The drafting of important estate planning documents may be the most critical aspect of the estate planning process to protect yourself and your estate from undesirable consequences. Yet it is also one of the items that people seem to procrastinate on the most.

This article will identify and explain the purpose of some of the common estate planning documents that you should consider. Since every situation is different, this information is not intended to be legal advice or acted upon without consulting appropriate legal counsel.

Will

This is a document that allows individuals to determine how they would like to have their estate distributed after their demise. It is one of the more basic and inexpensive estate planning documents. As a result, it has some pitfalls to watch out for.

First, many people incorrectly believe that a will allows an estate to avoid probate. A will does not allow the beneficiaries of an estate to transfer property without going through the probate process. A will does allow an individual to name whom they would like to inherit their property upon their death, but only upon completion of the probate process. Probate is discussed in more detail under the category of Living Trusts below.

Second, a will is contestable. Simply speaking, anyone is free to contest the will by filing a claim with the court, often at no charge.

Third, a will is a public document which allows anyone to view it. This means that family members, neighbors, friends and even individuals not known by the decedent can view the contents of the estate.

Fourth, a will only becomes effective upon the owner’s demise. If the owner only becomes incapacitated and is incapable of making decisions that affect their affairs, a will is of no value.

Living Trust

A living trust is a document that allows the settlor’s estate to avoid probate as long as it is funded properly. Probate is a time-consuming and expensive process during which the courts determine how the estate will be divided upon an individual’s demise. In California, it is fairly common for the average probate process to take six to eighteen months to complete and to cost 7% or more of the gross value of the probate estate.

There are two primary reason that the probate process exists. First, it is used to determine whom the estate owes money to and to make sure that claimants get their fair share. Secondly, it is the process used to determine who is entitled to sign legal documents, such as deeds, on behalf of the decedent.

When someone dies without a will or a trust, they are considered to have died intestate. The state that they live in has a statutory distribution system which will determine who the heirs will be. It is very rare for the state’s predetermined system to correspond exactly with the estate distribution wishes of the decedent.

When someone creates a living trust, they are known as the settlors. In addition to the settlors, there are the initial trustees who make decisions about the living trust. With living trusts, it is common for the settlors to also act as initial trustees. This simply means that they have created the living trust, currently own the living trust and are also managing the living trust. There are situations where the settlor may not want to manage the living trust; there is no obligation for them to do so as they can select a trustee other than themselves.

At the time the living trust is created, there will also be a selection made for one or more successor trustees. As the name implies, successor trustees are the individuals will succeed the initial trustees as managers of the trust after the initial trustees are deceased or if they are no longer capable of making decisions related to the trust.

The final selection is the beneficiaries of the trust. Beneficiaries are the individuals who will receive the trust property upon the demise of the owner.

There are two steps to creating an effective living trust. The first step is to create the trust by properly drafting trust documents. The trust There are is a self-standing entity that is established by someone who may have one or more goals in mind. Some of the more common goals include probate avoidance; accomplishing estate distribution; caring for a special-needs individual; reduction and/or avoidance of estate taxes; and the selection of individuals who will make decisions if the settlors become incapacitated.

The second step in the trust creation process is to fund the trust. Once a trust is created, it becomes its own entity capable of owning property. The trust will only function properly if property is actually transferred into it. The real estate will get transferred by means of a quitclaim deed. Any accounts with financial institutions will get transferred using a form which will be provided by the institution.

Once all the property is transferred to the trust, it will be considered to be fully funded. Legally, the property is now owned by the trust—not by the previous owner. However, assuming the previous owner created the trust, there will be no difference regarding the level of control that the owner has. With one important exception, there are no restrictions placed on the owner by the trust that inhibits the owner’s ability to make financial decisions about any of the items or accounts in the trust. In that exception, when a married couple jointly create what is known as an A/B trust, it is common to draft the trust in such a way as to cause a part of the trust to become irrevocable upon the demise of the first spouse. This provision may restrict or limit the legal abilities of the surviving spouse.

As a final note about trusts, not all property can or should be added to the trust. Any accounts that have designated beneficiaries such as IRAs, life insurance and annuities will bypass probate without the use of a trust, assuming the beneficiaries are named properly. It is a common mistake to think that the trust beneficiaries will receive their stated percentage of the entire estate when in reality they will only receive their stated percentage of the trust estate, which only consists of the items that have been transferred to the trust.

Power of Attorney for Finances

The power of attorney for finances, or financial power of attorney, is a document that allows the creator to appoint someone to handle their financial affairs while they are alive, but incapacitated. Although it can be customized to accomplish a variety of wishes while the creator is alive, it will become void upon the creator’s demise.

The most common confusion about this document is what financial items the document actually covers. In short, the power of attorney for finances will allow the appointed individual to make decisions about any financially-related assets and/or accounts that are owned by the individual directly and not by their trust. If a financial account is owned by the trust, then the trustees and/or successor trustees will have the authority to make decisions regarding those assets.

Advanced Health Care Directive

The advanced health care directive allows the creator to appoint someone to receive their medical condition information from doctors and make decisions on their behalf if they are incapable of making their own decisions. It also allows the creator to express his or her health care preferences when they are incapacitated. This document has become extremely important since the revision of the HIPAA (Health Insurance Portability and Accountability Act) laws, commonly referred to as the privacy laws, in 2004.

In short, the updated HIPAA laws make it illegal for doctors or other personnel to release medical information to anyone other than the patient without proper consent. This updated law is very restrictive and includes relatives, close family members and even the spouse. If someone is unconscious at the time they are admitted to the hospital, it is illegal for the doctors to release information about that individual to anyone without a current advanced health care directive. If the health care directive was created prior to the law change in 2004 (which requires certain criteria to be stated in order for it to be compliant), then it must be updated.

The HIPAA laws also affect one’s trust and power of attorney for finances. Both of these documents allow the appointee to make decisions on behalf of the creator when he or she becomes incapacitated. However, as a protection to the creator, most of these documents require that two doctors certify that the creator is incapable of making their own decisions. If the creator doesn’t have a current advanced health care directive, then the doctors cannot legally release this information. If the doctors cannot release this information, then the appointees have no ability to prove that the creator is incapacitated. If they cannot prove that the creator is incapacitated, then the documents are of no value since they require the appointee to prove that the creator is incapacitated before the document will allow them to make decisions for them.

Unfortunately, if an appointee finds themselves in this predicament, they will most likely need to get permission from the court in order to act. This is the last thing they will want to do at a time when a loved one needs help the most.

Living Will

This is the legal document that allows an individual to make their wishes known ahead of time as to whether they want to remain on life support. If an individual does not wish to remain on life support, these wishes need to be stated in writing beforehand. Otherwise, it may be illegal for the doctors to do anything other than allow the individual to remain in their current state even if there is no hope that he or she will regain consciousness.

The documents discussed in this article certainly are not the only ones that should be considered, and I could elaborate more on the intricacies each one. However, the main purpose of this article is to provide a basic primer about the purpose of these documents.

These documents should only be drafted by an attorney who has experience in this type of practice. I do not recommended that an individual draft his or her own documents, even with the do-it-yourself kits available for a nominal fee. Each individual’s situation is unique and every question that requires an answer has ramifications that should be discussed and understood first. Only a professional who is experienced with these documents can thoroughly assist in explaining these ramifications.