An estate plan can be a complicated thing. Attorneys, accountants, advisors all may be involved in pulling together a customized plan that conforms to your desires, complies with state and federal law and minimizes your tax obligations. But it is still a good idea to understand the basics. For example, there are (at least) four documents you should have in place or be thinking about when it comes to proper protection of your estate.
- Power of Attorney
You sign this document to authorize another to act for you if you later become incapacitated or you will be unavailable for a period of time when documents need your attention. For instance, you may be trekking in Nepal for two months (or something less exciting) and know that your house refinance needs to close while you are away. You could appoint your spouse, adult child or friend temporarily to sign the closing documents on your behalf. Another situation arises when you experience a serious illness or advanced age and you wish one of your adult children or a trusted friend to assist with banking, investment direction to your financial advisor or to work with the directors of your assisted living facility.
- Advance Directives
You sign this form to authorize another person (your agent) to make medical decisions for you when you cannot act. Also, you may specify what types of care you wish your agent and your physicians to provide for you when they are making decisions about your care. These decisions affect what level of nutrition, hydration and other procedures your family and physicians should consider. (Note: this form is different from the POLST (Physician Orders for Life-Sustaining Treatment) in that the POLST is used to instruct medical care providers on what level of emergency treatment should be given to a very sick individual or elderly person).
Of course, most of us are already somewhat familiar with this document. It appoints a person to act on your behalf (a “Personal Representative,” also sometimes referred to as an “Executor”). Upon petition to the probate court, the judge authorizes the Personal Representative to gather assets, pay bills, pay taxes, notify beneficiaries under the will (and heirs) and to distribute the property according to the direction in the will once all of the administration has been completed. The will may establish trusts that are designed to reduce taxes, manage funds for minors or other beneficiaries and protect the assets from the beneficiary’s creditors. In Oregon, for example, the minimum time that an estate must be kept open is four months, a period that gives creditors time to file claims. Usually the probate process takes a year to eighteen months unless tax issues remain unresolved.
Often referred to as a “living trust” because it is established during your lifetime, a trust can avoid probate at death if funded during your lifetime. Trusts may be revocable (a will substitute) or irrevocable (often used for tax planning for family, charity or business succession). In a revocable trust, you (the “Trustor/Settlor/Grantor”) name a person or institution, or both, to act as your Trustee. Usually, the Settlor (and often his or her spouse) serves as Trustee during their lifetime while they are able to do so. You transfer property during your lifetime to the trust by deed (for real property), assignment (for tangible and intangible personal property) and by beneficiary designation (to coordinate life insurance proceeds, retirement benefits and the like). As the beneficiary of your trust, if you become incapacitated, the alternate trustee continues to manage the property, pay bills and take care of you. At death, the revocable trust, like a will, spells out how the property will continue to be managed under the trust or how it will be distributed to the beneficiaries. The major advantages of the trust include administration of the estate without involving the probate court and privacy (probate files are open to the public).
Of course, each of these documents can be complicated, and each will be highly personal to you, your needs and your family situation. Your advisors can play a role in preparing them and making them clear to you. But it is important to understand the basics and to appreciate the different functions of each of the documents.