An estate plan is a strategy for dealing with assets when a person dies. In other words, an estate plan ensures that all their assets are distributed according to the “decedent’s” wishes and in the most tax effective manner as possible. Your “estate” consists of everything you own including real property, personal property, investments, bank accounts, cash, life insurance, retirement accounts, etc. The “plan” consists of executed documents, specific designations, possible assignment of deeds and other tools. A lot of people might think that a will and an estate plan are synonymous, but a will is only one part of an estate plan. A full estate plan may include a will, a health care directive, and a power of attorney, with many estate plans also including trusts, deed transfers, and specific beneficiary designations.
A will is an essential component to an estate plan. A will enables someone to decide exactly who gets what from the decedent’s estate. A will also names a person as the “Personal Representative,” who oversees administering the will. This may sound simple, but it can get very complex. The main task of the Personal Representative is to use the will to transfer the estate to the correct “beneficiaries”. This almost always includes putting the estate through probate, the court process by which estates are administered. Probate can be formal or informal as well as supervised or unsupervised, depending on the complexity of the estate, the sufficiency of the estate plan, and if there are people who might challenge the administration of the estate. If a person dies without a will, they are “intestate”, and their estate is distributed according to the state intestate statute.
While a will is often the focus of an estate plan, other documents are necessary to complete the plan, including a healthcare directive and power of attorney designation. These documents have their effect before a person dies, enabling a designated person to make decisions and act regarding their health and finances. A power of attorney designation does not remove any power from the principal, but it grants another person the authority to sign documents and access accounts on the principal’s behalf. A health care directive appoints a person (a “health care agent”) that will make decisions regarding the principal’s body and health if the principal is not able to make those decisions themselves. A health care directive does not and cannot force the health care agent to do anything specifically, it only gives them the ability to make decisions on behalf of the principal.
A trust is a document that gives even more flexibility and control in deciding where a person’s estate goes after they die. Like a will, a trust dictates where a decedent’s assets go, but unlike a will, a trust can also decide when assets are transferred or under what circumstances. Trusts also can have affect before a person dies.
A clear and complete estate plan provides 3 things: peace of mind as to what will happen when a person dies, provides clarity as to what happens to a decedent’s assets, and prevents potential conflict over where a decedent’s assets should go. Depending on the amount of assets in an estate, certain estate plans can even minimize the taxes paid on an estate as it is distributed to the beneficiaries.
While the “stuff” of an estate is important, a complete estate plan also decides what happens to children (and even pets). Through a will and/or trust, a person can appoint “guardians” who will take care of their loved ones after they die and choose how their care will be paid for.
Estate plans vary from simple to extremely complex, but an estate plan is important for everyone. Do not let the “legalese” of complicated documents keep you from feeling confident about your estate. A good estate plan is one that, once completed, gives peace of mind and clarity about your intentions for those who come after you.
Jacob Grow