[CFP, Estate] 4, Basic Documents

Mastering Basic Documents for the CFP Exam: Wills, POAs, and Medical Directives

📚 Subtitle: Essential Guide to Key Documents and Avoiding Common Mistakes

When preparing for the Certified Financial Planner (CFP) exam, mastering "Basic Documents"—including wills, durable power of attorney (POA), and advance medical directives—is crucial. These foundational documents play a significant role in financial planning by clearly defining client wishes for asset distribution, financial management, and healthcare decisions.

Let's dive deep into each document, providing you a solid conceptual understanding, concrete examples, and highlighting pitfalls candidates commonly encounter.

📝 Understanding Wills

A will is a legal document detailing the distribution of assets after death. It allows clients to specify beneficiaries, guardians for minors, and appoint an executor.

Key Concepts:

• Testator: Person creating the will.

• Executor: Individual responsible for carrying out the terms.

• Probate: Court process verifying the will.

Example:

Jane's will specifies her assets be equally divided among her three children. She appoints her brother as the executor to manage distribution.

Common Mistakes on Exam:

• Confusing "executor" with "beneficiary."

• Forgetting probate implications (e.g., assets like life insurance with named beneficiaries pass outside probate).

✅ Exam Tip: Remember, a will always passes through probate unless assets are specifically structured otherwise.

🔑 Durable Power of Attorney (POA)

Durable POA empowers an agent to manage someone's financial affairs, remaining valid even if the principal becomes incapacitated.

Key Concepts:

• Principal: Person granting authority.

• Agent/Attorney-in-Fact: Individual receiving authority.

• Durability: Continues authority despite incapacitation.

Example:

Michael gives his daughter durable POA to handle his finances if he becomes incapacitated. After a severe stroke, she legally manages his investments and pays his bills.

Common Mistakes on Exam:

• Misinterpreting "durable" as temporary.

• Confusing POA for finances with healthcare directives.

✅ Exam Tip: Highlight the "durable" feature—exam questions often emphasize the continuation of authority after incapacity.

🏥 Advance Medical Directives

These documents specify healthcare decisions if clients are incapacitated, including Living Wills and Healthcare POA.

Key Concepts:

• Living Will: States desired medical treatment.

• Healthcare POA: Appoints an agent for medical decisions.

• HIPAA Authorization: Permits access to medical records.

Example:

Sarah's living will explicitly states she does not want artificial life support. Her healthcare POA designates her husband to make other medical decisions if she can't.

Common Mistakes on Exam:

• Mixing up living wills with healthcare POA.

• Ignoring HIPAA's role in medical privacy.

✅ Exam Tip: Clearly differentiate between living wills (specific treatment choices) and healthcare POA (general decision-making authority).

🚩 Common Mistakes Recap

• Wills: Mixing executor with beneficiary roles.

• Durable POA: Overlooking the durability and confusing financial POA with healthcare decisions.

• Medical Directives: Confusing living wills (specific treatment) with healthcare POA (general authority).

🎯 Key Memory Tricks:

• "Wills deal with what happens after death, POAs during life."

• "Durable = continues despite incapacity."

• "Medical directives clearly separate treatment specifics (Living Will) and who makes decisions (Healthcare POA)."

🚀 Boost Your Prep! For podcasts, videos, and additional exam resources, visit: open-exam-prep.com

Good luck on your CFP journey! 🍀📖