Planning ahead can reduce stress and help ensure your wishes are known and can be implemented.
A will is a legal document that can set forth your wishes on such topics as the distribution of your assets and the care of any minor children when you die. It names an executor, who carries out the provisions of your will. If you don't have a will, your assets will be disbursed according to state statutes—which may not be according to your wishes.
Power of attorney
A power of attorney is a document granting authority to another person to make certain decisions on your behalf. Its authority ends when the person granting authority revokes authority, becomes incapacitated, or dies. The requirements for a valid power of attorney vary by state.
Durable vs. springing power of attorney
Durable power of attorney remains in effect even if the person granting the authority becomes incapacitated. It ends if that person dies or formally revokes power.
A springing power of attorney does not go into effect immediately, but automatically becomes effective under certain specified conditions, typically when a person becomes incapacitated.
General vs. limited power of attorney
A general power of attorney applies to all affairs, such as opening financial accounts and managing personal finances. A limited power of attorney applies only to particular assets or accounts owned, such as granting authority to sell a home.
You can choose any competent adult to serve as your power of attorney. Given that you’re providing someone authority to make important decisions on your behalf, be sure to exercise great care in selecting your agent. Also, consider naming an alternate power of attorney in case the person you’ve initially named is unable to take the responsibility.
A conservatorship is a legal concept in which a court appoints a person to manage the financial and personal affairs of an incapacitated person or minor (known as a conservatee or ward). The conservator's duties include, for example, overseeing finances, establishing and monitoring the physical care of the conservatee, and managing living arrangements.
A beneficiary is an individual who receives the benefit from an estate, trust, retirement account, life insurance policy, or account with a transfer on death (TOD) designation. Choosing a beneficiary for investment accounts and insurance policies can be as important as writing a will. These decisions are critical but not complex. Assets in your retirement and other accounts pass directly to the beneficiaries on record with your financial institution. No matter what’s written in your will, the beneficiaries named on accounts or insurance policies take precedence in almost all instances.
Remember to name beneficiaries on all your retirement accounts, such as workplace retirement savings accounts like a 401(k) or 403(b), and IRAs. In many instances, having beneficiaries named on an account allows the account to pass outside the probate process, enabling your beneficiaries to save time and avoid expenses. As with all accounts, estate taxes may still apply. Be sure to consult your tax advisor.
Under IRS rules, required distributions from an inherited IRA are generally based on the age of the beneficiary, not the age of the original IRA owner. If your beneficiary is younger than you, these rules can minimize the taxable amount that must be withdrawn each year after your death.
Workplace savings plans:
If you’re married, keep in mind that some employer-sponsored retirement plans automatically designate your spouse as the beneficiary unless you name another beneficiary, and your spouse has consented in writing. You should check with your company to understand its policy on beneficiary designations.
Choosing a beneficiary or beneficiaries on a nonretirement account, such as a brokerage account, may establish a transfer-on-death (TOD) registration for the account.