For many people, the hardest part of determining how assets will be distributed after death is sifting through estate planning terminology and documentation. Help your clients get started on their estate plans by reviewing these three basic concepts and clarifying some misconceptions.
What your client should know:
1. There’s a big difference between a last will and a living will.
- A will, often referred to as a last will and testament, is a legal declaration of how, when and to whom your assets should be distributed upon your death. Without a will, your state’s law will determine how your estate is dispersed, which may run contrary to your own wishes.
- A living will is a legal declaration of your wishes to health care providers in the event you become terminally ill or incapacitated. Often living wills determine if doctors should use extraordinary measures to keep you alive and the level and duration of care.
- Both a will and a living will need to be affirmed by two disinterested witnesses, and each document may be revoked and replaced by newer versions as your feelings change.
2. Similarly, there are different types of power of attorney.
- A power of attorney allows you to authorize an attorney to make legal and financial decisions on your behalf in the event you become incapacitated.
- If a power of attorney is specified as limited or temporary, it stops being effective in the event you become incapacitated. A durable power of attorney remains in effect until death.
- A health care power of attorney is a separate document that allows you to appoint someone you trust to make health care decisions on your behalf in the event of your incapacitation. This kind of power of attorney is necessarily considered durable.
3. A trust allows you to consolidate and distribute your assets without requiring a probate.
- Once an irrevocable trust is put into effect, the property inside the trust is no longer under your control, or part of your estate, which has the benefit of reducing your estate’s value when establishing the amount owed for estate taxes.
- A revocable trust allows you to change your mind on assets, beneficiaries or even having a trust at all. Because this trust is impermanent by design, it typically is considered part of your estate when establishing value for estate taxes.
- A key advantage to a trust is that it avoids the time, expense and publicity of probate proceedings. A last will and testament requires probate, which means your estate’s inheritance value and beneficiary names and addresses will all be public record.
Scott M. Grenier, CFP®, AEP®, is a Senior Estate Planner for Baird’s Private Wealth Management group.
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