Prepare these documents, and update older ones, while you still have the decision-making capacity to do so. By the Editors of Kiplinger's Retirement Report October 31, 2012 Advance-planning documents can help ensure that all your financial and medical wishes are carried out to the letter. This is especially important when Alzheimer's disease and dementia come into play. It's essential to draw up these documents -- and update older ones -- while you still have the decision-making capacity to do so. If you don't have the appropriate documents, a court may step in and appoint a guardian for you. Because of the differences in state law and the complexities involved in ensuring that your instructions are airtight, see a lawyer for help in drawing up these documents.SEE ALSO: Special Report on Long-Term Care Power of attorney for finances. This legal document allows another person to manage your finances on your behalf. Naming a competent, trustworthy agent is essential. Many seniors designate a family member for this task. You can build in checks and balances by requiring that the agent provide a periodic accounting to a third party, such as another relative or a lawyer. Or you can require that another individual sign off on any gifts of your property. Powers of attorney should state the agent's authority to handle specific investment accounts, annuities and other assets -- details that aren't included in some off-the-shelf documents. Make sure the power of attorney is "durable," meaning that the agent's powers continue when the person creating the power of attorney becomes incapacitated. Advertisement Living trust. This document can provide detailed guidelines on how your property should be managed if you become incapacitated. You transfer your investments, real estate and other assets into the trust and name yourself as trustee, so you maintain control of the property. You also name one or more successor trustees to manage the property if you become incapacitated, and you include detailed instructions on how the money should be used if you are hospitalized or need long-term care. After you die, the trust allows the successor trustee to transfer your property to your beneficiaries without having to go through probate. If you have a living trust, you still need a financial power of attorney to manage transactions that may fall outside the scope of the trust, such as dealing with credit card accounts. To provide checks and balances, it's best to name different individuals as your living trust's successor trustee and as your agent under a power of attorney. Health care directives. A living will documents your wishes regarding life-sustaining treatment. Find living will forms for each state at www.caringinfo.org. Some states combine the living will with a health care power of attorney in one form. The health care power of attorney allows you to appoint someone to make medical decisions for you if you become incapacitated. You also can include specific instructions on how your agent should make your health care decisions. Laws governing these documents can vary from state to state. Look at the American Bar Association's health care power of attorney guidance, titled Giving Someone a Power of Attorney for Your Health Care, at www.americanbar.org. Advertisement Also, seniors looking to include more details in their advance directives might consider the Five Wishes form, which meets legal requirements in more than 40 states. The form, available at www.agingwithdignity.org, allows users to designate a health care proxy and outline the care they want under various medical scenarios. Standard will. The will identifies the individual's beneficiaries, who will receive the assets in the estate. It also names the executor, the person who manages the estate. The executor will have no legal authority until the person dies. Separately, individuals must designate beneficiaries of their retirement plans on the plan documents themselves; naming beneficiaries for retirement-plan assets in a will is not legally binding. Letter of instruction. This document will provide your family the financial and other information they need if you become incapacitated. At the very least, the letter should list all of your investment accounts, insurance policies, loans, cemetery plot records, real estate holdings, military benefits, overseas assets and even frequent-flier memberships. It should also provide the location of important documents and the names of key contacts, such as your lawyer, financial adviser and insurance agent. Make sure to include the computer passwords for all of your online accounts. Your letter also could direct heirs to cancel club memberships and to call current and past employers regarding company benefits and stock options. Include funeral instructions and information you would like in your obituary. You can place all of the documents in a binder. Consider using a booklet, the Family Love Letter (www.familyloveletter.com), as a guide. Make sure to note the location of any items you may have hidden. Advertisement Special needs trust. This trust is set up to provide for an incapacitated spouse if the well caregiver dies first. The amount put in the trust will be based on the expected cost of care over the individual's lifetime. Such trusts are drafted so that the assets are not considered to belong to the disabled person. That protects eligibility for certain government benefits, such as Medicaid benefits for nursing-home care, without requiring the ill patient to first spend down all assets. Assets could be spent on extras, such as special therapies, a geriatric care manager or a private nursing-home room. A trustee would make spending decisions. Haven't yet filed for Social Security? 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