Key Estate Planning Documents You Need
There are five estate planning
documents you may need, regardless
of your age, health, or wealth:
- Durable power of attorney
- Advance medical directives
- Letter of instruction
- Living trust
The last document, a living trust, isn't
always necessary, but it's included
here because it's a vital component of many estate plans.
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 ready
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
There are two types of DPOAs: (1) an immediate DPOA, which 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.
A springing DPOA is not permitted in some states, so
you'll want to check with an attorney.
Advance medical directives
Advance medical directives let others know what medical
treatment you would want, or allows someone to make medical
decisions for you, in the event you can't express your
wishes yourself. If you don't have an advance medical directive,
medical care providers must prolong your life using
artificial means, if necessary. With today's technology,
physicians can sustain you for days and weeks (if not months
or even years).
There are three types of advance medical directives. 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. (Just make sure all
documents are consistent.)
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,
one can be used only to decline medical treatment that "serves
only to postpone the moment of death." In those states that do
not allow living wills, you may still want to have one to serve as
evidence of your wishes.
Second, a durable power of attorney for health care (known as
a health-care 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 hospitalized. The other is used while you
are outside the hospital.
A will is often said to be the
cornerstone of any estate
plan. The main purpose of a
will is to disburse property to
heirs after your death. If you
don't leave a will, disbursements
will be made according
to state law, which might not
be what you would want.
There are two other equally important aspects of a will:
- You can name the person (executor) 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.
- You can name a legal guardian for minor children or dependents
with special needs. If you don't 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,
nonlegal document that
your will and is used to
express 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
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.
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 trust is called a living trust because
it's meant 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 be used to 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 who live overseas.
Further, probate takes
time, and your property
generally won't be distributed
until the process
is completed. A
small family allowance
is sometimes paid, but it
may be insufficient to
provide for a family's
ongoing needs. Transferring
a living trust provides
for a quicker, almost
immediate transfer of
property to those who
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.
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.
There are other ways to avoid the probate process besides
creating a living trust, such as titling property jointly.
Living trusts do not generally help reduce estate taxes or
protect property from future creditors or ex-spouses.
The use of trusts involves a complex web of tax rules and regulations. There are costs associated with creating and maintaining these legal documents. Consider the counsel of an experienced estate planning professional and your legal and tax advisers before implementing a trust strategy.