Defining the Different Estate Planning Documents
Updated: Dec 8, 2022
Estate planning involves several moving parts that work together. While many of our clients have already visited an attorney and had a set of estate planning documents drawn-up, we thought it may be helpful to provide a quick overview of what may be included. The most common estate planning documents are as follows:
Power of Attorney
Advance Health Care Directive
And for those who have yet to have estate planning documents drafted, we hope this post may provide some helpful insight and a little encouragement to consider moving forward with an estate plan (especially if you own a home in California). Below, in addition to outlining the common documents, we also highlighted a few assets and accounts to keep in mind.
Your estate planning documents play a critical role in your overall legacy plan but there are many pieces to the puzzle. Our Living Legacy Planning process combines your estate planning documents with additional financial, investment, and tax strategies. A thorough analysis of these different aspects of your life and an understanding of your values help us create a comprehensive legacy plan which focuses on enjoying your wealth now, and effectively transferring it according to your wishes.
A revocable trust, sometimes called a “living trust” or an “inter vivos trust,” is often the cornerstone of an estate plan. A revocable trust is created and active while you are living and provides a vehicle to use, hold, and distribute property. By contrast, a testamentary trust is usually created by a will and does not become effective until its creator passes away; for the most part, a testamentary trust is irrevocable (i.e., it cannot be changed.)
There are three key parties to a revocable trust:
Settlor/Trustor/Grantor – this is the person who creates the trust.
Trustee – this is the person who holds legal title to the property that is in the trust. This person is responsible for managing the property for the benefit of the beneficiaries. [i]
Beneficiary – this is the person or group of people for whom the trust is created. Beneficiaries will usually either take ownership of the trust property itself and/or receive the income from the trust property. [ii]
There is often some fluidity and even overlap between the three parties to a trust. The settlor, trustee, and beneficiary can even be the same person. Most revocable trusts we encounter start off that way. For instance, the settlors are a husband and wife and while they’re living, they serve as the trustees by holding and managing the trust property, and they manage that property for their own benefit as the beneficiaries. Then, once the husband and wife have both passed away, a new trustee (who was already named in the trust document) will step in to manage the trust property for the benefit of the remaining beneficiaries. At that point in time, the beneficiaries (who were also already named in the trust document), are often the children of the original settlors (the husband and wife) and/or various charities. As we saw when the trust was originally created, sometimes the new trustee can also be a beneficiary of the trust.
A revocable trust provides specific instructions for how the trust property must be managed and distributed. One of the major benefits of a trust if you live in California is that the trust can own your home (and any other real property) and upon your passing, in most circumstances, the home could be inherited easily by your heirs and would avoid a lengthy, expensive probate proceeding. In our previous article, we provide some additional details about leaving a home to your heirs.
A will, sometimes called a “last will and testament,” is a legal document that lists a person’s instructions for their property when the person passes away. [iii] A will can also identify guardian(s) of minor children. The will identifies an executor who is responsible for carrying out the deceased’s person’s wishes. The executor is also sometimes called the personal representative of the estate. [iv]
If a will and trust are drafted together, we often see that the executor of the will is the same person as the trustee of the trust. Additionally, the will document will often be drafted as a pour-over will. A pour-over will directs that all property that is not already in the trust at the time of the deceased person’s death be transferred into the trust.
Unfortunately, if your home or other real property is not already in the trust, your will document will likely require a probate proceeding to effectuate the transfer. To try to avoid probate, even if you have a trust, it’s important to ensure that your home and any other real property have been transferred to the trust before your death. People often assume that this happens automatically but that’s not the case. Transferring your home to your trust requires you to sign a new, notarized deed.
Power of Attorney
A power of attorney (POA) is a document that gives someone else the legal authority to act on your behalf. The creator of the POA is called the principal and the person that the document authorizes is called the agent or attorney-in-fact.
There are several different types of POAs – a general financial POA, a durable financial POA, a durable POA for health care (see section below), a limited (special) POA, etc. [v] – the POA that may be applicable to you depends on your needs. We commonly see that when an estate plan includes a trust, the POA is drafted to allow the agent to manage your personal affairs and assets that are not in the trust (assets in the trust would be managed by the trustee, however, frequently, the trustee will be the same person as the POA agent).
California has created a standardized (statutory) POA that can satisfy the legal requirements and can be easily drafted and customized (preferably by an estate planning attorney). [vi] Some of the items over which you can grant your agent authority to act on your behalf include personal and family maintenance, real estate transactions, banking and other financial institution transactions, business operations transactions, and tax matters.
The California statutory POA includes language that the POA can continue to be effective even if you (the principal) become incapacitated. This election is what can make the POA “durable.” As a simple illustration, a durable POA could be a helpful document for a husband and wife if the husband becomes incapacitated due to dementia, and the wife still needs to handle his affairs. The durable POA could authorize the wife (acting as her husband’s agent) to endorse and deposit checks, pay taxes, access safe-deposit boxes, operate a family business, and sign contracts.
Advance Health Care Directive
An advance health care directive (AHCD) provides instructions about your future health care and authorizes someone else (your agent) to make health care decisions for you if you are unable to do so. California has also created a statutory AHCD and the first part of it is a power of attorney. [vii] The AHCD will typically become effective when a physician finds that you are no longer able to make your own health care decisions.
Some typical areas that an AHCD covers are decisions about pain management, prolonging life, and organ donation. Some of the powers that can be granted to the agent include the authority to consent to or refuse medical care, autopsy authorization, and the release of medical information.
Assets & Accounts to Keep in Mind
When thinking about estate planning, adding assets to a trust is an important step. However, certain assets may not be eligible to add to a trust. You should pay special attention to payable on death accounts (PODs), transfer on death accounts (TODs), life insurance policies, and retirement accounts. By their nature, these types of accounts have their own beneficiary structures and are not well-suited to be owned by a trust (there are exceptions though). For these types of accounts, it’s imperative to keep the primary and contingent beneficiaries up to date to ensure that the assets will transfer to the intended beneficiaries.
This article is only a high-level overview of some of the most common estate planning documents. If you already have an estate plan, we would welcome the opportunity to analyze it and create a visual representation of your estate as part of our Living Legacy Planning. And even if you don’t already have an estate plan, it’s never too early to start the process. We’d be delighted to assess your individual situation, recommend estate planning attorneys, and work together to develop a comprehensive legacy plan.
Disclosures: This information should not be construed as investment, tax, or legal advice.
vi. California Probate Code §4401. https://codes.findlaw.com/ca/probate-code/prob-sect-4401.html
vii. California Probate Code §4701. https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=PROB&division=4.7.&title=&part=2.&chapter=2.&article=