What Are The Basic Items In an Estate Plan? What Does Each Item Do?
There are several basic items in an estate plan, each with their own function. The first and the one most clients first associate with estate planning is a will. What’s important to recognize with a will is what it does, what it doesn’t do, and what its basic function is. A will is only a valid document once a person dies; the will has nothing to do with the management of assets while a person is alive. The purpose of the will is to create the division and distribution of assets that are passing through the will according to whatever the creator of the will decides. What’s also important to recognize about a will is that it may or may not have anything to do with assets that a person dies owning either because a will is only going to govern the singularly owned assets of the person who has died and not assets that are owned jointly with a spouse, child, or anyone else. It also doesn’t affect assets such as retirement plans, life insurance policies, and annuities where the person has the ability to appoint a beneficiary and has done so. Those beneficiary appointments are private contracts that that that person has with those financial institutions that will dictate where those accounts go. This is a common misconception that even though a will may say I’m dividing everything equally among my children, that direction is only going to apply for assets that are actually passing through the will. In a circumstance where the creator of the will has named one child as the beneficiary of all of their life insurance policies and retirement accounts then those accounts are going to go to the child that the person has nominated regardless of what language is otherwise in the will. The moral of this story is when creating your distribution plan under the will, you always need to have in the back of your mind, what you own and how you own it so you’re not defeating what it is you’re trying to accomplish under the will. Again, a will only deals with the division and distribution of assets owned singularly by you after you die.
Another part of proper estate planning is to plan for events of incapacity before you die. The traditional document for financial planning in the events of incapacity is a power of attorney. A power of attorney is a contract where the creator of the contract appoints an agent to do what the contract says the agent can do and the contract can be very limited or very broad in scope. It’s our suggestion, in estate planning, that what you’re planning for is the worst circumstance where you cannot do anything for yourself and would want to plan for this document to be as expansive as it can be. The power of attorney, by state law, can only last until your death, which is when the will takes over. The problem with powers of attorney is it’s not a panacea. There is no such thing as a universal power of attorney that is guaranteed to be accepted by every third party financial institution that a person deals with. You’re always subject to the ability and the agreement of the various institutions that you have your assets with to accept the power of attorney you have prepared. Most of the circumstances we see in our office where powers of attorney are being dishonored have to do with the age of the document. Conceptually, this is the one flaw in the power of attorney system where you are really planning for the event of incapacity on the back end of the problem instead of the front. Meaning that you are signing a document today and hoping that when the event of incapacity happens at some point in the future that the agent that you name will be able to use that power of attorney at the time that the event occurs. If that point in the future is 10 or 15 years from the time you originally prepared your power of attorney then your agent is going to run into problems more often than not in having every institution that you deal with agree to accept that document that they’ve never seen before. With powers of attorney in particular, it’s important that those are updated and re-dated at least every 3 years to help manage this age problem.
The other basic document for incapacity planning deals with the medical side of the coin. In Virginia that document is an advanced medical directive which is similar but different to the financial directive. Similar in that the creator of the document is nominating an agent to undertake the instructions, different in the sense that it’s intentionally limited to medical decisions, and complying with the federal HIPAA privacy requirements to allow the agent to be able to access your private health information as part of the job, and in how you’re empowering your agent to undertake those instructions. In the advanced medical directive context those documents are instructive in nature, they’re not designed to instill any discretion on the agent to decide what to do. The principal creating the document is telling the agent what to do and fight in certain medical circumstances. Alternative to the financial side where that’s not as easy to do because things change with people’s finances so that the grant of authority under a financial power of attorney is more discretionary in nature. Those are some of the functional differences between the two. But the combination of a will, power of attorney, and an advanced directive form the foundation of the documents that everyone really should have.
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