August 18, 2023

A Guide to Essential Estate Planning Documents

Comerica Wealth Management

A Guide to Essential Estate Planning Documents: Wills,Trusts, Power of Attorney and More

Key Takeaways:

  • Without a well-defined estate plan, you risk losing control over key decisions in the case of incapacity or death.
  • The probate process can be costly and time-consuming. By investing in a well-crafted will or revocable trust, you can minimize these burdens for your loved ones.
  • Documents, such as a will, revocable trust, advance health care directive and power of attorney ensure that assets are distributed according to your wishes and provide legal authority for making health care and financial decisions.

Everyone has an estate.

No matter where you are in life, you will need to plan for what happens to that estate when you’re no longer around to control and use it. Attorneys and financial advisors often recommend that clients protect their assets by establishing an estate plan. But what constitutes a complete estate plan? Why are these documents important?

Let’s look at four documents that should be a part of every estate plan: a will, a revocable trust, an advance health care directive and a power of attorney.

Components of a Complete Estate Plan

Will

A will is a document that states your final wishes. It also outlines how you want them to be carried out upon your death. Use a will to leave detailed instructions about what should happen to your assets. This includes:

  • Who will receive your assets (beneficiaries)
  • How beneficiaries will receive them (outright or in trust)
  • When they will receive them (either immediately or over time)

A will names an executor, who becomes the legal representative of the estate at your death. You can also name a guardian (or guardians) to care for your children should both parents pass away before the children reach the age of majority. Dying intestate, or without a will, results in your assets being divided based on predetermined rules set by your state of residency. This reduces the amount of control you have on the terms of distribution. Ultimately, your will has to go through probate, a court-supervised process that authenticates your will and determines when and how to distribute your estate. The probate process involves identifying, locating and calculating the value of your assets and paying any debts or taxes for which you are responsible. Probate can be expensive, reaching tens of thousands of dollars in costs. It’s also time-consuming. You can drastically reduce the time and expense by putting together a well-written will prior to passing.

A well-written will minimizes the costs, time commitment and impact of the court-supervised probate process.

Revocable Trust

A revocable trust (or “living trust”) is an alternative route for distributing your assets following your death. One of its primary benefits: you get to avoid probate. Unlike wills, which take effect only on death, revocable trusts are effective immediately when signed and funded. Additionally, a revocable trust:

  • Can save you significant court fees and administrative burdens by avoiding the probate process, so long as the revocable trust is funded
  • Allows you, the settlor, to control the property in the revocable trust, as well as the terms of the revocable trust
  • Offers continuity of management if you become disabled, avoiding total reliance on durable powers of attorney
  • Creates one holding place for all your property
  • Distributes property after your death
  • Offers privacy for you and your loved ones (a revocable trust is not a public record, but a will is)
  • Is easy to create and maintain and can be easily altered or amended
  • Has no adverse lifetime gift or income tax consequences

Setting up a revocable trust requires careful planning and specific legal documents

The primary document is the trust agreement, sometimes referred to as a declaration of trust. This agreement outlines the terms of the trust, including the designation of the trustee, successor trustee, beneficiaries, and the provisions for managing and distributing assets. The trust agreement must be signed and notarized to be legally binding. In addition to the trust agreement, you'll need to prepare deeds or other transfer documents to move assets into the trust, such as real estate deeds, bank account change forms or brokerage transfer documents. Consulting with an estate planning attorney or legal professional is advisable to ensure that all documents are properly drafted and executed to reflect your specific wishes and comply with your state's laws.

Revocable trusts are an alternative route for distributing your assets following your death to avoid probate.

A Revocable Trust with a Pour-Over Will

While a revocable trust is preferred to a will, it does not render a will obsolete. Wills may be established to work in coordination with a revocable trust established during your lifetime. This type of will is called a pour-over will.

A pour-over will documents that any property not in the name of the revocable trust be distributed to the trustee of the revocable trust. This creates an extra level of protection in the event you did not transfer all your assets to your revocable trust during your lifetime. A pour-over will is also necessary to name guardians for any minor children.

While a revocable trust is preferred to a will, it does not render a will obsolete.

Advance Health Care Directive

An advance health care directive is effective upon incapacity. And it accomplishes two goals. First, it appoints an agent with legal authority to make health care decisions on your behalf. Second, it provides instructions to that agent regarding your health care wishes, including end-of-life decisions. This scenario may be difficult to think about, but it’s an important protective measure. Your agent has the power to 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, life-or-death decisions. Lastly, advance health care directives typically include a HIPAA form, which addresses the use and disclosure of your health information.

An advanced healthcare directive is effective upon incapacity.

Power of Attorney for Finances

A durable power of attorney for finances is a legal document that grants a designated agent the authority to manage your financial affairs outside of a revocable trust. This includes responsibilities such as:

  • Overseeing retirement account assets
  • Filing tax returns
  • Making financial gifts
  • Handling health insurance coverage

If certain real property or investments are not included in the revocable trust, the agent can also manage these assets, and may even transfer them to the trustee of the revocable trust, consolidating financial management.

