Estate planning basics generally start with a will, trusts, and powers of attorney.
A will governs the distribution of certain property owned by you at the time of your death. Generally, your will allows you to dispose of such property in any way you choose. There may be some limitations on who you can prevent from inheriting your property, or special requirements for the manner in which you eliminate them from your will. For example, many states have spousal rights of election laws that permit a spouse to claim a certain interest in your estate regardless of what your will states.
A will governs the distribution of certain property owned by you at the time of your death.
Your will does not govern the distribution of non-probate assets. That is property that is controlled by beneficiary designations or by titling and so passes outside your probate estate. Examples of non-probate assets are real estate titled in joint names with rights of survivorship, certain joint bank accounts, life insurance, retirement plans and accounts, and employee death benefits. These non-probate assets will go automatically to another person when you die, and your will is not applicable to them unless they are payable to your estate by the terms of the beneficiary designations for them.
If you die without a will, state law will determine who receives your property by default. These laws vary from state to state, and may or may not reflect your wishes. A will allows you to alter the state’s default plan to suit your personal preferences. It also permits you to exercise control over many other personal decisions, such as who will distribute your property.
Wills can vary in complexity and are one of the most widely used tools in estate planning.
Trusts are legal structures that can provide significant flexibility for the ownership of certain assets. This flexibility enables you and your beneficiaries to do more complex and thought-out planning that cannot be done with a will alone. The term trust describes the holding of property by a trustee who is the legal owner of the trust property, while beneficiaries maintain equitable ownership of the trust property. Sometimes a person may be both a trustee and a beneficiary of the same trust.
Trusts are legal structures that can provide significant flexibility for the ownership of certain assets.
A common misconception is that trusts are only for the wealthy. Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached maturity. This is a good way for parents to ensure that caregivers do not spend the money inappropriately or that their children do not waste their inheritance on a new sports car. A trust permits the trust assets to be held by the trustee and used for the support and education of minor children, with eventual division of the trust among the children when the youngest has reached a specified age. This type of arrangement has an obvious advantage over the distribution of property through only a will, without regard for the ages and maturity levels of the children.
Powers of attorney are often overlooked in the estate planning process, but are an important piece of most estate plans. A power of attorney gives one or more persons the power to act on your behalf. The power may be limited to a particular activity for one-time use, may be temporary, or may give permanent authority to act on your behalf. The power may take effect immediately, or only if you become unable to act for yourself due to mental or physical disability.
A power of attorney gives one or more persons the power to act on your behalf.
If you do not have a power of attorney and become unable to manage your personal or business affairs due to illness or mental incapacity, a court may appoint someone to act for you. A power of attorney allows you to choose who will represent your wishes and allows you to limit his or her authority.
If you are in a condition such that you can no longer express your preferences regarding medical treatment, decisions will be made for you. An advanced health care directive (also sometimes referred to as a Living Will) allows you to plan for these situations. State laws vary, but many states allow you to express your wishes regarding medical treatment if you become terminally ill or critically injured, and to appoint someone to make decisions for you if you cannot make them for yourself. Without such directives, your family may find it necessary to obtain court orders to deal with these complex medical situations.