Overview of Basic Estate Planning

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Attorneys and financial advisors often recommend that their clients establish an estate plan. What makes up a typical fundamental “estate plan?” Why are these documents so critical? The following addresses these two questions.

Components of a Typical Estate Plan

In most cases, an estate plan is comprised of 1) a pour-over will, 2) a revocable trust, 3) an advance health care directive, and 4) a power of attorney.

Will/Pour-Over Will

A will is a document that states what your final wishes are and how you want them to be carried out upon death. Most people use a will to leave instructions about what should happen to their assets after they die. This includes, for example, who will receive their assets (beneficiaries), how they will receive them (outright or in trust), and when they will receive them (either immediately or over time). A will names an executor/executrix, who becomes the legal representative of your estate at death. You also can name a guardian(s) who would take care of your children if both parents were to die before any minor beneficiaries turn the age of majority.

Dying intestate, or without a will, results in your assets being divided based on predetermined rules set forth by your state of residency. Having a will, at a minimum, can ensure that you stay in control of the terms of distribution. However, a will always goes through probate, a court-supervised process to authenticate your will and determine when and how to distribute your estate. The process involves identifying, locating and calculating the value of your assets and then paying any debts owed or taxes due. Probate can be very expensive, reaching tens of thousands of dollars in costs, and greatly time-consuming. It is best to avoid probate whenever possible. Being proactive by establishing and funding a revocable trust avoids probate by having a trustee who you appoint to manage and distribute your assets, as opposed to the court.

Revocable Trusts

As previously mentioned, revocable trusts are an alternative route for disposing of one’s assets that do not require probate. Assets can include real estate, valuable possessions, bank accounts and investments. Unlike wills, which only take effect on death, revocable trusts are effective immediately when signed and funded. Their terms can be changed anytime that circumstance or feelings change. Additionally, a revocable trust:

  • Can save significant court fees and administrative burden by avoiding the probate process (to the extent that the revocable trust is funded);
  • Allows the settlor to retain control of the property of the revocable trust, as well as the terms of the revocable trust;
  • Offers continuity of management in the settlor’s affairs upon disability (avoiding total reliance on durable powers of attorney);
  • Creates one receptacle for all the settlor’s property;
  • Distributes property after the death of the settlor;
  • Offers privacy for the settlor and his/her loved ones (i.e., a revocable trust is not a public record, whereas a will is);
  • Is easy to create and maintain and can be easily altered/amended; and
  • Has no adverse lifetime gift or income tax consequences

While a revocable trust is a better alternative to a will, it does not render a will obsolete. Wills may be established to work in coordination with a revocable trust established during the lifetime of the decedent. This type of will is called a pour-over will. A pour-over will provides at death, “that any property that passes through the will shall be distributed to the trustee of a revocable trust created during the decedent’s lifetime.” This provides an extra level of protection in the event you forget to fund your revocable trust during your lifetime. Furthermore, as mentioned above, a will is required to name whom you would like to act as guardian of any minor children.

Advance Health Care Directive

An advance health care directive establishes two objectives: (i) It appoints an agent with legal authority to make health care decisions on your behalf; and (ii) provides instructions to that agent regarding your health care wishes, including end-of-life decisions. The advance health care directive is effective upon incapacity. The agent can consent (or refuse consent) to medical procedures, consult with doctors regarding your health, and make a broad range of health care decisions for you. In most cases, your health care agent is your spouse first, then a close family member or very trusted friend who is not afraid to make difficult decisions that could be a matter of life or death. Lastly, advance health care directives typically include a HIPAA form, which addresses the use and disclosure of your health information.

Power of Attorney for Finances

The agent under a durable power of attorney for finances is responsible for any assets outside of the revocable trust (for example, managing your retirement account assets, filing your tax returns, making gifts and managing health insurance coverage). If you have not transferred all of your real property or investments into your revocable trust, the agent is responsible for managing those assets, as well, often by transferring them to the trustee of the revocable trust, where they can all be managed “under one roof.” Some people prefer to name the same person as successor trustee, executor and agent for finances, because there can be some overlap among these roles.

Inventory of Assets/Professional Contact List

Taking inventory of your assets is a large part of the estate planning process. An accurate asset inventory list provides a clear road map for your spouse, heirs and personal representative (typically your trustee) after you are gone, and is important for the final administration of your estate. What needs to be located are all your personal assets, such as bank accounts, stocks, life insurance, real estate, etc. As such, listing the asset, as well as including account numbers, passwords and the physical location of the asset, if applicable, as well as contact information for anyone you work with on these accounts, will be extremely helpful. Additionally, having a contact list of professionals, such as estate planning attorney, CPA, financial advisor, business partner, lender, etc., is necessary in the event of an emergency and otherwise.

The inventory of assets, your contact list of professionals, as well as your estate planning documents, should be updated periodically and stored in a secure location. Having a copy in a safe deposit box, as well as an in-house storage system, is one part of it. The other part is to provide a copy to the people appointed so that they have the necessary documents to act, if required. While this process is time-consuming and tedious, it will make many aspects of your estate easier and more successful.

The Importance of These Documents

Everybody has an estate. Whether you are wealthy or working on building your assets, your estate is made up of everything you own. As such, you will need to plan for what happens to that estate when you are no longer around to control and use it.

Creating a pour-over will and revocable trust will help simplify the administration of your estate and reduce the stress, anxiety and uncertainty that arises from passing intestate. Having clear intent not only helps family harmony and avoids potential conflict, but also provides for an expedited and organized way to transfer assets. Furthermore, in the absence of a power of attorney and advance health care directive, a court appointee will make decisions on how your assets are used to care for you, should you become incapacitated. This means that someone whom you may not wish to be in control or may not know could be making decisions on your behalf. If you have a revocable trust, the trustee you have appointed could manage those assets on your behalf. If you have a power of attorney, the agent can sign on your behalf for anything outside of the revocable trust, and if you have a medical directive, the agent can give consent when you are unable to do so. All these documents help with incapacity and avoiding conservatorship, which, like probate, can be long and costly.

Getting your estate planning in order should be a top priority. This is true whether you are planning for the intentional and expedited distribution of your assets upon your passing, or if you are planning for incapacity and ensuring someone will be able to manage your affairs on your behalf without the involvement of conservatorship.

For more detailed information on creating your fundamental plan, please contact your Comerica Wealth Advisor.

Sara Dorosoti, Senior Wealth Planning Strategist, Comerica Wealth Management



NOTE: IMPORTANT INFORMATION

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.

Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, N.A.; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Comerica Securities, Inc. is a federally registered investment advisor. Registrations do not imply a certain level of skill or training. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.

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