Estate planning is an aspect of financial planning that some people may not be eager to tackle, as it forces us to imagine and plan for what happens after we die. Describing how we want our assets to flow from our estate to the appropriate beneficiaries in the most efficient way possible is a crucial part of estate planning. Estate planning also encompasses end-of-life care instructions, powers of attorney, and the naming of key people such as guardians, attorneys in fact, trustees or executors. Additionally, with proper planning, you can pass your assets in a tax efficient manner.
There are some estate planning documents everyone needs, regardless of your age, health or wealth:
- Power of Attorney for financial matters
- Advance Medical Directives
- Last Will and Testament
- Living Trust (maybe)
Power of Attorney
A power of attorney (POA) gives someone else (the agent, or “attorney in fact”) the power to act on your behalf, such as paying everyday expenses, collecting benefits, watching over your investments and filing tax returns. It can be durable or non-durable. A durable POA (DPOA) stays in force even if the grantor of that POA becomes incapacitated, while a non-durable POA would cease at that point. It can be general or limited in scope. It can be immediate or springing. A springing POA only goes into effect once the principal becomes incapacitated or indicates that she is ready for the agent to begin acting.
Note: A springing DPOA is not permitted in some states, so you'll want to check with an attorney.
Advance Medical Directives
Advance medical directives let others know what medical treatment you would want, or allows someone to make medical decisions for you, in the event you are unable to express your wishes yourself. If you don’t have these documents, the default is that care providers must prolong your life by any means necessary, because they have sworn a Hippocratic Oath to that effect.
There are three types of directives. A Living Will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. Generally, a Living Will is expressed as “declining treatment that only serves to postpone the moment of death.” In most states, they only take effect in case of terminal injury or illness. In states that do not allow living wills, you may still want to have one to serve as evidence of your wishes.
A durable POA for health care allows you to appoint someone else to make medical decisions on your behalf. As you can imagine, these types of POAs are highly customizable to fully align with your wishes on potentially difficult and complex issues.
A Do Not Resuscitate (DNR) order informs medical personnel to not perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital.
Last Will and Testament
The main purpose of a Will is to express your wishes regarding disbursement of property to heirs after your death. In a Will, you also name key people such the executor of your estate and a legal guardian for minor children or dependents with special needs.
If you die without a Will, this is called “intestate”. At that point, state law will govern the flow of your assets from your estate. In Illinois, for example, this means that a spouse receives 50%, while children (if applicable) receive the other 50%.
Keep in mind that some assets may not follow the dispositive provisions of your Will, as they will pass by operation of law (i.e., jointly owned assets go to the other owner), by operation of contract (i.e., beneficiaries of life insurance, Individual Retirement Accounts (IRAs) or Transfer of Deaths (TODs)), or under the terms of your revocable trust, if you have one.
Assets that pass by the terms of the Will (testate), or via intestacy, will go through probate. Probate is a legal process that proofs the Will. The probate process is a legal proceeding that collects assets that you own in your name at the time of your death, ensures that your creditors are paid, and distributes your assets according to your Will or under the intestacy statutes.
Revocable Living Trust
A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your investments, home and other items. While you are serving as trustee, you control the property in the trust. As the trust is revocable, you may change the terms and provisions at any time (provided you still have capacity).
Though you can accomplish the same tax and dispositive outcomes with either a trust or a Will, using a revocable trust has some advantages. Assets that are titled in the name of the trust will not have to go through probate. Probate is a public process, so some people prefer to use a trust as their main dispositive document to keep their affairs more private.
Another advantage of using a revocable trust is incapacity planning. If you become incapacitated or no longer desire to manage your financial matters, the successor trustee named in the trust document can take of control of the trust assets and manage them according to the terms that you outlined in the trust.
If you do use a trust, it is very important that you properly fund the trust by retitling assets in the name of the trust. You will want to coordinate the titling of all of your assets—life insurance, retirement plans and trust assets—so that your wishes are correctly implemented. Assets that are not titled in the name of the trust (or that are not in joint names or subject to a beneficiary designation) would have to pass through probate before going to the trust.
Many clients find that although these can be difficult topics to discuss, they have greater peace of mind knowing that their plan is in place. With over 130 professionals, the Busey Wealth Management team can help you plan for the future. To learn more about our suite of financial planning services, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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