Expert's Guide to Estate Planning Documents Everyone Needs

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Having a financial plan in place during your lifetime is an important step in achieving peace of mind. But what would happen to your finances if you were to die suddenly, or if you were no longer able to manage your affairs due to incapacity?

There are important estate planning documents everyone should have so they can be ready for life’s uncertainties. These include a will, revocable trust (if appropriate), financial and health care powers of attorney, a living will and up-to-date beneficiary designations for retirement plans and life insurance.

An estate plan ensures that the people you want to pass your wealth to receive the right assets in the right way. The directions you provide now in your estate planning documents can always be changed.

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But if you have no estate plan in place, the aftermath can be costly and time-consuming for your family.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Planning for incapacity

It is difficult to imagine a future where you are unable to manage your affairs due to serious injury or incapacity. But there are basic documents you can put in place now to help plan for that possibility.

Financial power of attorney. A power of attorney is a legal document in which an individual (the principal) designates another individual, such as a spouse, child or close family member (the agent), to act on his or her behalf.

A power of attorney is usually “durable,” meaning that the powers granted to the agent continue to be effective even if the principal loses capacity. The power of attorney allows your agent to take care of financial matters for you in a variety of situations.

For example, your agent can manage banking and investment transactions, sign legal documents or apply for benefits on your behalf.

However, the power of attorney is no longer valid after your death. At that point, the terms of your will or revocable trust control the disposition of your assets.

While a power of attorney is important for those facing illness or old age, parents should also encourage their young adult children to put a power of attorney in place since parents can no longer make decisions for their children once they reach the age of majority.

Health care power of attorney/living will. In a health care power of attorney, you name an agent to make health care decisions for you when you are no longer able to do so. Your agent can also obtain access to medical information and records and authorize admission to a long-term care or rehabilitation facility.

You should also have a living will (also referred to as an advance directive), which can be part of your health care power of attorney or a separate document. In a living will, you express your preference for end-of-life measures, such as pain management, nutrition and hydration, and name a surrogate to carry out your wishes.

Planning for wealth transfer

It is equally important to plan for the transfer of your wealth and ensure you have the right team in place to carry out your wishes. Here are the documents that you may need:

A will. A will is a key document in all estate plans. In your will, you set the rules for the distribution of assets held in your individual name and designate an executor to oversee the administration and distribution of those assets.

You can also name guardians for your minor children in your will, making it an especially important document for young families.

A will must be admitted to probate, and the cost and complexity of probate proceedings vary by state.

Revocable trust. In many states, a revocable or “living” trust is the central document of an estate plan. A revocable trust can avoid the need for a probate proceeding after your death. It can also facilitate the handling of your property during your lifetime in the event of incapacity.

With a revocable trust, you transfer title to your assets into the name of the trust. You can serve as sole trustee during your lifetime or name a co-trustee.

During your lifetime, you are the beneficiary of the trust and can typically access the trust property in the same manner as an account in your own name. You can revoke or amend the terms of the trust at any time.

If you have a revocable trust, your will is usually a “pour-over” will, directing that any assets you may not have titled in the name of the trust during your lifetime should be added to the trust at your death.

If you lose capacity, the successor trustee you name in the trust instrument can take immediate control of the trust property to meet your needs. Upon your death, the trust property is distributed to the people and organizations you name in the trust instrument.

Trusts. If you have a large estate or a more complicated family picture, you may want to leave assets in a trust.

Trusts can be used for lifetime gifting or the transfer of assets at your death and are often used to take advantage of the federal estate tax exemption, for marital and charitable deductions and for income tax planning.

Beneficiary designations. For many individuals, retirement accounts and life insurance policies make up a substantial portion of their wealth. Remember that these assets are not controlled by the terms of your will or revocable trust.

Instead, their distribution is governed by the beneficiary designation forms you have filled out with the plan administrator or life insurance company.

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Your insurance company or retirement account administrator should be able to provide you with a copy of your current beneficiary designations as well as the forms necessary to make any changes.

Naming the right team to carry out your wishes

One of the most important things to consider when putting an estate plan in place is naming a team you can trust to carry out your wishes.

The executor of your will, the trustees of any trusts and agents under powers of attorney all play key roles. They act as a fiduciary with duties of loyalty and prudence.

Depending on the circumstances, these individuals may be responsible for gathering and valuing your assets, assessing and paying debts and liabilities, filing and paying taxes, arranging for funeral expenses and distributing your assets according to the terms of your documents.

For an executor, this job can last for many years. For a trustee of continuing trusts, it could be decades. It is important that the individuals you name have the organizational and financial skills to carry out these duties. Of course, they also can hire professionals to assist as needed.

At the end of the day, you need to know that your affairs will be handled in the way you planned. Talk to the individuals you are considering to ensure they understand and accept their potential roles and responsibilities.

Depending on the complexity of your plan and family situation, you might also consider naming a corporate trustee to provide expertise, experience and objectivity.

Review and update

Your estate planning documents are most effective if they are up to date and reflect your goals. It is important to review and update your documents whenever you have a significant life change, such as marriage, divorce, the birth of a child, death of a beneficiary or relocation.

But there may be other reasons, such as a change in your financial status, changes in federal or state tax laws, or changes in your relationships with named beneficiaries, executors, trustees or agents.

Regularly reviewing and updating your documents helps ensure that your assets will be distributed to the right people in the right way.

This article is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Leslie Gillin Bohner is Chief Fiduciary Officer and General Trust Counsel at Fiduciary Trust International. She oversees the administration and delivery of trust services and leads a national team of fiduciary professionals. She is a member of the firm’s Executive and Management Committees and joined Fiduciary Trust International in 2020 as a result of the company’s acquisition of The Pennsylvania Trust Company. Leslie has more than three decades of experience serving high-net-worth individuals and families.