Estate Planning Fundamentals

Every estate plan should include a last will, power of attorney, and health care directive; additional benefits can be realized by including a revocable living trust. Each document serves a particular and important purpose that cannot be served by any of the other documents; these purposes are described below.

A last will and testament specifies who will receive and who will manage and distribute your assets upon your death. It also names a guardian for your minor children. If you pass away without a will, you are said to have died “intestate,” and the laws of the state will determine who receives your assets. In addition, since all minor children under 18 years of age must have a guardian, a guardian will be selected for your children through a judicial process if you pass away without a valid will.

A will does not allow your estate to avoid the probate process; it simply gives directions to the probate court, and a will must be probated in order to be effective. Probate is the legal process for establishing the validity of your will and transferring your “probate property” in accordance with your will. However, incorporating a revocable living trust into your estate plan can allow you estate to avoid the probate process and achieve additional planning objectives.

A revocable living trust is essentially a contract whereby you, as “grantor,” transfer your assets to a “trustee” with specific instructions contained in the trust agreement describing how the trust assets are to be managed. You will typically serve as the initial trustee of your revocable living trust as well as the grantor, meaning that you retain complete control over all of your assets while you are living. A trust can be an especially useful tool for reducing estate taxes that would otherwise be owed or establishing protective trusts for the benefit of your descendants upon your death.

When the grantor of a trust passes away, the successor trustee distributes the trust assets according to the instructions in the trust agreement. This is the mechanism for avoiding probate; the successor trustee legally takes over the management and distribution of your estate. Any property transferred to your revocable trust will avoid probate. Note that some assets pass by operation of law without the need for a trust or probate; these include property held in joint tenancy with rights of survivorship, retirement plans and life insurance policies that have a beneficiary designation, payable-on-death bank accounts, etc.

If you have a revocable living trust, you still require a last will and testament just in case an asset remains in your estate upon death. If your plan includes a trust, your will is often referred to as a “pour-over” will since it simply directs that all of your assets be “poured-over” into your trust to be disposed in accordance with its terms.

A durable power of attorney authorizes whoever is named in that document to act on your behalf to the extent authorized in the document. This document is effective if you are physically or mentally incapacitated, but ends upon your death; this allows another individual to manage your affairs during any time that you are unable. A power of attorney may be drafted so that it is effective from the moment it is signed, or may become effective only if you become incapacitated. After death, the successor trustee of your revocable living trust (or the personal representative named in your will if you do not have a living trust) will possess the powers of management and the right to distribute your assets to your beneficiaries.

An advance health care directive specifies your preference for health care treatment, such as whether life support systems should be continued if there is no hope of recovery. It also appoints someone else to make these decisions for you if ill health prevents you from being able to specify your own wishes. An estate plan may include any number of addition documents, but these are the basics.


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