This post is Part 2 of our 3-part series in which we answer the question: What is an “Estate Plan”? From Part 1 of this series, I gave you the general definition of an estate plan and listed the two primary types of estate plans:
- An Estate Plan that is built around a Last Will & Testament (LW&T); or
- An Estate Plan that is built around a Revocable Living Trust (RLT).
There are pros and cons to each of these types of estate plans (which I discuss in Part 3 of this series) but you need to remember that—so long as you have your wits about you (i.e., so long as your retain your mental capacity)—you can always make changes to your estate plan if your own circumstances or estate planning preferences change. However, it is vitally important that you get an estate plan in place now because you don’t know when you will lose your mental capacity or die.
Any estate plan that is built around a Last Will & Testament (LW&T) should—at a minimum—include the following documents:
- A Last Will & Testament (LW&T), which is a document that you sign in your capacity as the “Testator.” The terms of your LW&T (sometimes a LW&T is simply referred to as a “Will”) do not become effective until your death. This means that you can change your LW&T as often as you want during your lifetime. One key part of any well drafted Last Will & Testament is the nomination—by you, the Testator—of the person or persons you want to serve as the Executor of your estate. The Executor of your estate is the person who will “be in charge” of the administration of your estate after your death. The Executor’s primary tasks include (1) making an inventory of the property in your estate; (2) getting control of that property (to protect it from waste or neglect); (3) paying your outstanding debts and taxes (that you owe at the time of your death); and then (4) distributing the property that remains to your loved ones, according to the terms of your LW&T. This brings me to the second key part of any well drafted Last Will & Testament: clear instructions regarding your wishes about “who gets what and how” of the items of property you’ve left behind. Your LW&T should clearly state who is to receive your property upon your death.
- A Durable Power of Attorney for Property Management (DPAPM), which is a document you sign in your capacity as the “Principal” and by which document you appoint an Agent (sometimes an Agent is referred to as an “Attorney-in-Fact”) to manage and protect—on your behalf (i.e., if you become incapacitated)—your real and personal property (e.g., including your home, your financial accounts and investments, including your retirement plans, annuities, life insurance policies, etc.). An Agent under your DPAPM can also act for you regarding other financial or personal matters involving you (health insurance, income taxes, etc.). Usually, your DPAPM remains in effect until your death (unless you revoke it).
- An Advance Health Care Directive (AHCD), which is a document you sign in your capacity as the “Principal” and by which document you appoint a Health Care Agent to act on your behalf to make medical decisions for you if you become unable to make these decisions for yourself (i.e., if you become incapacitated). Your AHCD remains in effect until your death (unless you revoke it). This often overlooked document—which is so simple to put into place—is critical to any estate plan, regardless of how complex or simple the estate plan. Even if you do nothing else, please sign an Advance Health Care Directive so that—if you ever become unable to make your own medical decisions—a trusted family member, friend, or advisor (someone who knows you and understands your values) will be able to make those critical decisions for you. We have seen firsthand the extreme cost and heartache that falls on the loved ones of an incapacitated person who never signed an Advance Health Care Directive—a judge had to appoint someone to make medical decisions on behalf of the patient (it was a very expensive process that left everyone involved feeling awful).
In Part 3 of this blog series, we’ll explain an Estate Plan that is built around a Revocable Living Trust and then we’ll close with a comparison of this kind of estate plan with an estate plan that is built around a Last Will & Testament—there are “pros” and “cons” of each of these types of estate plans over the other type. I hope this information is helpful to you. Please leave a comment if you have the time. Thanks again. JBC