Estate planning is a process. It involves people — your family, other individuals and, in many cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. And it addresses your future needs in case you ever become unable to care for yourself. Through estate planning, you can determine:
- How and by whom your assets will be managed for your benefit during your life if you ever become unable to manage them yourself.
- When and under what circumstances it makes sense to distribute your assets during your lifetime.
- How and to whom your assets will be distributed after your death.
- How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.
You do — whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself. For many, such “life planning” is the most important aspect of an estate plan.
If you fail to plan ahead, a judge will appoint someone to handle your assets and personal care. And your assets will be distributed to your heirs according to a set of rules known as intestate succession. Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse, have priority in inheritance ahead of the state. Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry. Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).
A will is a traditional legal document that:
- Names individuals (or charitable organizations) who will receive your assets after your death, either by outright gift or in a trust.
- Nominates an executor who will be appointed and supervised by the probate court to manage your estate; pay your debts, expenses and taxes; and distribute your estate according to the instructions in your will.
- May include nominations of guardians for your minor children.
Most assets in your name alone at your death will be subject to your will. Some exceptions include securities accounts and bank accounts that have designated beneficiaries, life insurance policies, IRAs and other tax-deferred retirement plans, and some annuities.
It is a legal document that can, in some cases, partially substitute for a will. With a revocable living trust (also known as a revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die — typically without the need for court involvement.
Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. (The terms of the trust generally become irrevocable when you die. However, in trusts created by married couples, some or part of the trust may continue to be revocable by the surviving spouse.)
In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die.
A durable power of attorney allows your authorized agents to act on your behalf on financial matters. It is called durable because if allows the person you authorized to act on your behalf if you become incapacitated. It can be limited to special circumstances or it can be general. That authority will end if you become incapacitated — unless you have a durable power of attorney. A durable power of attorney will remain in effect while you are incapacitated. This means that if you were suddenly unable to handle your own affairs, someone you trust — your legal agent or attorney-in-fact — could do so for you.
If you set up a living trust, it is the trustee who will provide the necessary management of the assets held in trust. However, even if you have a living trust, you should still consider setting up a durable power of attorney for property management as well to handle limited financial transactions and to deal with assets that may not have been transferred to your living trust, such as retirement accounts.
If you become incapacitated and do not have a durable power of attorney, then a conservatorship proceeding must be commenced through the probate court system for the appointment of a conservator to take responsibility of your estate. This can be expensive and time consuming.
An advance health care directive, also known as a living will, is a legal document in which you can specify what actions should be taken for your health if you are no longer able to make decision for yourself because of incapacity and ensure that your health care agent will have access to your medical records in order to make necessary medical care decisions on your behalf. In addition, this legal document can contain your wishes concerning such matters as life-sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral. (You can revoke the directive at any time, as long as you are still competent.)
If you become incapacitated and do not have a properly executed advance health care directive, then a conservatorship proceeding must be commenced through the probate court system for the appointment of a conservator to take responsibility of your person. This can be expensive and time consuming.