Creating an estate plan can be confusing if you don’t know estate planning basics. For example, most of my estate planning clients come to me because they were told they needed a trust. Wait, maybe it was a will? Which one lets the person talk to their doctors, or is that something different? There’s clearly a lot of confusion about what’s needed to make sure a client’s bases are all covered. And knowing what each document is called helps, too. So, here is an overview of the typical documents found in an estate plan.
Will – if you have anything at all, it’s probably a will. A will is the most basic part of any estate plan. Essentially, it tells the world what happens to all your assets (i.e., your “stuff”) after you die and who’s in charge of getting it to where it needs to go. It is NOT useful for holding assets over time or for avoiding probate. For those, you need a trust.
Trust – as stated above, a trust is a good idea if you want to hold assets for a long period of time – for example, if you have a young child who can’t inherit right away, or you want to give someone an allowance rather than an outright distribution. A trust is a legal entity, rather like a corporation, so it can own assets in its own name, and the trustee can manage the assets until it’s time to distribute.
A trust is also good for avoiding probate. Probate is when the government oversees the distribution of your estate, and it is required in California when your estate (everything you own in your name) is worth more than $166,000 (as of 2021; this number is indexed for inflation). Anything owned by your trust is not part of your estate, so if you can move your house and other high-value assets into your trust before your death, you can skip the probate process entirely.
Typically, a will and trust work together, where the will acts as a safety net to make sure anything that wasn’t put in the trust during your lifetime can still be moved in there after death. If you missed something important (like putting your house back in trust after a refinance), then it can be expensive, but it’s still much cheaper (and less hassle) than a full probate proceeding.
Power of Attorney – this document tells everyone who will pay your bills for you. You can make it effective immediately, or you can have it kick in after an event, such as a doctor declaring you unable to manage your finances. A power of attorney is only effective during your lifetime; it ends on your death. Since you’ll still be around while the power of attorney is in effect, you should make sure to pick someone reliable and trustworthy as your agent. Remember, once they have access to your finances, they can do anything you can do with your money unless you state otherwise.
Advance Health Care Directive – this document tells everyone who the doctors should talk to if you’re unable to talk to them yourself. You can also give directions to your agent, such as whether or not you want to be on life support or where you want your ashes scattered after you’re gone. Make sure to choose someone who you can trust to carry out your wishes. If the person will do what they think best, regardless of what you said you want, or will cry and wring their hands when the doctors ask them for a decision, that person is probably not the best choice.
If you’d like to learn more about estate planning basics and these documents, you’re welcome to sign up for my newsletter, where my “Estate Planning Overview” document is available as a free download. You’re also welcome to email me at email@example.com.