Here we will go over the basics of your estate planning, along with any special context for you as a solopreneur.

Living trust

How it works

A living trust is a legal instrument that you establish while you are alive to protect your assets and simplify their distribution after you die.  It helps your family and assets avoid probate, which can be time-consuming, public, and costly.  You still retain control over your assets, but your trust owns the assets instead of you.  A trustee controls the trust which, in a living trust, is you.

You often use a pour-over will too, which allows anything outside of your trust to go into your trust after you die.  This is an insurance policy in case you do not title all of your assets properly, but it does mean that those assets will go through probate.

Why it’s important

It helps you avoid probate, saving your heirs time, money, and excess emotional difficulty.  It can be expensive to set up a living trust, and may not be necessary if your assets are limited to retirement accounts and bank accounts.  Those can avoid probate through other mechanisms.  If you own a business entity or real estate then you are much better off with a trust.  Your business can be tended by your successor trustee so the business value does not deteriorate.

Power of attorney

How it works

A power of attorney is a legal document that grants another person legal authority to act on your behalf.  A power of attorney may have different “flavors.”  Some powers of attorney can be immediate, whereas other spring into effect if a certain event occurs (like incapacitation).  Powers of attorney may give full powers whereas other may only be limited to specific financial transactions.

Why it’s important

A power of attorney offers you continuity in the event you cannot manage your own affairs.  It can save your business from falling apart if you cannot operate it yourself.

Living will

How it works

A living will specifies the medical care that you want in the event you cannot issue that directive yourself.

Why it’s important

You have your medical wishes in place ahead of time, which means that you will be cared for in the manner you most desire.  This also saves your loved ones from having to make the decision themselves.  They can follow your exact wishes, without having to actively make the choice.

Health care proxy

How it works

A health care proxy is similar to a living will, except it designates a person to make those healthcare decisions on your behalf.  You grant the person the authority to make these decisions, which may or may not have been communicated by you.

Why it’s important

This grants a specific person the authority to make these decisions.  This can be helpful because it makes clear who has the authority and can absolve another person from that decision, if you feel that they may not be the appropriate person for that responsibility.

Guardian nomination

How it works

A guardian nomination specifies the person(s) that you want a court to care for your minor children in the event that you die.  You can also leave instructions for their care.

Why it’s important

If you do not nominate a guardian for this possible event, a court will do it without any input from you.  It has the potential to become much more emotionally devastating than the situation already is.

Beneficiary designation

How it works

A beneficiary designation determines who inherits a specific financial account.  Retirement accounts like IRAs and 401ks use these, and brokerage and bank accounts have a similar function called a Transfer on Death designation.  This avoids probate and the cost of setting up a living trust.  Importantly, you should only rely on this if you have no other assets. You should have a living trust if your situation has more complexity than these simple types of accounts.

Why it’s important

You avoid probate and all of its shortcomings.  You also make it clear who inherits what.  If you have a Solo 401k do not forget to do this simple step after all of the hard work to set it up.

Sherman Asset Management does not provide legal advice.  The information contained herein is provided for informational purposes only.  Do not rely solely upon this information for your individual circumstances.