Estate planning isn’t top of mind for most young adults, especially those who are in good health. But an estate plan is a critical component of a solid personal finance strategy, and it’s never too early to start one. While it will need to be updated over time, putting together an estate plan in your early adult years creates a solid foundation — one that would become critical should the unthinkable happen.
Below, we’ll walk through the essentials of estate planning for young adults: what documents they need, why they’re important, what tips they should keep in mind, and more.
The 5 Essential Estate Planning Documents
Before we dive into the most important estate planning documents for young adults, let’s do a quick recap of the ones that anyone should have, regardless of age, marital status, or whether they have children:
- Healthcare Proxy: This document designates a healthcare surrogate or medical power of attorney — someone trustworthy who can make medical decisions on an individual’s behalf if that person becomes incapable of making those decisions on their own. Typically, young adults should choose a healthcare proxy who’s in good health, is relatively young, and lives close by, as some decisions can only be made in person.
- HIPAA Authorization: This document grants certain individuals — including a healthcare surrogate or medical power of attorney — access to a loved one’s medical records, which may be necessary in order to determine the best course of treatment.
- Durable Financial Power of Attorney: This form allows an individual to appoint a financial power of attorney who can make decisions regarding their finances and property should that individual become unable to manage them themselves. As with a healthcare surrogate/medical power of attorney, young adults should consider choosing somebody in good health, relatively young, and close by. They should also be trustworthy and responsible with money.
- Living Will: This document allows individuals to detail their preferences regarding healthcare, disability, and end-of-life care. For example, would they want to be placed on life support if needed?
- Preneed Guardian: This document designates a preneed guardian — someone who can serve as an individual’s guardian, or the guardian of anyone else they care for, if they become incapacitated.
Resource: Estate Planning for Young Adults Checklist
Additional Estate Planning Documents Young Adults Should Consider
While the five documents above serve as a solid estate planning foundation for young adults, several additional documents can be beneficial. This includes a:
Last Will and Testament
While some young adults may have already designated beneficiaries for their property — IRAs and 401(k) accounts, for example, often require beneficiaries — there are likely many assets for which they still haven’t specified a beneficiary. A last will and testament (also simply called a will), however, allows them to specify who they want to grant these assets to upon their passing.
If they have children, this will also be where they name a guardian (or guardians) responsible for raising their children in the event that they and their partner die or become incapacitated before their kids reach adulthood. They should do this as soon as they become a parent.
When choosing a guardian, young adults should keep in mind that:
- They shouldn’t name just one person or even one married couple. A successor guardian should also be named in the event the chosen guardian is unable to take on the role.
- Choosing a guardian could lead to family tension. Some family members might be offended if they are not selected, while others may not have the means or desire to take on the responsibility. Discussing these plans in advance could help smooth over tensions and address any questions/concerns that may arise.
- The most important criteria to look for in potential guardians are that they are responsible, have values that the parents agree with, and will treat the child according to their needs and their parents’ wishes. Guardianship decisions can also be updated at any time, so young adults shouldn’t be afraid to review their decisions periodically to ensure that the person or couple they’ve selected is still appropriate.
- It may be helpful to name two separate people to serve as guardians — “a guardian of the person,” who takes care of raising the child, and a “guardian of the estate,” who handles the child’s finances and inheritance. While this can help create a system of checks and balances and prevent the misappropriation of funds, however, it may also add a layer of logistic complexity.
Read More: Financial Planning & Budgeting Strategy for High-Income Professionals
Revocable Living Trust Document
Another document that can be valuable when it comes to estate planning for young adults is a revocable living trust document. Like a will, a revocable living trust document allows an individual to designate who receives what property upon their passing. But unlike a will, it doesn’t have to go through the court system, so it provides an additional layer of protection and privacy.
A revocable living trust document is an especially good idea for those who:
- Have significant assets in their own name
- Have special needs beneficiaries
- Have properties in multiple jurisdictions (multiple states or even countries)
- Have beneficiaries for whom they want to control the distribution terms and timing (revocable living trust document distributions take place at ages 30, 35, and 40)
- Have children from a previous relationship
- Want to limit a beneficiary’s access to inherited assets — for example, if they have concerns about the beneficiary’s spending habits, exposure to creditors, or level of responsibility (in which case, they might consider a spendthrift trust)
- Are potentially subject to the estate tax
Life Insurance Policy
A life insurance policy is another document that young adults should consider including in their estate plan. Life insurance policies are useful, flexible estate planning tools for young adults, as they can provide tax-free proceeds and security for their loved ones.
Often, a life insurance policy — such as an irrevocable life insurance trust — can even cover the cost of any estate taxes the family of the deceased might encounter. Depending on the plan, it could even pay off a child’s private high school tuition or the cost of a college education.
There are various types of life insurance plans, from policies that cover individuals for a set number of years to policies that cover them for the rest of their lives. The right type for each person will depend largely on their budget, needs, and health. For those who are unsure which life insurance plan to choose, it can be helpful to talk to a CERTIFIED FINANCIAL PLANNER™ professional and/or insurance broker.
Letter of Intent
The last of the estate planning documents for young adults that we’ll be covering — but certainly not the least — is the letter of intent.
This document allows young adults to give specific guidance about how they would like their personal affairs to be handled. A letter of intent could include anything from directives around their funeral (such as whether they would prefer to be cremated or buried) to who should take care of their pets to their children’s preferred daily routines.
It’s a handy catch-all for anything that may not be addressed in other estate planning documents — so young adults should feel free to include whatever matters most to them.
Real World Example:
Medical considerations are one of the most important parts of a young adult’s estate plans. We educated Jim, one of our clients, that medical records are kept confidential from his immediate family members once he is 18. They no longer have the same power over making medical decisions on his behalf. As an 18-year-old college freshman attending an out-of-state school, he did not like hearing that now he is legally medically independent.
Pro Tip: Appoint a Healthcare Proxy
We advised Jim to designate his trustworthy older siblings or parents as a Healthcare Proxy. He consulted with a referred estate planning attorney before executing the Healthcare Proxy and HIPAA Authorization documents. Jim felt comforted knowing that having these documents in place reduced the burden on his loved ones in a medical emergency.
Gain Peace of Mind With a Thorough Estate Plan
At the end of the day, estate planning for young adults is critical. After all, it’s the best way to ensure that their wishes are carried out and that their loved ones are taken care of. To do this, however, they’ll most likely want to work with a CERTIFIED FINANCIAL PLANNER™ professional and a good estate lawyer who can help them identify, articulate, and officially document their preferences and directives.
A CERTIFIED FINANCIAL PLANNER™ professional can help you tie all the different parts of your estate together into a plan that represents your wishes. You can then have a licensed estate planning attorney create documents as part of a customized strategy.
But an estate plan isn’t just a set-it-and-forget-it type of deal — it should be revisited at certain points in a young adult’s life, such as a marriage, the birth of a child, a move to another state, an illness, or even a bank merger or legislative changes (such as the Tax Cuts and Jobs Act of 2017).
While drafting an estate plan might seem intimidating, it’s well worth the effort — and it doesn’t have to be done alone. The dedicated professionals at Team Hewins include CERTIFIED FINANCIAL PLANNER™ professionals who specialize in estate planning. Call today to set up a free consultation, and get one step closer to peace of mind.
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