Many people ignore the need to create an estate plan or limit their entire estate plan to just a will. But sometimes having a will is not enough. This is especially true if you have wishes concerning medical care or want to save as money as possible when transferring assets after you pass away.
Having an estate plan is not common for many people. The reasons are varied, but include not having the time to prepare one, feeling like it's too expensive to create one or feeling like there aren't enough assets to justify the time and money to develop an estate plan.
But there is some good news: Many people, especially when they get older, will start the estate planning process by creating a will. For some people, this is perfectly adequate to protect their legal, financial and personal interests.
But for many others, having a will creates an incomplete estate plan that can provide a false sense of security. In this article, we'll explain why this is sometimes the case.
Will versus estate plan: What's the difference?
A will is a legal document that sets out your wishes to be carried out at the time of your death. Specifically, these wishes concern how your property gets distributed and the care of any minor children you may have.
An estate plan does a lot more than a will. In addition to the will, it can consist of additional documents, including:
- Power of attorney: There are various types of powers of attorney, but they revolve around the legal principle of allowing someone else to make legally binding decisions on your behalf. Common types of powers of attorney, including durable, health care and springing.
- Living will: Also known by other names, such as advance health care directive, a living will sets out your medical wishes that someone else should honor in situations where you are unable to make those decisions yourself. Generally speaking, these will be wishes that deal with final wishes you cannot make yourself, such as if you're terminally ill and incapacitated.
- Trust: This special legal creation allows person A to transfer property to person B for the benefit of person C. For example, a parent might transfer $100,000 to a trust to help support a child after the parent dies. When creating the trust, the parent will choose someone to serve as the trustee and make decisions on how the money should be spent for the child's benefit.
These documents can allow you to have someone else make decisions on your behalf even if you're still alive. This can be quite useful if you become temporarily incapacitated or are otherwise unable to take care of your affairs.
For example, many members of the military will create an estate plan so a friend, family member or spouse can handle the soldier's affairs while stationed overseas.
Then there are financial benefits that you can obtain by creating an estate plan, such as reducing the fees, taxes and legal costs of carrying out your wishes after you die.
When having only a will is adequate
A will is usually enough as the sole document in an estate plan when the person who creates the will has few assets, doesn't have any particular wishes concerning the medical care they receive and has no minor children.
A will may also be enough in situations where any substantial property consists of non-probate assets. This means the property will not be subject to the jurisdiction of a probate court when the person dies. Common examples of non-probate assets include:
- Financial and retirement accounts with named beneficiaries or “payable on death” designations
- Life insurance
- Property located in a living trust
- Property held in joint tenancy with right of survivorship
But for most people who need or want a will, there will also be a need to have additional estate planning documents.
When having a will is not enough
It's hard enough to convince people to create a will, so it's not surprising that having a complete estate plan is even less common.
| Asset Countable for Purposes of Medicaid Eligibility | |
|---|---|
| 32% | Have one or more estate planning documents |
| 23.9% | Have a will |
| 13% | Have a living trust |
| 6.2% | Have a health care directive or living will |
Having an estate plan that includes more than just a will is usually necessary for three reasons.
First, there's the fact that you will have special wishes concerning the medical care you receive. Normally, you'll be conscious and of sound mind to decide how medical professionals should care for you in a hospital or other medical facility. But what happens if you are unable to make these decisions?
Perhaps you're unconscious after a car accident and don't want first responders or doctors to use all life-saving methods to revive you. Or if you are in a coma or vegetative state, you want certain things done for you (or not done for you).
Without making a living will or health care power of attorney, you may not be able to have your wishes carried out. Instead, the “default” rules created by state law will determine the medical care you receive. State law may also include assigning someone you don't like to make these decisions for you.
The second reason has to do with reducing the chances of a legal fight. These can sometimes come up when there's disagreement about the medical care a family member should receive or how property should be distributed or managed in certain situations. Sometimes, unexpected disputes arise among beneficiaries. Regardless of the reasons, money gets wasted on litigation in court costs and attorneys' fees.
Third, without sufficient estate planning documents, property may still pass to your heirs as you intended. However, they may be subject to certain estate, income or inheritance taxes, as well as probate fees. And these costs could have been avoided if you set up a trust or other estate document before you died.
For example, the probate process alone can end up taking anywhere from 3% to 8% of the total estate value. This includes court costs, executor fees, accounting fees, appraisal costs and bond fees. This means your surviving beneficiaries do not receive as much of the property as they potentially could have had you developed a more complete estate plan.
Then there's the potential for delays during the probate process, which could tie up assets for months or years, making it harder for loved ones to survive while the probate court sorts out what's going on.
The bottom line
A will is a great first step in creating an estate plan, but it's often not enough to make sure your wishes are fully honored, especially with respect to medical and financial concerns.
From a financial perspective, you can think of a will as setting out your wishes when you die while an estate plan determines how those wishes are carried out in the most economical way possible.