Are you thinking about an estate plan but not certain what might be included in an estate plan? Most people understand that wills and trusts can be used to transfer a person’s property after the person passes away. But an estate plan considers an individual’s or couple’s specific needs and develops a customized plan with will(s), a trust(s), powers of attorney, and other documents that work together to achieve the individual’s or couple’s goals. Although it primarily involves the distribution of property to beneficiaries and naming guardians for minor children, estate planning is related to financial planning and tax planning.
Last Will and Testament
A will—also known as a last will and testament—is a legal document in which an individual (the “testator”) gives instructions on how his or her property should be distributed to others who survive the testator. If the testator has minor children, the will also identifies individual(s) who will serve as guardian(s) for the minor children. When the testator signs his or her will, two witnesses must be present and sign as witnesses, and a notary public must notarize the signatures.
The wills of a married couple often mirror each other, and each spouse gives his or her entire estate to his or her spouse. Wills can be used together with a trust to ensure that any property not held by the trustee of the trust is transferred to the trustee, which avoids the probate process.
After the testator passes away, a special-purpose court known as the Probate Court oversees the appointment of a personal representative and the transfer of assets to beneficiaries. The main purpose of “probating” the testator’s will is to have the court ensure that the assets are distributed according to the testator’s instructions and allow objections and claims to be heard by the court.
Durable Powers of Attorney
A durable power of attorney is a document that authorizes another person to act on behalf of the person who signs the power of attorney. The person who signs the power of attorney is called the “principal,” and the other person who is authorized to act for the principal is called the “agent.” A durable power of attorney allows the agent to, for example, sign contracts, deeds, access and utilize the principal’s accounts, and take other actions that legally bind the principal. They allow the agent to manage or assist in handling the agent’s financial and personal business affairs.
Durable powers of attorney can be limited to specific task, such as signing documents related to the sale of property, or they can apply generally to all the agent’s financial and business affairs. They can be effective immediately on signing of the power of attorney, or they can become effective only after the agent is unable to manage his or her business affairs.
Healthcare Powers of Attorney
A healthcare power of attorney is like a durable power of attorney but is limited to decisions involving the person’s healthcare. The purpose of a healthcare power of attorney is to allow the agent to make healthcare decisions on behalf of the principal, but agent must make decisions consistent with guidelines stated in the healthcare power of attorney. Generally, these powers of attorney are effective on signing, but the principal continues to make her or his healthcare decisions until she or he is unable to make them without assistance. The agent, who is usually a family member, may simply assist the principal with health and medical matter, but the healthcare power of attorney gives the agent full authority to step in and make decisions if and when necessary.
The areas often covered by a healthcare power of attorney include, among other things, general instructions the agent and medical providers regarding healthcare treatment, medical treatment and surgery, “do not resuscitate” instructions, blood transfusions, and long-term care. Healthcare powers of attorney also provide the agent with authority under the Healthcare Insurance Portability and Accountability Act of 1996 (“HIPPA”) to provide information to medical providers and others to the extent necessary. Medical providers must also respect and follow the guidance provided in the healthcare power of attorney.
Living Wills
A living will is a document that states the signer’s instructions on whether and under what circumstances to stop all life-sustaining support. The guidance in a living will must be respected by medical providers, family members, and others. The instructions in a living will are sometimes combined with a healthcare power of attorney.
Trusts
A trust is an agreement under which one person (the “trustor”) vests another person (the “trustee”) with authority to hold, manage, buy, and sell property for the benefit of beneficiaries. Under a trust agreement, the trustor establishes clear duties that the trustee must fulfill while serving as trustee and administering the estate. The trust agreement will also give instructions on how and when the trust property will be distributed to the beneficiaries. Trustees are also considered fiduciaries by law and are held to a higher standard for their duties on behalf of the beneficiaries. The beneficiaries must be clearly identified.
The main difference between a trust and a will is that property transferred to the trust is no longer in the trustor’s estate and, thus, is not part of the trustor’s probate estate. In other words, the trust property does not get probated. Instead, the property is administered and distributed according to the terms of the trust agreement without the Probate Court’s involvement.
Written trust agreements are often lengthy and detailed, but they are often used to hold, manage, and distribute trust assets in a way that ensures prudent investment and expenditures on behalf of the beneficiaries. A trust agreement might, for example, require that the trustee to avoid risky investments and make distributions to the beneficiaries only after the beneficiary reaches a certain age (25% of the beneficiary’s interest at age 25; 50% of his or her interest at age 30; and the remainder his or her interest at age 35). Trusts can also be set up for charitable purposes.
Trusts can be revocable or irrevocable. Under a revocable trust, the trustor can terminate the trust by revoking it and transfer the trust property back to the trustor. If not revoked, a revocable trust becomes irrevocable after the trustor passes away (or all trustors have passed if there were more than one). A trust that is irrevocable from the date it is created usually has a specific purpose charitable or tax-savings purpose.
Conclusion
Overall, an estate plan usually includes at least a will and related power-of-attorney documents but may also include trust agreement. A will gives directions to the named personal representative on how and to whom to distribute your property and assets. But a will does not cover certain types of non-probate assets such as an insurance policy or joint bank account.
Powers of attorney authorize another person (named in the document) to act on your behalf in your personal business affairs or health care decisions. A living will gives instructions to healthcare providers about end-of-life care decisions when you are unable to make or communicate those decisions yourself.
Finally, a trust agreement is written agreement that authorizes the named trustee to own and manage property on behalf of beneficiaries named in the agreement.
Each individual’s or couple’s needs and goals will vary. Although many people prefer using a trust and avoid probate, a trust may not be appropriate or necessary in all cases. The goal should be to develop an overall estate plan that suits the needs and goals of each individual or couple. This post is intended to provide a brief overview of the documents that may be included in an estate plan.
