When someone passes away, his or her property must somehow pass to another person. In the United States, any competent adult has the right to choose the manner in which his or her assets are distributed after his or her passing. (The main exception to this general rule involves what is called a spousal right of election which disallows the complete disinheritance of a spouse in most states.) A proper estate plan also involves strategies to minimize potential estate taxes and settlement costs as well as to coordinate what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event of death or disability. On the personal side, a good estate plan should include directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you know and trust would do that for you, and know when you would want them to authorize extraordinary measures and when you would prefer they do not.
Sadly, most people fail to do proper estate planning because they believe that they do not have "a lot of assets" or otherwise believe that their spouse and children can just come in and divide the assets by themselves. If you don't make proper legal arrangements for the disposition of your assets and affairs after your passing, the state's intestacy laws will dictate how your assets will be distributed. This can result in the wrong people receiving your assets as well as higher estate taxes.
If you pass away without establishing an estate plan, your estate will undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.
Your estate is simply everything that you own, anywhere in the world, including:
If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian is unable to serve or if both parents should meet an untimely fate together.
A comprehensive estate plan might include the following documents, prepared by an attorney, based on in-depth counseling to account for your particular family and financial situation:
A Living Trust can be used to hold legal title to and provide a mechanism to manage your property, real and personal. You or you and your spouse are the Trustee(s) and beneficiaries of your trust during your lifetimes. You also designate successor Trustees to carry out your instructions in case of death or incapacity. Your Living Trust is "revocable" which allows you to make changes and even to terminate it. Some of the benefits of a properly funded Living Trust are that it will avoid or minimize the expense, delays, and publicity associated with probate, and it can help minimize estate taxes. Read the FAQ section on Living Trusts for more information.
If you have a Living Trust-based estate plan, you also need a Pour-Over Will. For those with minor children, the nomination of a guardian must be set forth in a Will. The other major function of a Pour-Over Will is that it allows the executor to transfer any assets still owned by the decedent (and not the Trust) into the decedent's trust so that they are distributed according to its terms.
A Will, also referred to as a "Last Will and Testament", is primarily designed to transfer your assets according to your wishes. A Will also typically names someone you select to be your Executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a Guardian as well as alternate Guardians in case your first choice is unable or unwilling to serve. A Will only becomes effective upon your death, after it is admitted by a probate court.
A "Durable Power of Attorney for Property" allows your designated "agent" to carry on your financial affairs in the event that you become unable to do so. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you if you become incapacitated. This court process is time-consuming, expensive, emotionally draining, and often costs thousands of dollars.
There are generally two types of durable powers of attorney: an "immediate" durable power of attorney; or a "springing" durable power of attorney that only comes into effect upon your subsequent incapacity, as defined by you and your doctor. Anyone can be designated as your agent, usually your spouse, a trusted family member, or friend.
You should also appoint someone you trust to make medical decisions should you become incapacitated. This is done through a Durable Power of Attorney for Health Care or a Health Care Proxy, where you designate the person or persons to make such decisions for you. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent's decisions as if they were your own.