ESTATE PLANNING FOR YOUNG ADULTS
Many young adults assume they don’t need an estate plan because they are young, they don’t have a lot of assets, or they will be dead, so who cares? The reality is that everyone should have at least a basic estate plan and that many items can be accomplished with minimal costs. Some items may even come into play during your life. This article will explore the basics of estate planning for those under 35.
NAMING BENEFICIARIES
The simplest item to address when forming an estate plan for young adults is naming beneficiaries on financial accounts. Employer sponsored retirement plans like 401Ks or pensions typically allow you to name one or more beneficiaries that will inherit the accounts if you die. Bank accounts and brokerage accounts usually allow you to make a transfer-on-death (TOD) election, which functions similarly to naming one or more beneficiaries. Either method allows the young adult to determine who they would like to receive their assets without creating a will. In addition, specifying beneficiaries allows your assets to transfer without going through probate. Probate is a legal process of settling the affairs of a deceased person that can be lengthy and expensive. Remember to always name both primary and contingent beneficiaries. For example, your spouse may be the primary beneficiary, and your children could be contingent beneficiaries in equal shares. This would allow your assets to pass to your children in the event that something happens to both you and your spouse.
LEGAL DIRECTIVES
One of the building blocks of an estate plan are legal directives, which typically come in to play if you are still alive but incapacitated. These include a medical power of attorney, a durable financial power of attorney, or a medical directive. Together these documents specify your wishes and appoint representatives to carry them out should you be unable to do so. These documents are critical for people of all ages.
Once a child reaches 18, they are legally an adult, and their parents have no legal right to access their medical, financial or educational records or make decisions on their behalf. From the young adult’s perspective, if you are sick or seriously injured, would you want someone to be able to receive updates on your condition, ensure your wishes are carried out, or manage your financial affairs until you are able to do so? A medical power of attorney (POA) allows one to appoint someone to make healthcare decisions on their behalf and gives them the right to access one’s medical records. Be sure your medical POA explicitly grants your agent access to your Protected Health Information to avoid any HIPAA issues. A financial POA allows an individual to act as your agent regarding financial affairs such as paying bills or filing taxes. Keep in mind that both medical and financial POAs can, and likely should, be drafted with limits to the powers of your agent. One other item to consider is a Family Educational Rights and Privacy Act (FERPA) waiver, which allows schools to share educational information with parents.
It is important to note that one’s spouse does not automatically have decision making power for an incapacitated spouse, and that an unmarried partner has far less authority. Without medical and financial POAs in place, it may require a court order to appoint a spouse or partner as guardian or conservator. This can be a lengthy process that could cause financial difficulties while establishing.
A medical directive spells out one’s wishes for medical care if one is unable to make them. This may include desires around resuscitation, forgoing treatment if in a permanent vegetative state, or religious concerns. Providing guidance in these areas could ease the burden on loved ones forced to make difficult end-of-life decisions.
PROVIDING FOR FAMILY
Starting a family is a major life milestone and should be addressed in one’s estate plan. If the young adult did not previously have a Last Will and Testament, now is the time to do so. Among other things, a will allows parents to provide for guardianship of minor children, ensuring that your children will be cared for by trusted individuals. It is also time to protect your family through life insurance. Term life insurance policies are inexpensive when one is young and in good health. If your family lifestyle depends on two incomes, be sure to take out a policy on both partners. There are many ways to calculate the amount of insurance needed, including the income multiplier method, human life value approach and a need analysis. Working with a financial advisor to create a financial plan may provide clarity and peace of mind around your insurance and estate planning needs. As your net worth grows, it may be prudent to consider the use of a trust to control the distribution of your assets.
PROFESSIONAL ADVICE
As previously mentioned, many of these items can be addressed with minimal cost. Your financial institution should be able assist you in naming beneficiaries or making TOD elections. Drafting POAs, medical directives, and a will typically require working with an attorney. There are also sources like Trust & Will or Legal Zoom that offer online services to create estate planning documents. When making your choice consider that an attorney will typically provide some education around the process, answer any questions you have and can offer customization to suit your specific needs. It is a good idea to thoroughly review both the services provided and the cost before deciding on a provider.
ONGOING REVIEW
An estate plan should be dynamic and change with life events. A good practice would be to review one’s estate plan and supporting documents annually to see if changes need to be made. The plan should also be examined when life changes occur, such as the birth of a child, a career change, or with changes in relationships. For example, as one’s parents age they may no longer be the appropriate choice as potential guardians of minor children. Beginning with the understanding that the plan will need to change will free you from trying to come up with the perfect plan. Having something in place is always better than having nothing.
FINAL THOUGHTS
Thinking of estate planning as some grandiose undertaking can be intimidating. Start with a simple step like ensuring all your accounts have beneficiaries or TOD elections within the next month. Once you have accomplished that, move on to the next task, but don’t try to do too much at one time. Please schedule a call if you would like to discuss estate planning as it relates to your specific situation or if you would like to learn more about our financial planning services.