Top 5 Estate Planning Documents You NEED Right Now
We have found that people often wonder which documents are required or recommended for one to have a "complete estate plan." Although different attorneys or firms may offer some slight variations, below are the documents we have found to be essential to having a complete estate plan, that is a plan applicable to most people's circumstances and with documents everyone should have in their estate due to their importance.
5. Retirement Plan and/or Life Insurance Policy Documents
The first item on our list may seem like we are breaking the rules a bit as it is really a non-specific grouping of documents, but we have found that at least one of these documents applies to one's estate in some fashion. We group them together as they both perform the same important function for one's estate - providing liquidity so one's estate will have assets in it to pass on to your intended beneficiaries.
Additionally, life insurance is often used in the estate planning world specifically to provide relatively instant liquidity to one's estate wherein one's trust pays for the life insurance premiums with the trust then designated as the beneficiary of the policy. This allows for one to tailor their estate plan distribution to their liking (such as having multiple beneficiaries, various types of beneficiaries, or conditions on distributions) and the flexibility to always amend that distribution without having to complete new paperwork with the life insurance company.
4. Advance Healthcare Directive
An Advance Healthcare Directive, sometimes referred to as a Healthcare Power of Attorney, is a document wherein you designate someone, your agent, to manage your medical care in an emergency or if you were to become incapacitated. An advance directive also allows you to dictate specific medical wishes you want your agent to follow such as refusing certain pain medication, do not resuscitate (DNR), etc.
Additionally, if one's Advance Healthcare Directive has modern HIPAA (Health Insurance Portability and Accountability Act) language, then your agent also has authority to manage your medical records - something that is now essential for your agent to completely manage our medical care by providing them a complete picture of your health.
Finally, keep in mind that your agent's authority expires upon your passing as the Advance Healthcare Directive becomes null and void. All matters from that point on fall under the purview of our executor or successor trustee (discussed below).
3. Financial Power of Attorney
Similar to an Advance Healthcare Directive, a Financial Power of Attorney operates much the same way but with regards to one's finances. A Financial Power of Attorney is a document wherein you designate someone, your attorney-in-fact, to operate on your behalf and manage your financial affairs.
Financial Powers of Attorney are customizable as well. They can be limited or broad in the scope of powers they grant. For example, you can execute a limited power of attorney to authorize our attorney-in-fact to manage a particular bank account, all your real estate, or to simply represent you in one particular transaction.
Financial Powers of Attorney may also be either expiring or continuous - that is you can designate a date on which your attorney-in-fact's authority expires or can set their power to be continuous, at least until your death or revocation of the power of attorney.
Similarly, you can designate your Financial Power of Attorney to be either springing or effective immediately. If a power of attorney is springing, that means it does not go into effect until some act or event has occurred. Typically, when one elects for a springing power of attorney, they require 1 or 2 doctors to issue a doctor's note attesting to your lost capacity and inability to manage your affairs on your own. Conversely, your power of attorney can be designated to become effective at its execution - I.e., the date of signing (and notarization).
Additionally, as your attorney-in-fact may be granted a lot of authority and discretion to manage your financial affairs, you may have an understandably vulnerable feeling about the arrangement. However, firstly, you should not make this kind of decision lightly and thus the party your designate should be one in whom you have a great deal of trust. Secondly, your attorney-in-fact has a "fiduciary obligation" to operate in your best interest, even if to the detriment of their own. For example, if both you and your attorney-in-fact own stock in the same mutual fund and they believe the investment is no longer sound and the positions should be sold, your attorney-in-fact is obligated to sell your positions before their own, even if it meant they would receive a lower price per share. Breach of one's fiduciary obligations to another opens one up to heavy liability personally.
Finally, keep in mind that your attorney-in-fact's authority expires upon your passing as the Financial Power of Attorney becomes null and void. All matters from that point on fall under the purview of our executor or successor trustee (discussed below).
3. Last Will and Testament
A foundational document in estate planning that has been around for over 2,500 years, a Last Will and Testament, typically known simply as one's Will, is typically one's first thought when they think of creating their own estate plan, and rightfully so. Wills are important and flexible documents allowing you to (i) determine the distribution of your assets following your passing; (ii) elect your executor (the manager of your estate); (iii) nominate the guardian(s) of your minor child(ren); and (iv) create testamentary trusts (a trust created in another document after the occurrence of some act or event often used to hold funds in one's estate until a beneficiary has reached a designated age).
Wills, in essence, are what allows one to manage their affairs after their passing. However, Wills to have some drawbacks modernly - namely that of probate. While the threshold varies state to state, one's estate may need court approval to transfer its assets to the heirs and beneficiaries of the decedent. For example, in California, if one's gross estate is worth over $166,250 at their passing, then court approval is required in order to distribute those assets. This is true whether one has a Will or not (intestate succession if no Will). Probate is often very expensive (which you can read more about here) and can take considerable time from open to close (typically 9-12 months in California) depending on the particular county or even particular court's calendar. Additionally, distributions cannot be made until court approval given at the final accounting hearing meaning no distributions until one jumps through all the court's hoops.
However, there are methods by which one's estate can avoid being subject to probate no matter it's size, the most important of which is the final document on this list.
1. Living Trust
If one's Will is a Model-T, then a living trust is a big F150 with all the modern bells and whistles. Aside from nominating a guardian for one's minor child(ren), a Living Trust does everything a Will can do but better and more: (i) determine the distribution of one's assets with great flexibility, discretion and the ability to create conditions on said distribution designed to account for ongoing, non-court dependent, management by the trustee; (ii) select the successor trustee of the trust (I.e., the manager of the trust estate); (iii) be designated as the beneficiary on various financial assets such as IRAs, 401(k)s, life insurances, etc. yet operate as a pass-through (sometime called a qualified entity or conduit) to the trust's beneficiaries for tax purposes (rather than bootstrapping the tax burden to the higher trust tax rate); and (iv) the ability to create various sub-trusts or even testamentary trusts without court approval.
You should also think of a Living Trust as living in that it is alive and works for you during your lifetime (as opposed to only operating after your passing such as a Will). A Living Trust can hold virtually any type of asset such as cash, real estate, artwork, cryptocurrency, etc. A Living Trust also allows for the management of businesses and even own said businesses; for example, a shareholder can assign their shares to their trust (avoiding probate) and thus their successor trustee (typically a family member) can take over the management of those shares when the time comes.
In addition, a Living Trust is also often used when one is looking to qualify for some type of public benefit (such as Medi-Cal in California). When looking to qualify for these types of programs, they often have set requirements for how one's estate should be structured before qualifying and thus Living Trusts are utilized to rearrange one's estate in accordance with the guidelines of the program's administrator.
Most importantly, however, a Living Trust allows one's estate to avoid probate. Having your assets titled into your Living Trust allows for your beneficiaries to receive their inheritances faster, your successor trustee will have an easier time at managing your estate, your estate will remain private rather than subject to public court proceedings, and, perhaps most importantly, your beneficiaries will receive more as less of your estate will go to costs and fees.