This arrangement allows for seamless financial oversight, especially when the same individual serves as the successor trustee, executor and financial agent. By clearly defining these roles and responsibilities, a durable power of attorney for finances ensures that your financial matters are handled according to your wishes, even if you become incapacitated or are otherwise unable to manage them yourself.

A durable power of attorney for finances ensures your financial matters are handled by a trusted individual if you become incapacitated.

Additional Documents

Inventory of Assets and Professional Contact List

Creating an accurate inventory of your assets is a crucial step in the estate planning process. This inventory should encompass a detailed list of all your personal assets, including bank accounts, stocks, life insurance, real estate, along with corresponding account numbers, passwords, and physical locations. By providing a clear road map of your financial landscape, this list aids your spouse, heirs, and personal representatives in the eventual administration of your estate. Additionally, it's advisable to include contact information for any professionals you collaborate with, such as your planning attorney, CPA, financial advisor, business partners, and lenders. This information ensures that these essential contacts are readily accessible in an emergency.

Together, an asset inventory and professional contact list form a comprehensive guide to your estate, simplifying management and providing peace of mind for both you and your loved ones. The inventory of assets, your contact list of professionals and your estate planning documents should be updated periodically and stored in a secure location. Keep a copy in a safe deposit box or an in-house storage system, as well as an electronic copy. Also provide a copy to the people named in the documents so they can act on your behalf, when or if required. While this process is time-consuming, it will make many aspects of your estate easier and more successful.

An accurate asset inventory list provides a clear road map for your spouse, heirs and personal representatives.

Life insurance trusts

An irrevocable life insurance trust (ILIT) is a common tool in estate planning, designed specifically to hold ownership of a life insurance policy. This arrangement offers several benefits, especially with the anticipated decrease in the federal estate-tax exemption at the end of 2025, making ILITs potentially more relevant.

An ILIT can either be the original purchaser of a life insurance policy or acquire ownership of an existing one. The main advantage of housing a life insurance policy within an ILIT is that the policy's value is excluded from the gross estate. This means it's not considered when calculating federal (and possibly state) estate tax liability. For this exclusion to be effective, the ILIT must be both the owner and the beneficiary of the life insurance policy. While the insured individual is alive, the trustee of the ILIT handles all policy-related matters, including premium payments and overall administration. Upon the insured's death, the ILIT receives the death benefit from the policy. The ILIT can then distribute the proceeds to beneficiaries or continue to manage and invest them, according to the trust's terms. Importantly, the ILIT should not be used to directly pay any estate tax liability. However, it can provide the estate with cash by purchasing assets or lending money to pay estate taxes. This strategy helps to prevent the need for forced sales of estate assets to non-family members, preserving the estate's value. Overall, an ILIT offers a strategic way to manage life insurance in the context of estate planning, providing flexibility, tax advantages, and protection against undesired asset liquidation.

An ILIT is a type of trust that is specifically designed to own a life insurance policy.

The importance of estate planning documents

Whether it's substantial wealth or modest assets, every individual holds an estate. Planning for the future of that estate is essential. Creating legal documents such as a pour-over will and a revocable trust can streamline the management of your estate and alleviate the stress of the probate process. These tools foster family harmony by minimizing conflicts and ensuring a swift and orderly transfer of assets. Without proper planning, including a power of attorney and an advance health care directive, decisions about your care and assets could fall to a court-appointed individual if you become incapacitated. This person may not align with your wishes, which could lead to undesirable outcomes. Establishing a revocable trust allows a trustee, whom you choose, to manage assets within the trust.

A power of attorney empowers an agent to act on your behalf for matters outside the trust, and a medical directive authorizes an agent to make health-related decisions if you are unable to do so. These documents collectively safeguard against the lengthy and expensive process of conservatorship and probate. Lastly, employing an Irrevocable Life Insurance Trust (ILIT) can further enhance your estate planning strategy by reducing estate taxes and improving liquidity. Together, these planning tools offer a comprehensive approach to securing your legacy and ensuring that your wishes are carried out in a manner that reflects your values and goals.

Estate planning tools, such as a pour-over will, revocable trust, power of attorney, advance health care directive, and an Irrevocable Life Insurance Trust (ILIT), organize and protect your assets.

Summary

Estate planning should be a top priority. With the right documents in place, you can protect everything from the distribution of assets upon your death to provisions for incapacity. Through the strategic use of tools like a pour-over will, revocable trust, power of attorney, advance health care directive, and an Irrevocable Life Insurance Trust (ILIT), you can ensure a streamlined and conflict-free management of your estate, protecting your wishes and providing assurance to you and your loved ones.

Estate planning should be a top priority.

Navigating the estate planning process?

Work with our team at Comerica. Our advisors have decades of experience helping clients from all income levels protect their family and their assets. Contact your Comerica Relationship Manager or request to speak with a Comerica Professional today.

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; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. 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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