Estate Planning 101

Know the basic legal documents needed to manage property and end-of-life wishes
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For those who haven't yet done any estate planning -- finalizing legal documents to manage and pass on property and set out wishes for end-of-life matters -- it's likely on their list of things to do.

You can provide some encouragement by taking the time to understand and then explain some of the basic arrangements involved in estate planning, and the protections and assurances they can provide.

What is estate planning?

Estate planning is a process in which individuals specify how their money and other property should be managed during life and after their deaths. And it commonly includes a related issue: directions about the type of medical care they want to receive if they become unable to communicate those wishes directly.

Specific final arrangements, such as whether to be buried or cremated, are also often part of the documents. And more sophisticated estate plans may even cover deferring or decreasing estate taxes or winding up a business.

While these matters require some soul-searching and forethought, estate planning is not the ordered and lockstep procedure that the term implies. In reality, it simply involves drawing up and finalizing one or more documents that give legal force to someone's wishes for property management and medical care.

What's in an estate?

When it comes to estate planning, myths and misconceptions abound. The primary one is that it's the province of only the very rich. But despite its lofty-sounding name, estate planning isn't reserved just for those who have a lot of money or property.

In the eyes of the law, an "estate" is simply all the property individuals own, both outright and jointly -- including bank accounts, real estate, stocks and bonds, vehicles, jewelry, retirement accounts, and even pets. And it includes interest and money to which they are later entitled, such as insurance proceeds and securities dividends.

What if there's no estate planning?

If they haven't done any formal estate planning, then decisions about their medical care, property, and final arrangements will be made without their input.

Medical decisions will fall to the treating doctor or hospital. Property will be divided and distributed at their death according to the hierarchy of survivors specified by state law. And final arrangements will be carried out according to the whims of relatives or in accord with community customs. And the plans these people or institutions put in place may not match the wishes of those for whom they're making the decisions.

Wills for basic estate planning

While estate planning runs the gamut from a simple document or two to complicated setups with managed trusts and timed payouts, there are a number of common arrangements and documents to consider.

In a will, you can specify:

  • What property you wish to leave to family, friends, and organizations.
  • Who you wish to act as guardian and manage property for any dependent children.
  • What person should act as a personal representative or executor to manage your estate at death, pay debts and taxes, and distribute remaining property as you specify.
  • Whether you want to cancel any debts still owed to you at death.
  • How outstanding debts and taxes should be paid.

A will is the most basic estate planning document there is -- and for some people, it represents the only estate planning they want or need to do.

A will alone, however, may not be sufficient to meet everyones' needs if they:

  • Expect to owe estate taxes when either or both of them die -- which is most likely if they own property worth $2 million or more.
  • Want to have some control over what happens to their property after their deaths, such as specifying that a house goes first to their children, then to their grandchildren (after their children die).
  • Have any child who has a special need or disability, and they want to provide management for property that goes to him or her.
  • Have children from one or more prior marriages who are likely to conflict with a current spouse.
  • Fear that someone may claim their wills are invalid because they were mentally incompetent or subject to fraud or duress when writing them.

For those with such concerns, they should consider setting up a trust instead of or in addition to a will.

Trusts for basic estate planning

Trusts are legal arrangements that give a person or a group of people the right to hold and manage specific assets. That simple definition aside, there are dozens of ways trusts can be set up and administered.

One general difference between estate planning trusts is that some are "revocable" (meaning that the indivduals can change their terms at any time, as long as they are mentally competent to do so) while others are "irrevocable" (they can't be changed or amended once created).

These days, the most common type of estate planning trust is a revocable living trust, which allows people to enjoy and control the trust's assets during their lifetimes and then automatically shift ownership of the property in the trust to a named trustee or trustees at death. The arrangement operates much as a will does, except that upon death, the trust property will not be processed through probate-- which can add administrative and legal costs and also delay the time it takes for the property to transfer to the beneficiaries.

Living trusts may not be a wise choice, however, if someone:

  • Has set up most property ownership in joint tenancy or pay-on-death transfers.
  • Owns very little valuable property.
  • Doesn't have a person he trusts to oversee his property.
  • Is involved in divorce proceedings, as some state laws bar creating such trusts once a divorce is filed.

Other estate planning elements

There are several other types of estate planning documents people should consider, depending on their circumstances.

Joint ownership. When property, such as a house or bank account, is held in joint tenancy (also called tenancy by the entirety), it will pass automatically to the named survivor. Like living trusts, property in joint tenancy doesn't go through probate. This is a good setup if the survivor is a spouse, close relative, or close friend who can be trusted not to sell or squander his or her share of the property.

Transfer or pay-on-death designations. Those who have an account in a bank, savings and loan, or credit union may be able to designate a beneficiary to automatically take the account funds at their deaths; these are called payable-on-death accounts. A similar legal arrangement, a transfer-on-death designation, allows them to register stocks, bonds, and brokerage accounts so that a named survivor takes them automatically at death. Both methods avoid probate.

Powers of attorney for finances. This document allows them to name a trusted person, called an attorney in fact, to handle their financial matters if they become unable to handle them on their own. Durable powers of attorney for finances are mainly preventive documents. If they don't have them and they become mentally incompetent, a judge will have to appoint someone to manage their finances for them -- even if the appointee is unfamiliar with them or their money matters.

Health care directives and powers of attorney for health care. These documents, also called advance health care directives, allow them to instruct healthcare providers about what life-prolonging treatments they want and don't want if they're no longer able to express themselves -- and to name an individual to oversee their care to be sure those wishes are enforced, sometimes in a separate document called a durable power of attorney for health care. Although state laws differ slightly, these directives are usually enforced only if someone is close to death from a terminal condition or in a permanent coma.

Final arrangements. This document will give legal force to their wishes to be considered for body and organ donations, and it can also state their preferences to be buried or cremated. As with other types of documents that take affect after death, they may also choose to name a person to oversee that the stated wishes are carried out as written.

Barbara Kate Repa

Barbara Kate Repa, a lawyer and journalist, has devoted her career to editing and writing about legal issues for consumers. See full bio