09/18/2014

The Basic Estate Plan

At its most essential, estate planning covers distribution of your world goods, whether owned in your own name or jointly with someone else.  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 married 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.
  • In Virginia, an Advance Medical Directive is a composite document containing 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; the HIPAA authorization is essential if you are dealing with a health insurance company on behalf of someone else.

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.

Beyond the basic documents listed above, estate planning also encompasses a review of how assets pass to heirs outside the will.  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.

A good estate plan with also include a listing of all banking and investment accounts, online usernames and passwords, direct debits from bank accounts, tax records, business entity documents, military records, birth and marriage certificates.  Think of the work survivors will have in cancelling accounts, changing addresses, preparing a final tax return, and how much help it will be to find a complete information kit. 

Erik A. Dewey, an Oklahoma writer who went through the difficulty of sorting out his father’s estate papers and online accounts, wrote “The Big Book of Everything", which is now in its second version.  With a total of 44 pages, it is a free and easy-to-use book that can be filled out as an Excel spreadsheet, or as a PDF.

There’s a lot to be said for do-it-yourself estate planning.  Forms are available online, the cost is low, and there’s no lawyer to bug you to get the documents done.  That said, if you decide to create estate planning documents without legal assistance, it is important to know that an improperly prepared document can be worse than no document at all.  There are certain signing formalities to be observed for witnesses and notarization, and a will may be declared invalid if signatures are missing.  A will can leave an insurance policy or retirement account to a named heir, but the beneficiary designation form will trump declarations in the will.