remain up-to-date given any significant changes (births, deaths, divorces, etc.) in your situation. While having these documents is important, there’s more to the estate planning process. For example, you may need to deal with possible estate-tax issues, as well as coordinate primary and contingent beneficiary designations on your IRA, employer-sponsored retirement plan (such as a 401(k) or 403(b) plan), annuity contracts and life insurance policies with your estate plan.

• William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.

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