The Basics of Estate Planning Documents

Karen Van Voorhis, CFP |

Estate planning and other legal documents often have similar sounding names and can often be confusing. Here’s a primer on some of the basics.

Estate plans typically consist of at least these three documents:

  • A will. These are sometimes formally referred to as a “last will and testament.” Wills are commonly the basic building block of any estate plan. This document indicates to whom your estate should be left; names the executor who will settle your estate; and names guardians for any minor children.
  • A document that names someone to make health care decisions on your behalf. The name of this document will vary depending on the state, but common terms include a health care proxy, health care power of attorney, durable power of attorney for health care, or advance directive.
  • A document that names someone to make financial decisions on your behalf. The name of this document will vary depending on the state, but common terms include power of attorney (which terminates upon your disability or death) or durable power of attorney (the “durable” part means that the authorization continues during your disability, and terminates upon your death). The person you name may be referred to as an agent or attorney-in-fact.

Additionally, depending on your family makeup, assets, and what you are intending to accomplish, your estate plan may need to include any of the following documents.

Living will or advanced directive. This document explains your health care related wishes, and best used in conjunction with a health care proxy.

Medical Orders for Life-Sustaining Treatment (MOLST). This is a document co-created by you and your doctor, signed by both of you. It contains directives from your physician to other health-care providers about what life-sustaining treatments you would like, based on your prior discussions and agreement with your physician.

Revocable trust. This is the simplest type of trust. As its name implies, it is able to be revoked (or amended). The owner is typically both the trustee and the beneficiary, and the trust uses the owner’s Social Security number. A revocable trust does not file its own tax return; rather, any income or gains are simply passed through to the trustee’s tax return. Assets are commonly (but not always) put into a revocable trust during life, typically because owning non-retirement assets in a revocable trust can help those assets avoid probate upon the owner’s death. Revocable trusts are also sometimes called living trusts, or revocable living trusts.

Irrevocable trust. This type of trust can be far more complicated, and typically have the common restriction that transfers of assets into the trust cannot later be taken back (“unable to be revoked”). Depending on the goal, some irrevocable trusts can still provide the flexibility of changing beneficiaries and trustees in the future. Irrevocable trusts are commonly used to give away assets; that is, to remove assets from one’s estate, when otherwise holding on to those assets would cost a certain amount in taxes (typically in future projected estate taxes). They can also be used to protect assets in non-tax planning scenarios such as protecting primary residences from Medicaid liens after the owner has passed. Irrevocable trusts may or may not have their own tax ID numbers and file their own tax returns (at increased trust tax rates). Sometimes life insurance policies are owned by irrevocable life insurance trusts (ILITs), for the purpose of keeping the eventual death benefit out of the insured’s estate.

Beneficiary designations. A beneficiary designation is account-specific or policy-specific and only applies to the following types of assets: retirement plans (IRAs, 401(k)s, 403(b)s, etc.), pension plans, annuities, and life insurance policies. Naming a beneficiary is typically a simple process and can be changed at any time. Note that any asset with a beneficiary designation passes outside of the terms of your will. For example, if your will states that you leave everything to your brother Tom, but the beneficiary designation on your IRA says that that account should be left to your sister Nancy, then the IRA will go to Nancy, despite what your will may say. Accounts without a beneficiary designation will often default to flow to your “estate” upon your death, which is often an unfavorable designation from both a tax and an administrative standpoint.

Please see your estate planning attorney if you have questions about your own estate plan or any of these documents.