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The Five Components of a Good Estate Plan
- February 8th, 2024
Many people believe that if they have a will, their estate planning is complete, but there is much more to a solid estate plan. A good plan should be designed to avoid probate, save on estate taxes, protect assets if you have to move into a nursing home, and appoint someone to act for you if you ever become disabled.
All estate plans should include, at minimum, two important estate planning instruments: a durable power of attorney and a will. A trust can also be useful; this document can help you to avoid probate and to manage your estate during your life as well as after you are gone. In addition, medical directives allow you to appoint someone to make medical decisions on your behalf. Continue reading to learn more about each of these estate planning tools.
Wills and Trusts
What Is a Will, and Why Do I Need One?
A will is a legally binding statement directing who will receive your property at your death. If you do not have one, your state will determine how to distribute your property. A will also appoints a legal representative (called an executor or a personal representative) to carry out your wishes. A will is especially important if you have minor children because it allows you to name a guardian for the children.
However, a will covers only probate property. Many other types of property or forms of ownership pass outside probate.
The following types of property all pass outside the probate process, so your will won't cover them:
- Jointly owned property
- Property in trust
- Life insurance proceeds, and
- Property with a named beneficiary, such as IRAs or 401(k) plans
(Read an article about the differences between probate and non-probate property.)
What Is a Trust, and Why Is It Important?
A trust is a legal arrangement through which one person, the "trustee," holds legal title to property for another person, who is the "beneficiary." (Note that the trustee can also be an institution, such as a bank or law firm.) Trusts have one set of beneficiaries; however, another set – often the beneficiaries' children – may begin to benefit only after the initial group of beneficiaries has died.
Setting up a trust is a good idea for several different reasons. The most common reason is to avoid probate.
For example, let's say you opt to establish a revocable living trust that terminates when you die. At that time, any property in the trust passes immediately to the loved ones you have named to benefit from it. This can save time and money for your beneficiaries.
Certain trusts can also result in tax advantages both for the donor and the beneficiary. These could include a "credit shelter" trust or a "life insurance" trust. Other trusts may assist you in protecting property from creditors or help the donor qualify for Medicaid.
Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust need know of trust assets and distribution. Provided they are well-drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes unable to handle their affairs.
Power of Attorney
A power of attorney, or POA, is another type of legal document important in estate planning. It allows a person you appoint to act in your place for certain purposes if you are no longer able to do so.
This appointee is your "agent" or "attorney-in-fact." For example, imagine someone who faces a serious illness or injury that renders them incapable of managing their affairs. In such a case, their agent could step in and take over certain types of transactions or decisions on their behalf. A POA for a business owner, let's say, might give the designated agent the specific authority to cash checks or trade stocks.
Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, your representative may have to seek court permission to take planning steps that they could implement immediately under a simple durable power of attorney.
A medical directive may comprise several different types of estate planning documents. These might include a health care proxy, living will, and medical instructions. The specific documents will depend on your state's laws as well as the choices you make.
Health Care Proxy
A health care proxy is a legal document in which you name someone you trust to make health care decisions for you if you become unable to do so.
Attorneys may also refer to these documents as durable health care powers of attorney or medical powers of attorney. (Read more about why it is essential for you to set up a health care proxy.)
A living will, or advance directive, stands as another important legal document in your estate plan. It can help ensure that your health care provider follows your wishes regarding medical treatments. For instance, you may want to instruct your doctors to withdraw life support if you are ever terminally ill or in a vegetative state.
A broader medical directive may include the terms of a living will. However, even if you are not facing a dire health situation, you may for some reason still be unable to communicate your personal preferences for medical care. This document can provide your physicians with those instructions.
To learn more about making decisions about end-of-life care, check out this article.
At the same time that you go about creating an estate plan, you may want to make sure your retirement plan beneficiary designations are up to date, too. This is not necessarily a part of your estate plan, per se. However, if you don't name anyone to benefit from these kinds of assets, your state or federal law, or your particular retirement plan, might end up controlling who receives those benefits after you have passed away.
Some plans automatically distribute money to a spouse or children. Although others may leave it to the retirement plan holder's estate, this could have negative tax consequences. The only way to control where the money goes is to name a beneficiary. (Read more about how to ensure your beneficiary designations are up-to-date.)
Consult With an Estate Planning Attorney
A strong estate plan will address your unique needs and situation. Beware of free estate planning documents you may find online. You may find that they will only fail you in your time of need.
Working with a qualified estate planner is your best bet for creating a solid plan. You want to have a plan in place that will help protect your assets for your loved ones after you have passed away. Contact a estate planning attorney near you today to make sure your estate plan is complete.
For additional information about estate planning documents you may need, refer to the following selection of articles:
- What Happens If You Die Without a Will?
- The Hazards of Do-It-Yourself Estate Planning
- What Are the Drawbacks of Naming Beneficiaries?
Created date: 11/16/2011