Personal Finance Essentials
The Key Components of an Estate Plan
Five Documents. One Plan.
Total Protection.
There are five documents that are routine parts of a complete estate plan. Together they cover what happens to your assets, who makes decisions for you if you cannot and how your family is protected in the event of your incapacity or death.
1. Will
A will is the document through which you leave instructions for the disposition of your assets. Through it, you state the people or charities you want to receive your assets upon your death, who is to be guardian for your minor children and who you appoint as executor (also called a personal representative) to carry out your wishes.
Wills typically cover which debts are to be eliminated (such as auto loans) and which are to be retained, which assets are to be sold, to whom remaining assets are to be given (including family heirlooms and items of sentimental value as well as financial assets) and when those assets are to be distributed – immediately, at some specified time in the future or upon satisfaction of certain conditions.
If you die without a valid will, your estate is distributed according to your state’s intestacy laws rather than your own wishes. Depending on where you live, that could mean your current spouse receives only one-third of your assets, while children from a prior marriage receive two-thirds. It could also mean that parents, in‑laws or distant relatives receive assets instead of the people you intended. Failing to write a will also means you give up the right to name a guardian for your minor children, leaving that decision to a judge.
Wills typically cover which debts are to be eliminated (such as auto loans) and which are to be retained, which assets are to be sold, to whom remaining assets are to be given (including family heirlooms and items of sentimental value as well as financial assets) and when those assets are to be distributed – immediately, at some specified time in the future or upon satisfaction of certain conditions.
If you die without a valid will, your estate is distributed according to your state’s intestacy laws rather than your own wishes. Depending on where you live, that could mean your current spouse receives only one-third of your assets, while children from a prior marriage receive two-thirds. It could also mean that parents, in‑laws or distant relatives receive assets instead of the people you intended. Failing to write a will also means you give up the right to name a guardian for your minor children, leaving that decision to a judge.
2. Living Will
In this document, you state your preferences regarding medical treatment should you become unable to tell doctors yourself. Do you want life-sustaining procedures performed, or do you prefer to be allowed to die naturally, comfortably and without pain? Your family – and your doctors – need to know your desires, and this is how you tell them. Without a living will, your family may face agonizing disagreements at exactly the moment they are least equipped to handle them.
3. Durable Powers of Attorney
These documents – sometimes combined into one – let you authorize another person to make decisions regarding your health care if you are unable to do so, and to manage your legal and financial needs, such as paying bills and filing tax returns. The word “durable” is critical: ordinary powers of attorney become void if you are incapacitated, so these documents are specifically designed to survive your incapacity.
The Durable Power of Attorney for Health Care grants another person – usually a spouse or close family member – the legal right to make medical decisions for you. They will decide what kind of medical treatment you should receive and, if necessary, carry out the wishes stated in your living will.
The Durable General Power of Attorney allows another person to sign legal documents and handle financial matters on your behalf – paying your bills, selling securities to obtain cash for medical expenses, filing your income tax return and renewing leases. Be aware that this document grants the person you name unlimited access and control of all your assets. Choose someone you trust without reservation.
The Durable Power of Attorney for Health Care grants another person – usually a spouse or close family member – the legal right to make medical decisions for you. They will decide what kind of medical treatment you should receive and, if necessary, carry out the wishes stated in your living will.
The Durable General Power of Attorney allows another person to sign legal documents and handle financial matters on your behalf – paying your bills, selling securities to obtain cash for medical expenses, filing your income tax return and renewing leases. Be aware that this document grants the person you name unlimited access and control of all your assets. Choose someone you trust without reservation.
4. Revocable Living Trust
This document offers benefits not available from a will. In a Revocable Living Trust, you place your assets into the trust, naming yourself as both trustee (so you retain full control during your lifetime) and beneficiary. Upon your death, the assets pass directly to the beneficiaries you have named, bypassing the probate process entirely.
The key advantages of a Revocable Living Trust include:
• Privacy. Wills go through the Probate Court, making them public information. A living trust remains private. No one outside your family needs to know what it says.
• Benefits during life. You can stipulate how your money is to be used during your lifetime, preserving your standard of living even if you are incapacitated and cannot make decisions yourself.
• Flexibility. Living trusts are revocable, meaning you can change every aspect of them at any time – the beneficiaries you name, the assets included in the trust and all other matters.
• Protection for heirs. Disgruntled heirs will find it harder to challenge a trust than a will in most states.
One important requirement: after you establish the trust, you must retitle your assets into the name of the trust. A trust that holds no assets accomplishes nothing. Think of a trust as a vault: it is of no value unless it holds assets. A Revocable Living Trust does not reduce estate taxes, since you retain control of the assets and they remain part of your taxable estate. Its primary purpose is estate administration – ensuring your assets pass to your heirs smoothly, privately and without probate.
The key advantages of a Revocable Living Trust include:
• Privacy. Wills go through the Probate Court, making them public information. A living trust remains private. No one outside your family needs to know what it says.
• Benefits during life. You can stipulate how your money is to be used during your lifetime, preserving your standard of living even if you are incapacitated and cannot make decisions yourself.
• Flexibility. Living trusts are revocable, meaning you can change every aspect of them at any time – the beneficiaries you name, the assets included in the trust and all other matters.
• Protection for heirs. Disgruntled heirs will find it harder to challenge a trust than a will in most states.
One important requirement: after you establish the trust, you must retitle your assets into the name of the trust. A trust that holds no assets accomplishes nothing. Think of a trust as a vault: it is of no value unless it holds assets. A Revocable Living Trust does not reduce estate taxes, since you retain control of the assets and they remain part of your taxable estate. Its primary purpose is estate administration – ensuring your assets pass to your heirs smoothly, privately and without probate.
5. Testamentary Trusts
These trusts are created within your will and take effect at death. They address a wide range of family circumstances, including family members who have special needs, drug or alcohol addictions, gambling problems or spendthrift behaviors. They are also used in situations involving former spouses, children from prior marriages or relationships, marital issues and complex business or real estate holdings.
Rather than leaving a lump sum directly to an heir who may not be equipped to manage it, a testamentary trust allows you to set conditions on how and when assets are distributed. You can delay distributions until heirs reach a certain age, distribute money as a regular allowance, require that funds be used only for education or medical expenses or limit distributions to interest while preserving the principal in trust.
Your estate plan should be drafted by an estate attorney. The law is complex and the consequences of poorly drafted documents can be significant and lasting.
Rather than leaving a lump sum directly to an heir who may not be equipped to manage it, a testamentary trust allows you to set conditions on how and when assets are distributed. You can delay distributions until heirs reach a certain age, distribute money as a regular allowance, require that funds be used only for education or medical expenses or limit distributions to interest while preserving the principal in trust.
Your estate plan should be drafted by an estate attorney. The law is complex and the consequences of poorly drafted documents can be significant and lasting.