Q. My wife and I would like to set up a basic estate plan. What are the essentials?
A. Many people believe that if they have a will, their estate planning is complete. But, actually, there is much more to a good estate plan. A good plan should be designed to avoid probate, minimize estate taxes, protect assets if you need to move into a nursing home, and appoint someone whom you trust to act for you if you become disabled. Here is a list of the basics:
(1) Will: The most basic document is a will. A will directs who will receive your property upon your death and who will be your executor to see that your wishes are honored. If you have minor children, it may also nominate guardians for them. But a will usually requires a probate proceeding, and only controls property that is part of your probate estate. Indeed, many people own assets which are not part of their probate estate, such as joint tenancy assets, life insurance policies, retirement plans, IRA’s, 401K’s, and annuities. The disposition of these non-probate assets is controlled by the form of title or by the associated beneficiary designation, and not by your will. For example, property held in joint tenancy goes to the surviving joint tenant, regardless of what the will says.
(2) Durable Power Of Attorney (“DPOA”): In a DPOA you designate a person to act in your place for financial matters when you are unable to act for yourself. The DPOA is usually considered a better alternative than a court supervised conservatorship, which can be cumbersome, public, and expensive. A DPOA can, if properly drawn, also authorize long-term care planning on your behalf. But the DPOA ceases to exist upon your death, and therefore cannot function as a will-substitute.
(3) Advance Healthcare Directive: By this directive, you nominate someone to make health care decisions for you in the event you are unable to do so yourself. It usually also expresses your wishes about end-of-life matters, burial and autopsy, and will authorize your agent to access your medical records and select physicians for you.
(4) Trust. If you have a home or other significant assets, you should also consider creating a trust. Unlike a will, a trust is designed to avoid probate and, upon your death, pass your trust assets to your beneficiaries in a manner which is usually speedier and less costly than a probate proceeding. Also, if you become incapacitated, a trust typically appoints a successor trustee to step in to handle your financial affairs during your lifetime. Unlike the DPOA, a trust does not suddenly cease to exist upon your death, but remains in effect long enough to distribute your trust assets as you have directed. In larger estates, trusts may also include provisions to minimize estate tax.
(5) Beneficiary Designations. At the same time that you create an estate plan, you should also review all beneficiary designations on assets such as insurance policies, retirement plans, annuities, and bank and brokerage accounts. This is because these beneficiary designations override your will or trust, and you should make sure that they reflect your wishes and are current. Example: a Pay-On-Death (“POD”) designation on a bank account will, upon your demise, distribute the funds therein to the POD beneficiaries, without probate or trust administration.
A good estate plan should also be customized to your particular circumstances. For example, if you are concerned about future long-term care expenses, you may wish to integrate long-term care planning into your estate plan, so that you or your spouse may access available government benefits (e.g., Medi-Cal) to help pay for that care without depleting a lifetime of savings or impoverishing the survivor.