Estate Planning Basics

Estate Planning is frequently equated with tax planning, especially by the wealthy to reduce the amount owed to federal and state governments at death.  Estate planning is much more than tax planning.  Good planning covers distribution of your world goods, whether owned in your own name or jointly with someone else.  Good estate planning also allows you to designate the people who should make financial and health care decisions on your behalf if you are not able to.  Injury, illness or complete incapacity is more likely to happen unexpectedly, and if you are not competent, it is too late to plan.

A basic estate plan consists of a will, a durable financial power of attorney and an advance medical directive. 

  • A will allows you to designate who will receive your worldly goods (and who will not through the process of disinheriting).   This is particularly important if the case of a couple with children from previous marriages.  Every state has its own laws on who inherits when there is no will.  It can be a very unpleasant surprise when the first spouse dies, and the survivor learns he is entitled to one-third of the estate, while a grown child from a previous marriage inherits the rest.  
  • A durable financial power of attorney permits you to designate the person you want to manage your financial affairs if you are temporarily or permanently incapacitated.  It is “durable” because it remains valid, even if you are incapacitated.
  • An Advance Medical Directive contains your health care power of attorney to designate who can make medical decisions and consult with your care givers if you are unable to manage your own care, and a Living Will in which you express your preferences for medical care if you are unable to communicate, and for end of life medical treatment that you want or specifically do not want.  The third component of the Advance directive is the HIPAA Privacy Authorization in which you designate which people should have access to your health care records.

As people’s lives become more complex, so does the estate plan.  Parents of minor children need to decide who should be the guardian of the children if neither of them are able, and then name the guardian in both a Will and a power of attorney, covering the need for guardianship in case of death and incapacity.

It is important to note that a Will controls the disposition only of assets you own solely in your own name.  Assets owned jointly with another person pass to the survivor by rights of survivorship.   A “Pay on Death” or “Transfer on Death” (POD/TOD) designation transfers ownership to the named designee.  Life insurance, and retirement plans such as 401(k), IRA and annuities pass to beneficiaries who have been formally named on a beneficiary designation form.   It is important to review beneficiary designations periodically, especially if you experience a major life change such as marriage, divorce, birth of a child or death of a spouse.  Although it may seem unfair, an ex-spouse named as beneficiary of a 401(k) will receive the account if the beneficiary designation is not changed.