The COVID-19 outbreak has shown us that now—more than ever—we need to protect the health and safety of our loved ones. In addition to practicing social distancing and washing your hands, you can also protect yourself, family, and property by creating (or reviewing your current) estate planning documents.
For those that haven’t created an estate plan yet, let’s break down exactly what a basic estate plan looks like and why each document is important. A basic estate plan—meaning, we’re not looking at federal estate tax planning or family business issues—usually involves five main documents: (1) a revocable trust, (2) a Will, (3) a general durable power of attorney, (4) a health care power of attorney, and (5) a living will.
- Revocable Trust
A revocable trust is the lead actor in an estate plan. This is the document that governs how your property will be distributed when you pass away. In a nutshell, here’s how a revocable trust works: You create the revocable trust during your lifetime and transfer property into the trust for the trustee to manage and control. In most cases, you are the trustee—so it’s like managing your property any other day of the week. There are numerous pieces of property you can put into the trust, for example, your house, business interests, bank accounts, personal property, and more. Qualified retirement accounts (such as IRAs, 401(k)s, and profit-sharing plans), however, cannot be put into the trust during your lifetime. When you pass away, all of the property that was put into your trust is then transferred to the beneficiaries that you designated in the trust agreement.
Sounds easy enough, right? So, what’s so great about a trust? There are three main benefits to having a trust. First, it provides incapacity planning. This means, if you ever become incapacitated, i.e. you are gravely ill, in a coma, or have advanced stages of Alzheimer’s or dementia, your successor trustee can step right in and manage your property for you—this avoids the need to establish a costly conservatorship (or a “guardianship of the estate”). Second, a trust avoids probate. In Arizona, if you pass away and had created a Will during your lifetime, you still have to go through the probate process, which is a court-supervised process for distributing your property. With a trust, any of the property that was transferred to the trust passes to your beneficiaries free of probate. Third, a trust can provide some creditor protection for your beneficiaries. So, if you would like to leave property to your children when you pass—but, say your son has a gambling problem or is going through a divorce—leaving property at your death in a particular creditor-protected trust for him may help shield that property from his creditors.
We could go on an on about the numerous other benefits of a revocable trust, but for now, we’ll just leave it at this: a revocable trust is a major player in an estate plan and a document each person should consider creating.
- Last Will & Testament
A Will is the best supporting actor in the estate plan narrative. We like to include a “pour-over Will” that works in conjunction with your revocable trust. The pour-over Will states that any property that has not been put in your revocable trust goes into your trust when you pass away. This ensures that if you forgot to put any property into your trust during your lifetime, anything leftover will go into your trust and be distributed according to the trust agreement. In other words, your Will is important as it acts as a safety net to catch anything you failed to put into your revocable trust during your lifetime.
- General Durable Power of Attorney
A general durable power of attorney (“GDPOA”) is also commonly known as a financial power of attorney. This document allows you to name a person or company to act as your agent and make financial decisions on your behalf if you become incapacitated during your lifetime. For example, if you catch an illness and are hospitalized for quite some time and cannot manage your assets anymore, then your agent steps in and handles your financial affairs for you. Again, this is extremely important as it may avoid setting up a conservatorship (or a “guardianship of the estate”) for you. However, it is also important to note that a financial power of attorney may not work in all situations. For example, many title companies prefer not to work with an agent on a GDPOA when selling a house. Therefore, while it is important to have a GDPOA, we typically recommend that you also establish a revocable trust so that your trustee (rather than an agent) is the one handling your property.
- Health Care Power of Attorney
A health care power of attorney (“HCPOA”) allows you to designate an individual or company to make medical decisions for you if you are unconscious, incapacitated, or unable to communicate. Because this agent will make treatment and intimate health care decisions on your behalf, it is important that they know your desires, beliefs, etc. A HCPOA also allows you to name a guardian on your behalf in case you are determined to be incapacitated. Just like the GDPOA, this is an important feature as it may avoid a guardianship proceeding in court.
- Living Will
Lastly, a living will compliments your HCPOA. A living will works with the HCPOA and lets you outline your health care wishes, what medical procedures and treatment options you approve, and instructions on end-of life care. A living will is essential to an estate plan as it provides guidance to your friends and family members who may be making your health care decisions for you. If you already have an estate plan established, don’t forget to dust it off and review it to make sure that it reflects any changes to your family and finances. If you don’t have an estate plan in place yet, it’s a good idea to sit down with an experienced estate planning attorney (don’t worry, this can be done over a video conference) to make sure that your wishes are well documented so that you and your loved ones are protected during your lifetime and upon death.