5 Elements of a Good Estate Plan

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 need to move into a nursing home, and appoint someone to act for you if you become disabled.

Every estate plan should include, at least, a durable power of attorney and a will. A trust can also be useful to avoid probate and to manage your estate both during your life and after you are gone. In addition, medical directives allow you to appoint someone to make medical decisions on your behalf.

1. Will

A will is a legally-binding statement directing who will receive your property at your death. If you do not have a will, the state will determine how your property is distributed, which could put further undo strain on your loved ones. A will also appoints a legal representative (executor or 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 types of property or forms of ownership pass outside of probate. Jointly-owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and aren’t covered under a will. Read my article, 8 Reasons You Need a Will Now!

2. Trust

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” Trusts have one set of beneficiaries during those beneficiaries’ lives and another set, often their children, who begin to benefit only after the first group has died. There are several different reasons for setting up a trust. The most common reason is to avoid probate which can take time and can be costly. If you establish a revocable living trust that terminates when you die, any property in the trust passes immediately to the beneficiaries.

Certain trusts can also result in tax advantages both for the donor and the beneficiary. These could be “credit shelter” or “life insurance” trusts. Other trusts may be used to protect property from creditors or to 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 incapacitated.

3. Power of Attorney

A power of attorney allows a person you appoint, (aka, “attorney-in-fact”), to act on your behalf in financial situations when/if you ever become incapacitated. In that case, the person you choose will be able to step in and take care of any monetary affairs such as writing checks and paying bills. 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 could be implemented immediately under a simple durable power of attorney.

4. Medical Directives

A medical directive, otherwise known as an advanced health care directive, is an indirect physician order, used to expedite patient care by competent health professionals. It could include a variety of documents, including a health care proxy, a durable power of attorney for health care, a living will and medical instructions. The exact document or documents will depend on your state’s laws and the choices you make which is the reason it’s so important to consult with an attorney in your locality or state.

Both a health care proxy and a durable power of attorney for health care designate someone you choose to make health care decisions for you if you become incapacitated. A living will instructs your health care provider to withdraw life support if you are terminally ill or in a vegetative state. A broader medical directive may include the terms of a living will, but will also provide instructions if you are in a less serious state of health, but are still unable to direct your health care yourself.

5. Beneficiary Designations

Although not necessarily a part of your estate plan, at the same time you create an estate plan, you should make sure your retirement plan beneficiary designations are up to date. If you don’t name a beneficiary, the distribution of benefits may be controlled by state or federal law or according to your particular retirement plan. 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.

Have you protected your loved ones properly? Contact me to make sure your estate plan is complete. There is never a charge for an initial consultation.