Investment Accounts

Investment accounts hold stocks, bonds, funds and other securities, as well as cash. Unlike a bank account, the value of assets in an investment account fluctuates and can decline. Assets with a greater risk of loss tend to offer the potential for greater reward. For this reason, many investors have a number of investment accounts, each used to help meet a specific financial objective.

This section introduces you to the major types of investment accounts. You’ll learn how they work, who regulates them who’s eligible to participate, and tips on sound account management.

Advance Planning

Beyond simply establishing investment accounts, it’s also crucial to plan for the future of your assets. This helps ensure that your wishes are carried out, your potential future needs are addressed and your loved ones are provided for. Planning isn't just for the wealthy—most investors can benefit from having clear instructions for the disposition of their assets. While the process might seem complex, breaking it down into manageable steps makes it more approachable.

Power of Attorney

When planning for how your personal affairs will be managed if you’re unable to handle them yourself, you might consider granting power of attorney to someone you trust to act wisely and in your best interest. This attorney-in-fact, or agent, has the legal right to make decisions on your behalf.

The laws governing powers of attorney vary by state, so it’s important to understand the applicable laws both where you live and where you have assets. Most states require that your power of attorney be in writing, witnessed and notarized. Many states provide power of attorney requirements and forms on the official state website. Consider talking to an attorney who specializes in these agreements, understands state laws, and can specify the authority you’re granting and exclude anything you still want to control.

You must sign a power of attorney when you’re still mentally competent for it to be valid, though the standards for mental capacity might vary by state. You can customize a power of attorney to grant broad authority or limit it to specific financial matters. Given the implications, exercise caution when you vest someone with the authority to make decisions about your finances.

There are different types of powers of attorney. For instance, a non-durable power of attorney is typically used for specific, temporary circumstances—say you need someone to handle a transaction like buying a house or signing a lease when you’re not able to attend—and is automatically revoked if you become physically or mentally incapacitated. A durable power of attorney remains in effect even if you become incapacitated. If your power of attorney isn’t durable, a court may need to appoint someone to act for you, usually called a guardian, if you become unable to handle your affairs. A springing power of attorney "springs" into effect only when a specific event occurs, typically when you become unable to manage your own affairs.

You might have the right to revoke the authorization to act on your behalf at any time as long as you aren’t mentally incapacitated, as defined by your state. You might also have the right to choose a different agent. If you decide to change or revoke your power of attorney, inform any parties that might rely on it as soon as possible. In many states, an agent who doesn’t know that you revoked their authorization might still be able to reasonably rely on the old power of attorney.

Wills

A will is a legal document that describes how you want your property and assets to be distributed after your death. It also lets you appoint a guardian for your minor children and make other decisions about your estate. Without a will, a court may make decisions about your estate pursuant to certain state and federal laws.

A standard will generally includes your choice of an executor, who will manage your estate and carry out your instructions after your death. Wills typically go through probate court, which can take time, and become a public record. Those wishing to avoid probate court and maintain privacy have the option of placing their assets in a living trust.

Some couples who share substantial assets might consider a joint will, which typically bequeaths all of the couple’s assets to the surviving spouse and provides for those assets to go to other designated beneficiaries upon the death of the second spouse. Joint wills have advantages and disadvantages that you might want to discuss with an attorney specializing in trusts and estates law in your state.

Life events like marriage, divorce, deaths, having children or acquiring significant assets should trigger a review of your will to keep it current. Remember that certain assets—like retirement accounts, life insurance policies and jointly owned property—typically pass directly to named beneficiaries or co-owners regardless of what your will states.

Consulting an attorney can help ensure that your will is valid and meets your state's specific requirements. If your will is judged to be invalid, your assets will be distributed as if you died intestate (without a will) according to the applicable laws of your state.

Trusts

A trust is a legal arrangement where one party (the trustor or grantor) gives another party (the trustee) the right to hold and manage assets for the benefit of a third party (the beneficiary). A trust holds your assets with specific instructions for how they should be handled.

Trusts can provide control over how and when your assets are distributed, potentially reduce estate taxes, protect assets from creditors, avoid probate and create financial support for loved ones with special needs or circumstances.

Common types of trusts include:

• Living Trusts (Revocable Trusts) – A living trust is one that you create during your lifetime and can be changed or canceled. Living trusts can allow you to maintain control over your assets, maintain privacy and provide flexibility—and they can help your heirs avoid probate. 
• Irrevocable Trusts – As the name implies, irrevocable trusts can’t be changed or revoked once established. They feature potential tax advantages, can protect assets from creditors and can help your heirs avoid probate. But irrevocable trusts typically force you to give up some control of your assets, are more complex and have potential gift tax consequences.
• Testamentary Trusts – A testamentary trust is created through your will and takes effect after your death to control the distribution of assets. This trust is primarily used by people whose beneficiaries are minors, those with disabilities or those who struggle with financial management. This type of trust has potential tax benefits, but it must go through probate.

Which trust, if any, makes sense for you depends upon your personal situation and wishes. A tax professional can help you understand the implications of each type of trust based on your circumstances.

To make sure the trust is legally valid and meets your needs, consider hiring an estate attorney to draft and/or review the document. As your life changes, your needs may change, so review your trust regularly.

Learn more from AARP about advance planning, and find information and resources related to planning for diminished capacity and illness from the Consumer Financial Protection Bureau (CFPB). You can also find estate planning information and FAQs from the American Bar Association.