Your Estate Plan: The 3½ Most Important Documents (and 5 Other Components to Consider)

When you think about end-of-life planning, you likely are considering creating your Will. However, a well-crafted Estate Plan includes a lot more than that.

The Most Important Documents in Your Estate Plan

Everyone, no matter what their situation is, should have the following three documents in their Estate Plan. The combination of these three documents makes sure that you are taken care of when you can’t take care of yourself, and that your loved ones are taken care of when you are no longer there. If you are missing any of these documents, you can cause yourself or your loved ones a lot of otherwise avoidable hassle.

1. Last Will and Testament

Your Will doesn’t actually control all of your assets, it only controls your probate property. Some property may pass through vehicles such as Joint Ownership or Beneficiary Designations – the rest of your assets go through a court process called “probate.” In Probate, the court gets involved to make sure these assets go to the right people – whether that is the people you named in your Will, or your “heirs at law.”

If you don’t have a valid Will, then your heirs at law, defined in the Pennsylvania intestacy statutes, inherit your assets. These means that your assets may not go where you want them to, and it makes the probate process more time-consuming and expensive for your loved ones.

A properly drafted Will doesn’t only direct where your assets go. It also allows for a great deal of flexibility in how beneficiaries get access to the assets, or what the inheritance may be spent on. For example, if you have minor children, your Will can include a Minor’s Trust to protect those assets from potential creditors or bad actors, and keep it safe until they are ready to handle that money responsibly.

Your Will is also where you make funeral and burial wishes, appoint the Executor who handles your estate, and make nominations for the guardian of any minor children. A competent Estate Planning attorney works with you to make sure you understand all the important considerations in making these choices.

2. Financial Power of Attorney

The primary purpose of a Financial Power of Attorney is to make sure that someone else has access to your assets to take care of you. It designates an agent who can act on your behalf, and defines exactly what powers and responsibilities they have when handling your assets. If you become incapacitated due to mental decline, or end up in the hospital for an extended period of time, your agent can step in to pay your bills – mortgages, utilities, hospital bills, and credit cards all still need to be taken care of, even if you can’t do it yourself.

If you haven’t designated an agent that can act on your behalf, your family has to go through the process of getting a court appointed Guardian of the Estate who can take care of you. Not only do the bills continue to rack up until this process is complete, but the process itself is expensive. Finally, your Guardian may be someone who doesn’t have your best interests at heart. There are many examples of Guardianship abuse – the best safeguard is to make sure you pick the agent yourself.

The Power of Attorney can be “Durable,” which means it takes effect immediately, or “Springing,” which means the agent needs proof you are incapacitated before it takes effect. While it might sound like a good idea to have a Springing Power of Attorney, this can create a lot of hassle and delay which you would likely rather avoid. An attorney can explain to you the different options, and show you how to protect yourself even when you create a Durable Power of Attorney.

3 (and ½). Healthcare Power of Attorney / Living Will

These are technically two documents, though they are usually drafted as a single document. The Healthcare Power of Attorney designates an agent who is able to speak to doctors on your behalf and receive your medical info.  It also allows them to make medical decisions for you in the event that you are unable to make them for yourself.

The Living Will (also known as an Advance Medical Directive) allows you to make your own end-of-life care decisions in advance.  These decisions can simply be guidance for your agent, or you can make them binding. Because hospitals are scared of liability, they pursue the most aggressive care to keep you alive if they don’t have instructions otherwise. Not only is that expensive, but it is incredibly difficult on family members.

If you have ever been in a situation where a loved one didn’t have a Living Will, then you know how difficult it can be. By making these decisions ahead of time, and making them binding, you are taking care of your loved ones by preventing family conflict.

Other Components to Consider for Your Estate Plan

Besides these three documents, there are many other components which may be beneficial in your Estate Plan, depending on your situation.

1. Revocable Living Trust

There are less scrupulous attorneys who try to sell clients on a Revocable Living Trust, even when it isn’t in the clients best interest. Living Trusts do not have any tax savings effects, nor do they protect assets from any creditors. While they are useful in certain circumstances, in Pennsylvania they are usually not necessary, and incur additional costs and hassle for the clients.

