For most of us, the act of contemplating our own mortality ranks right up there with having a root canal.
A do-nothing approach won't ease the emotional or financial burden your loved ones will face when you're no longer around to call the shots, however. And it won't ensure your medical wishes are carried out in the event you become incapacitated.
"It's very difficult for your family to have to make end-of-life decisions on your behalf when they don't know what your wishes are," said Austin Frye, an estate attorney and certified financial planner with Frye Financial Center in Aventura, Fla.
Note how often siblings argue about what's best for mom or dad, which can tear families apart.
A few legal documents, finalized before the inevitable, can relieve pressure on your loved ones and provide you with peace of mind.
—By Shelly K. Schwartz, Special to CNBC.com
Posted 21 Nov., 2013
"People often don't think about these things until something happens to someone they know, but when you wait too long, you create guesswork for the rest of the family," said Bill Dendy, an estate attorney, certified public accountant and financial planner.
Death doesn't discriminate, he said, so even young families should draft a will and other medical directives.
Be sure you communicate with the people you name on the forms, said Frye, especially the executor of your estate, the guardian of your children and the trustee to your accounts.
"Giving those jobs to your family members is a great honor, but don't let it be a shock to them when you're not around," he said. "It may be too much responsibility or they may not be in a position to take your kids. Make sure they are on board."
A medical power of attorney document authorizes an individual (or proxy) to make health-care decisions on your behalf in the event of physical injury or cognitive impairment. (Think car accident, stroke or sudden severe illness.)
If you're married, that's usually your spouse. Complications may arise, however, when you pick the next in line.
Traditionally, the eldest child gets the job, but he or she may live far away or be less competent than a younger child to make decisions on your behalf. Think carefully about your plan B and amend the document if the person named as your power of attorney moves away.
"You want to make sure that person is near enough to you geographically to make those decisions," Dendy said.
Health-care power of attorney forms are often created alongside an advanced medical directive for physicians, also called a living will. Such forms clarify your wishes regarding end-of-life treatment, including resuscitation and organ donation.
Without that completed form, Dendy said, your heirs may spend all their inheritance in court deliberating over whether you would choose to remain on a respirator.
An HIPAA (Health Insurance Portability and Accountability Act) form grants your power of attorney the right to access your medical records, which are protected under privacy law. That person will need it to interpret your wishes and make educated decisions about your care.
"Most hospitals automatically give out those forms when you are admitted, but for people who completed their estate planning years ago, it's wise to make sure they have an authorization form on file," Dendy said.
Your will is the next big piece of the puzzle, especially if you're a parent. This delineates who inherits your assets and identifies a legal guardian for underage children.
Absent a will, your estate will be distributed according to state law.
Dendy warned that a will is subject to claims and creditors, however. Thus, anyone named as beneficiary does not collect a penny until all debts are repaid, which could vastly reduce the inheritance.
By contrast, IRAs, 401(k)s and life insurance policies are not subject to creditors, so designated beneficiaries are entitled to the full amount.
"I've seen people, who intended to divide their estate equally among their children, undue a lot of their financial planning by naming one of their kids as the beneficiary to their IRA, another to their life insurance policy, and the last to assets in their will," Dendy said. "That can be avoided if you name all your kids as equal beneficiaries to all your assets—your will, your IRA, your 401(k), and your life insurance policy."
Some financial advisors favor revocable living trusts, as assets passed to your beneficiaries through a trust do not go through probate—the legal process whereby assets left in an estate are used to pay off creditors and anything left is distributed to heirs. By contrast, assets named in a will go through probate, which can be costly and time consuming.
But Frye and Dendy agreed that those with a revocable living trust should also have a will.
"If you leave something out of the trust or make a mistake—which happens often—it would be as if you died without a will," said Frye, noting that the will provides a safety net for anything not left in a trust.
A trustee (typically you) manages property held inside a revocable living trust, which can be altered at any time during your life.
They are often more expensive than a will to establish, however, and require an extra layer of account management. As such, if you live in a state where probate laws are less burdensome, you may not need to incur the expense, according to Dendy.
"If you live in a state with an onerous probate process, or you own properties in multiple states, it's definitely worth doing a trust so your heirs don't have to go through probate in all those different states," he said.
You will also need a durable financial power of attorney that identifies the person you'd like to manage your money if you are unable to make decisions.
A power of attorney document, which should include the term "durable" to ensure it remains in effect after you become disabled, grants that person the legal authority to pay taxes on your behalf, borrow money, pay bills, invest and handle bank transactions.
A durable financial power of attorney can spare your loved ones significant legal fees, as they don't have to secure authority from the courts to handle your financial affairs. It can be structured to take effect on the date you sign it or in the future if a doctor certifies you are clinically incapacitated.
Last but not least, you'll want to keep an organized file of all your proof of ownership documents, including life insurance policies, mortgage deeds, land and car titles, stock certificates, and brokerage accounts.
Keep investment reports and up-to-date beneficiaries for your IRAs, 401(k)s and any other retirement account with current balances. And don't forget passwords to all accounts—online or otherwise.
You can keep those documents with your attorney, in a safe deposit box at the bank or in a fireproof safe at home. Be sure that if you opt for a safe deposit box you authorize your spouse or next of kin to have access. Otherwise, the bank won't open it until your estate goes through probate and your heirs have a death certificate in hand. By then, your funeral will be over and the burial instructions you kept inside won't do anyone any good.
Also be certain that your spouse and beneficiaries know where these documents are, so they won't have to hunt it down or re-create them through the legal system after you die.
"Tell your heirs where your original documents are and give them copies where appropriate," said Dendy. "I've seen too many cases where nobody can find the will or power of attorney when you need them."