Music legend Prince died at age 57 this year, shocking fans everywhere. With no current wife or children, he is survived by six siblings and left an estate estimated to be worth more than $100 million.
I grew up in Chanhassen, Minnesota, where Prince lived, so his story hits close to home. I would occasionally see him riding his purple motorcycle around town, and I delivered a weekly newspaper to his estate for one of my first jobs.
As a financial planner, it was shocking to me that Prince apparently did not have a will. It may still be found, but with such a large estate and no wife or children, it’s hard to understand why he wouldn’t have left one.
Why do you need a will?
Prince is hardly the only person to forgo a will. And if many people — including some who have mega estates — don’t have an estate plan, why do you need one? How does having a will and key estate documents help those you leave behind?
Put simply, having a will ensures that your assets end up with the people and institutions you want. A will is a legal document in which you express your wishes for how your property should be distributed and you name someone to be the executor of your estate, managing the distribution of your property.
Unfortunately, in Prince’s case, there are already reports that his siblings are struggling over with what to do with the estate. This could take years to resolve and could have been avoided if there were a detailed estate plan.
Furthermore, if you have minor children, a will would list a guardian for your children. If you don’t have a will, it is likely your state would decide who would care for your children after you pass away. Is that a decision you want the state to make on your behalf?
Key estate-planning documents
And while many people tend to focus only on a will, it’s also vital to have updated beneficiary designations and other key documents in place to enact your wishes. It is important to note that beneficiaries on your retirement accounts and life insurance policies supersede a will, so it’s crucial to make sure you name a beneficiary and review your beneficiary designations on a regular basis.
The other important legal documents you need as part of a sound estate plan include:
- Financial power of attorney: This allows someone else to make financial decisions on your behalf if you become incapacitated.
- Health care power of attorney: This allows someone else to make health care decisions on your behalf if you become incapacitated.
- Living will/medical directive: This details your wishes regarding life-prolonging medical procedures. It is difficult for family members to make this decision if they don’t know or understand your wishes.
- Letter of last instructions: This is optional, but it contains the contact information of key individuals such as lawyers, financial planners and accountants, as well as account information and your specific wishes, that will help your executor finalize the distribution of your estate.
Do you need a trust?
A trust is a legal document that allows a third party, the trustee, to hold assets on behalf of a beneficiary or beneficiaries. Using a trust in your estate planning is optional, but it can help your estate avoid probate court, the time-consuming legal process of transferring ownership of your property. Retirement account and life insurance proceeds avoid probate with the proper beneficiary designations, but other assets like bank and investment accounts, homes and cars would go through probate and be distributed according to your will if they were not held in trust.
Using a trust can also help you reduce estate taxes and accomplish certain goals for how your money is handled after your death. But while trusts may help your estate avoid some taxes and the costly probate process, they cost money to create and maintain, and many people don’t need them. Contact a financial planner to determine if a trust is right in your situation.
How to avoid common mistakes
As a financial planner, I come across several common estate-planning mistakes that are important to avoid.
- Make a plan. The biggest mistake is not going through the process to set up estate documents at all. If you don’t have estate documents, start the process now. If you are not sure whom to work with, contact trusted sources such as your financial planner, accountant or a family friend for recommendations for a qualified estate attorney. Many companies offer estate-planning services as part of their benefits packages, so you can ask your human resources department as well.
- Update your beneficiary designations. I also frequently see incorrect beneficiary designations — or none at all — on retirement accounts. The simple act of properly listing retirement account beneficiaries can help your heirs save thousands of dollars on taxes, given withdrawal requirements for individuals compared to estates. And remember, this is important because for life insurance and retirement accounts, the beneficiary designation trumps what is in your will.
- Review your plan. Many people will do the work to establish an estate plan but then fail to review it regularly to confirm it matches their current wishes. For instance, if you divorced but forgot to update your estate documents, you could still have an ex-spouse listed as the beneficiary in your will or on your retirement plan or life insurance accounts. Make sure that you review your estate documents and beneficiary designations every year.
- Keep your documents in a safe place. Another common issue is that the heirs and the executor have no idea where the deceased’s documents are located or how to access them in case of an emergency. Once you have completed your estate documents, store them in a safe place where others could find them in case of an unfortunate event. I typically recommend keeping them in a fireproof safe or filing cabinet that designated family members know how to access. If you use a safe-deposit box, make sure your loved ones are on the account, or it could take weeks for them to gain access.
Creating your estate documents is not the most exciting activity, but won’t you sleep better knowing a plan is in place?
This article originally appeared on NerdWallet.
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