To build, buy, or refinance. Call our experts at: phone icon1-844-422-3622

Estate Planning Basics

You Need These Five Key Estate Planning Documents Now

2019-04-18

By Brittany Benassi, VP Financial Planning, Certified Financial Planner® at AAFMAA Wealth Management & Trust

Estate planning helps give you peace of mind knowing you have planned for your loved ones and property after your death. A proper estate plan ensures your heirs are cared for in a way you desire and can save your family time and money. Estate planning involves making decisions about how your property is used, maintained, and distributed if you become incapacitated and after your passing.

When it comes to estate planning, there are five documents you need to have regardless of your age, health, or wealth:

  1. Durable Power of Attorney
  2. Advanced Medical Directives
  3. Will
  4. Letter of Instruction
  5. Living Trust (note: While a living trust isn't always necessary, it's often a vital component of many estate plans)

What makes these five documents essential? Take a look:

Durable Power of Attorney

A Durable Power of Attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is prepared to look after your financial affairs when you can't, your property may be wasted, abused, or lost.

A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes.

There are two types of DPOAs:

  1. An immediate DPOA, which per its name is effective immediately (this may be appropriate, for example, if you face a serious operation or illness); and
  2. A springing DPOA, which is not effective unless you have become incapacitated.

Caution: A springing DPOA is not permitted in some states, so you'll want to discuss your options with an attorney.

Advanced Medical Directives

Advanced Medical Directives let others know what medical treatment you would want to pursue or allows someone else you’ve assigned to make medical decisions for you in the event you can't express your wishes yourself. If you find yourself in this situation without an advanced

medical directive, medical care providers are required to prolong your life using artificial means if necessary.

There are three types of advanced medical directives, and each state allows only a certain type (or types). You may find that one, two, or all three types are necessary to carry out all of your wishes for medical treatment. If this is the case, you’ll want to make sure all of your documents are consistent so there is no confusion over what care you should receive.

First, a living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, though a living will, you can only decline medical treatment that "serves only to postpone the moment of death." In states that do not recognize living wills, you may still want to have one for your caretakers to reference as evidence of your wishes.

Second, a durable power of attorney for healthcare (known as a healthcare proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will or won't have.

Finally, a Do Not Resuscitate order (DNR) is a doctor's order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs: one is effective only while you are in the hospital, and the other is effective while you are outside the hospital.

Will

Many say a Will is the cornerstone of any estate plan. The main purpose of a will is to disburse property to your heirs after your death. If you do not leave a will, state law will determine those disbursements, which might not be what you would want. There are two other equally important aspects of a will:

  1. You can name the person(s) (executors) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose.
  2. You can name a legal guardian for minor children or dependents with special needs. If you do not appoint a guardian, the state will appoint one for you.

Keep in mind that a will is a legal document and the courts are very reluctant to overturn any provisions within it. Therefore, it's crucial that your will be well-written and articulated, and properly executed under your state's laws. It's also important to keep your will up-to-date.

Letter of Instruction

A Letter of Instruction (also called a testamentary letter or side letter) is an informal, non-legal document that generally accompanies your will and expresses your personal thoughts and directions regarding what is in the will (or about other things, such as your burial wishes or

where to locate other documents). This can be the most helpful document you leave for your family members and your executor.

Unlike your will, a letter of instruction remains private. Therefore, it is an opportunity to say the things you would rather not make public. A letter of instruction is not a substitute for a will. Any directions you include in the letter are only suggestions and are not binding. The people to whom you address the letter may follow or disregard any instructions.

Living Trust

A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The name living trust indicates that you intend it to function while you're alive. You control the property in the trust and, whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.

Not everyone needs a living trust, but it can help accomplish various purposes. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate.

Depending on your situation and your state's laws, the probate process can be simple, easy, and inexpensive, or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas.

Further, probate takes time, and generally distribution of your property won’t happen until the process is completed. The family might receive a small allowance, but it may be insufficient to provide for their immediate ongoing needs. A living trust can provide a quicker, almost immediate transfer of property to those who need it.

Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management. Finally, avoiding probate may be desirable if you're concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not.

Caution: Although a living trust transfers property like a will, you should still also have a will because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children.

Tip: There are other ways to avoid the probate process besides creating a living trust, such as titling property jointly.

Caution: Living trusts do not generally minimize estate taxes or protect property from future creditors or ex-spouses.

Everyone needs an estate plan. By making the preparations before a death or incapacity provides comfort and ease for your loved ones. So, whether you need to revised an existing plan or create an estate plan from scratch, it is best to contact a professional to who can assist you with your personal wishes.