The main benefit of a Living Trust is to avoid probate by keeping all of the assets out of your name. But in Pennsylvania probate is not very difficult, and most of the costs associated with probate still have to be paid. Additionally, if you don’t make sure to have all your assets titled in the Trust, probate is still necessary.

However, there are some instances where a Living Trust is beneficial – primarily when you own real property in another state. If you own that property in your own name, then your executor likely has to travel to that state to qualify before that court. Keeping these assets titled in a Living Trust allows your Successor Trustee to immediately take control of the assets without having to open ancillary probate in that state.

If your primary residence is another state, then Living Trusts can be much more beneficial. California, Texas, Florida, and Delaware (among others) all have very good reasons for using Living Trusts to avoid probate.

2. Irrevocable Trusts

Where a Living Trust keep the assets under your control, as you can always revoke it, an Irrevocable Trust removes your ownership of the assets entirely. Because of this, you should be very careful when creating one, and never do so without talking to an attorney first.

Irrevocable Trusts can be incredibly powerful Estate Planning tools, whether you are using them for Tax Minimization, Asset Protection, Government Benefits Qualification (like Medicaid), or other reasons. They are also more complex, require regular maintenance, and must file tax returns every year. Under the right circumstances they are very beneficial, but not everyone requires one.

3. Business Succession Plan

If you own a business, part of your Estate Plan is creating a business succession plan. A business succession plan isn’t just for what happens to the business after you pass – it’s also for what happens when you’re ready to retire. In either case, having a business succession plan now means the business is worth more when the time comes to pass it on.

If you don’t have a plan in place, then if you pass suddenly, your beneficiaries might have no other option than to just shut the doors and sell off the assets. Unfortunately, this is probably the least profitable way to close a business. Instead, there are a number of options available to you. If you have a business partner, you may want to have the first right of refusal to buy out each others interest, and then keep life insurance policies on each other to fund that purchase.

If you have family who wants to take over the business, plan for that now by naming them in the Will, and then work out a plan for how you can pass your interest down to them when the time comes to retire, such as having them buy you out over a period of time. The same planning can be done with a key employee who would like to take over the business.You might also have the option of selling off your book of business to someone in the same profession. In every one of these options, you should begin working with an accountant now to determine how to get the most value out of your business.

4. Life Insurance

Life Insurance is an important part of most Estate Plans. If you have people depending on you, like a spouse or young children, you should have a sizeable policy that replaces your income for a while. Even if you are a homemaker and don’t have an income, you should still have a sizeable policy. If you pass, your spouse won’t or be able to work for some time. Even when they do go back to work, there are likely have additional expenses, such as day care.

Even if you no longer have anyone depending on you financially, you should have a smaller policy which can cover funeral and burial expenses. Unfortunately, funerals can be very expensive – well over $10,000. Life insurance pays out immediately and can be used to cover those expenses, rather than family having to pay out of pocket and waiting for months to be reimbursed out of the estate.

In some cases, life insurance may be an effective tax minimization tool. Life insurance is exempt from the Pennsylvania Inheritance Tax, and directing those payments to certain beneficiaries may be able to lessen the taxes due.

5. Other Vehicles

Not all property passes through your Will. Jointly held property with the right of survivorship passes to the other owner upon your death, without ever becoming part of your estate. Likewise, beneficiary designations or payable on death accounts go directly to the designated beneficiary.

If you’re not careful though, these non-probate assets may frustrate your wishes. If you want to leave everything equally to your children, but have one child listed as a beneficiary on a brokerage account, or as joint owner on a bank account, those assets go directly to that child. They also receive an equal share of all the property that is in your estate, and end up with a greater portion of the inheritance. An attorney works with you to make sure your various deeds, titles, and beneficiary designations are properly set up.

Conclusion

A well-crafted Estate Plan may sound like a lot to take care of, but it doesn’t need to be confusing. A competent attorney works with you to make sure you understand everything you are doing, and make the process as simple and efficient for you as possible. When it’s time to create your Estate Plan, you should reach out to a reputable Estate Planning Attorney who can help you through the process.