Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

​In a previous post (see http://FFundamentals.com/Blog/Post/18/An-emergency-fund-and-insurance-play-different-roles-in-your-emergency-plan) I described how an emergency fund and insurance form the core of an emergency plan. An emergency fund addresses small to medium-sized financial emergencies, while insurance covers large financial emergencies.

Basic estate documents are the 3rd pillar of an emergency plan. These documents address emergencies in different ways than an emergency fund or insurance.

Many people hold the opinion that estate documents are just for old or wealthy individuals. This isn’t accurate. While some estate planning techniques are only used by wealthy families, other ones are more broadly relevant to younger individuals without significant wealth. I will highlight five examples below:

1. Will. A will is a legal document that expresses your wishes if you were to die. It is broadly relevant because it allows parents of young children to name a legal guardian for each child. This information will be used by your county’s family and probate court to make a final guardianship decision.

2. Power of attorney for healthcare decisions. This document, also called a health care proxy, is a legal document that allows you to name someone who will be authorized to make healthcare decisions for you if you are unable to make them for yourself. It has no effect if you are competent to make your own healthcare decisions. It is broadly relevant because many people live alone and far away from any direct family members. It can give you peace of mind that someone nearby will be authorized to make healthcare decisions for you if you ever face an emergency that leaves you temporarily incapacitated.

3. Power of attorney for financial decisions. This legal document operates the same way as a healthcare proxy, but just for financial decisions. For example, the person you name in the document will be authorized to access your bank accounts and pay your bills if you are unable to perform these tasks yourself. As with the healthcare proxy, it can be designed to have no effect if you are able to make financial decisions yourself.

4. Living will. This document acts as a complement to a healthcare proxy. It allows you to express how you want end-of-life decisions to be made. This will help the person you name in your healthcare proxy to make the most appropriate decisions for you, and will provide guidance to the doctors and hospital giving you care.

5. Revocable trust for life insurance. Many parents of young children will want to own a life insurance policy as part of their emergency plan. But sometimes it isn’t easy to identify an appropriate beneficiary of the policy. (The beneficiary is the person who will receive the benefit once the policy pays out.) For example, young children aren’t an appropriate choice, because they aren’t mature enough to handle a large sum of money. In this case, a trust can be established that will act as the beneficiary of your policy. A trust is a legal document that provides instructions on how you want the life insurance proceeds to be managed. It can specify portions to be paid out each year for living expenses, and portions to be retained for future college expenses, for instance. A person you name, called the trustee, will be legally responsible for following your wishes.

All of these documents require the help of a licensed attorney. If you don’t know of a good attorney to call, you could ask friends or colleagues for referrals. Or you could call the Massachusetts Bar Association’s Lawyer Referral Service at 617-654-0400.

These are standard documents and should not be expensive to draft. A good attorney will be happy to give you an estimate of the cost before any work is done.

These documents will help you prepare for potential emergencies, such as situations where you become temporarily incapacitated or die. And they perform functions that an emergency fund and insurance can’t perform. So as you put together your own emergency plan, remember to include all three pillars in your approach.

Thanks for reading! You can learn more at our web site’s blog page (http://www.FFundamentals.com/Blog) or Facebook page (http://www.Facebook.com/FFundamentals).

Stephen Barkhuff, CFP(R), CFA, MBA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. You can reach him at mailto:SBarkhuff@FFundamentals.com.