Creating a Complete Estate Plan
Creating a comprehensive estate plan is a long and tedious task. You have to document all your assets and accounts, decide who the beneficiaries are and who will have control, all while looking for tax saving strategies. The list below should clarify many of the legal parts and briefly explain what each document or designation does.
1.) Last Will & Testament
A will is the most basic legal document for estate planning. Without a last will, the court can decide how your assets get distributed and who gets custody of minor children. Wills allow you to specify which possessions go to whom and designate care instructions for minor children, as well as make funeral arrangements in advance. Wills are often accompanied by a living will to cover disabilities, testamentary trusts and life insurance to protect minors and other loved ones, and a living trust to avoid publicity and probate taxes.
2.) Living Will
A living will is the most important legal document to have during your lifetime and in your estate plan. It allows you to describe the type of care you want should you become critically ill, and what you want in end-of-life care. Once completed, you should give a copy to your lawyer, doctor, hospital, power of attorney, and others close to you so it is available when needed instead of tucked in a safe.
3.) Living Trust (Inter Vivos Trust)
Living trusts are used to keep estate distribution a private matter, while also avoiding court, and probate taxes. They can be combined with a Financial Power of Attorney to assign a decision maker upon incapacitation, and with a “pour-over” will, to transfer assets not included in the trust and assign guardianships. They are also revocable should your situation change your estate plan can change with it.
4.) Durable Power of Attorney for Health Care and Finances
Financial Power of Attorney – A legal document that authorizes a person of your choosing to make your legal and financial decisions if you become disabled or incapacitated. You may also specify requirements for the position such as providing statements to a lawyer or accountant or having taxes done independently. Without such a designation, you could be put under guardianship should something happen to you.
Healthcare Power of Attorney – A legal document that authorizes a person of your choosing to make your healthcare decisions if you become disabled or incapacitated. This assignment is usually done in conjunction with a Living Will, which allows you to make specific healthcare decisions in advance. Without such a designation, you could be put under guardianship should something happen to you.
5.) Guardianship Designation
This legal designation allows you to decide who will care for your minor children (or pets) called a “guardian of the person” and who will care for their finances, called a “guardian of the estate.” The designation can also be used to leave specific directions for the care of the person or estate.
6.) Testamentary Trust
A testamentary trust is often used to protect assets for minor children and heirs and is one of the most important aspects of a complete estate plan. This allows you to designate how your heirs will receive their inheritance. Often life insurance is used as a funding mechanism for these trusts.
7.) Insurance & Retirement Accounts
Term life insurance is the mechanism most used by testamentary trusts to ensure a child’s care is properly funded.
Whole life policies are an excellent way to create or add to a legacy fund.
Disability insurance is an under-utilized tool to protect your income and lifestyle should you become disabled before retirement.
Long-term care insurance (LTC) provides funding for nursing and home care costs.
Umbrella policies protect assets from personal liability.
Irrevocable life insurance trusts are vehicles used to shield large policies from taxes.
Retirement Accounts such as a 401(k), 403(b), Traditional and Roth IRAs are used to save and fund retirement and to reduce tax liability.
Health Savings Accounts (HSAs) are used to save and pay for health care and to reduce tax liability.
Education saving accounts (ESAs) such as Coverdell or 529 plans are used to save for higher education expenses and to reduce tax liability.
8.) Partnership Agreements
Cohabitation Agreements specify how assets are to be used during the cohabitation and how they will be divided after.
Parenting Agreements specify the care and custody of a minor child.
Marriage Agreements outline assets, custody, and support expectations prior to, during, and after a marriage.
Family Limited Partnerships are legal entities used to transfer ownership of a family business to heirs outside of probate and/or avoid creditors while allowing for the retained control of management decisions.
LLCs with an Operating Agreement are used to help make decisions and define interests and roles among heirs/owners/siblings, regarding jointly owned property, such as houses or farms. This entity also makes co-owned property less appealing to individual creditors and protects personal property from creditors of the LLC.
9.) Ownership & Beneficiary Designations
As a part of your estate plan, you should always designate beneficiaries to your accounts as this will allow those accounts to pass by probate. Joint ownership of various is also used to avoid probate and taxes. Copies of these designations should be kept in a safe place, with your lawyer, and trusted family and/or friends. This form should also include locations of any valuables and keys, a list of accounts, assets, policies, deeds, debts, and advisors, etc. It is the foundation of your estate plan.
10.) Charitable Giving
Charitable Trusts are used to donate your assets to a cause you care about while avoiding taxes.
Private Foundations are a way to control how your charitable offerings are being used while keeping the funds out of your taxable estate.
Donor-Advised Funds allow your to set up an investment fund for the benefit of a charity. These often have better tax deductions than private foundations.
A comprehensive estate plan should include
- A last will & testament including guardian and executor designations, funeral instructions, and a testamentary trust with a funding mechanism such as life insurance for after death protection
- A living will & living trust including powers of attorney plus disability insurance & LTC, and retirement/saving account(s) for in life protection.
- Partnership Agreements and umbrella/liability policies for your securing your business and personal dealings with others.
- Charitable Trusts, Private Foundations, or Donor-Advised Funds to aid interests that you care about.
If you have any questions about the foregoing list or would like to set up your own personalized estate plan please contact Tarris Law.