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The Estate-Planning Documents Everyone Needs

No matter how strong a grip you have on your finances, it's important to help your loved ones handle things when you're not able to. 

In this clip from Industry Focus: Financials, Motley Fool analyst Gaby Lapera and Dan Caplinger, the Fool's director of investment planning, talk about the various documents that you should have to protect your family. Between wills, trusts, durable powers of attorney, healthcare directives, and just a simple list of accounts, you'll learn what to have ready when tough times strike.

A full transcript follows the video.

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This podcast was recorded on Sept. 22, 2016 for the Oct. 31, 2016 episode.

Gaby Lapera: Estate planning is things you need to do before you die. I think most people have in their heads, "I really need to get a will." I don't think they even think about other stuff that could be attached to that. So, to get us started, Dan, what documents do you need to prepare before death?

Dan Caplinger: There are a bunch of documents that are really helpful to have in a number of situations, not just in preparation for death, but also in case you actually manage to keep living. Having a full set of these estate planning documents can help you and your family in a wide range of situations.

First, you mentioned the will. Very basic, it's definitely a good idea to have, because it's the primary instrument for figuring out where your stuff goes after you die. But it's not the only document that does that. A lot of people get confused about this. One thing you have to be absolutely sure that you do is complete what are known as the beneficiary designations. These forms are used for accounts that you have at financial institutions that require them -- it's like an IRA, for instance. If you have a retirement account, whether it's an IRA or 401(k), they will have you fill out a beneficiary designation. On that, you'll say, "Who's going to take this account after I pass away?" A lot of people mistakenly think that their will says where their IRA or 401(k) or other types of these accounts, where these will go after they die. Your will does not control that; it's your beneficiary designation that controls that. It's important on not only retirement accounts, but also life insurance policies. Check with your financial institution -- a number of places will have these forms available on other types of accounts as well on what's called "payable on death" accounts. So, make sure, if you have one of those, you've filled out that necessary paperwork.

The other major class of documents you should have are what's known as powers of attorney. Those fall into two categories. One covers financial elements, so it lets you name someone else who can take care of things like writing checks on your bank account, paying your bills, making trades in your investment account. This happens if you're incapacitated -- so, you're still living, but something's happened to you, you've had a major accident or a major illness, and you're unable to take care of those affairs on your own, this person can step in and handle that. So, that's the financial side.

Then, you have another power of attorney on the healthcare side. That's the person who can make medical decisions on your behalf. Going with that power of attorney also what is sometimes known as an advanced medical directive -- some people call it a living will. That's where you set out what your wishes are for whether you want life-saving techniques used, life support systems, or other measures taken to extend your life, or whether you don't want those -- it's an opportunity to express that. It's a wide range of documents, but they cover a bunch of different situations.

Lapera: And suffice to say that for all of these things, you should choose, for your power of attorney, both medical and financial, you should choose people that you really trust. And you can change that over time, that's not a problem. But you also want to make sure that this is legally binding, so you want to find a lawyer to help you do these things. There's lawyers that specialize in this.

Caplinger: It's not just that you should pick people you trust, but you should pick people who know the gravity of the situation, who are prepared to deal with the hard decisions they might be asked to make. It's important that you be able to trust them, but they also have to have a comfort level that if they're called upon to act, they feel comfortable, they know what you want, they know what you would do. It's so much easier to do that when everything is great, upfront, well before any of those documents are needed, so that if that crisis happens, the person you name will be ready to handle it.

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