Estate planning begins with an examination of your personal objectives and the preparation of legal documents to direct the disposition of property during life and upon death. These documents generally include a durable power of attorney, advanced medical directives, a will, and a trust agreement. All of these documents are products of state law, which specifically dictates their form and content. While their general purposes remain the same, the documents may vary slightly in name or form from state to state.
1.) Durable Power of Attorney
Through a durable power of attorney, an individual delegates authority to handle his or her financial matters to another person in the event of disability or incapacity. In the absence of a durable power of attorney, family members must institute a legal proceeding to have a probate court appoint a guardian. This guardianship process can be expensive, difficult, and is a public proceeding.
2.) Advanced Medical Directives
Advanced medical directives let others know what medical treatment you would want or allows someone to make medical decisions for you in the event you can't express your wishes. There are three types of advanced medical directives and each state allows only a certain type (or types):
a.) Health Care Power of Attorney: appoints a representative to make medical decisions for you in the event of disability and details how much authority the representative will have.
b.) Living Will: works in conjunction with a health care power of attorney to authorize health care providers to take specific action in the event there is no reasonable hope for recovery.
c.) Do Not Resuscitate Order: a doctor's order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs – one is effective only while you are hospitalized and the other is used while you are outside the hospital.
A will allows you to direct who will get your property upon death and under what circumstances. It also addresses the payment of estate administration expenses/taxes and names an executor to handle these matters. A very important element of a will is the designation of a guardian for minor children.
Trusts come in two general forms – a testamentary trust is funded at death, while a living trust is funded during life. Not everyone needs a trust, but they can help you plan for the management of assets during life, if incapacitated, and upon death. Trusts can also help reduce potential federal or state estate taxes. One advantage of a living revocable trust is that the distribution of assets upon death is not subject to the jurisdiction and oversight of the probate court.