Financial Advice for Retirement, Social Security, IRAs and Estate Planning

What Will and Estate Planning Documents and Estate Planning Forms Do You Need and Why Are They Important?

Last update on: Jun 17 2020
Estate Planning

Estate planning is more important than ever.

Estate planning is about seeing that your hard-earned wealth goes to those you want to have it, and in the most efficient way possible. Many people left their loved ones in difficult straits because they didn’t realize that, and many more are likely to do so in the coming years.

Estate planning involves using documents and forms such as a will, one or more trusts, durable power of attorney, letter of intent, health care power of attorney, advance medical directive, springing power of attorney, beneficiary designation forms and others. These forms are used to implement a plan to reduce family conflicts and reduce waste from high expenses, delays, probate, mismanagement, creditor claims and more.

 

Estate Planning Documents/Forms Needed

The following documents are used most frequently and are essential to most estate plans:

  1. Last Will and Testament
  2. Revocable living trust
  3. Pour Over Will
  4. Advance Medical Directive / Living Will / Health Care Power of Attorney
  5. Financial Power of Attorney
  6. Other Trusts
  7. Beneficiary Designation Forms
  8. Letter of Intent
  9. Digital Assets Details
  10. List and Details of Financial Accounts and Assets
  11. Other Important Documents

 

Estate Planning Documents/Forms: Last Will and Testament

The will is one of the primary documents in every estate plan, even if you don’t have substantial assets. This estate planning document ensures that a person’s property is distributed according to his or her wishes. The will contains a detailed list of instructions as to how your property should be distributed.

This estate planning document allows you to determine what happens to possessions with financial or sentimental value.

This estate planning document also contains provisions for designating a guardian if you have minor children.

A person also can include any funeral provisions in the last will. These instructions are binding on survivors in some states but not in all states.

In the absence of a will, a probate court names the executor for your estate and makes other decisions for you.

If you utilize a Revocable Living Trust (described below) as part of your estate planning, then the will is only used as a safety net to cover assets that were not transferred to the trust. This is known as a Pour Over Will.

More on the Will: How to Craft the Perfect Will for your Estate Plan

 

Estate Planning Documents/Forms: Revocable Living Trust

Why a Revocable Living Trust Is Important in Estate Planning

A revocable living trust (also called a living trust) is created to hold ownership of most of an individual’s assets.

The living trust has advantages in three phases of the trust creator’s life: his lifetime, possible incapacitation and what happens after his death.

 

Functions of a Revocable Living Trust

The primary reason most revocable living trusts are created is to avoid probate. Assets held by a trust are distributed according to the terms of the trust. The trust isn’t subject to probate and isn’t filed with the court. The trust, in effect, serves as a will substitute for assets owned by the trust.

More Probate Resources: To Probate or Not to Probate

This trust also protects the privacy of its creator and beneficiaries. A revocable living trust is a private document and remains so, because unlike a will it is not subject to probate and isn’t filed with public records. Your assets and whom you have chosen to leave your estate to remain private.

The trust is revocable, meaning the trust creator maintains the right to change its terms or completely revoke it. The trust creator can reclaim assets placed in a revocable trust. He can divert the trust’s income to himself or another beneficiary, sell the assets, or put more assets into the trust.

A revocable living trust should specify what happens if the trust creator becomes mentally incapacitated and can no longer handle his and the trust’s affairs. The trust documents should name a successor trustee, someone to step in and take over management of the trust if the trust creator is determined to be mentally incompetent. In this way, the revocable living trust substitutes for a financial power of attorney.

The successor trustee can then manage the trust creator’s finances and the assets that have been placed into the trust.

The trust creator and the revocable living trust share the same social security number. Income and gains of the trust are reported on the creator’s income tax return as though they were earned in the creator’s name. The terms of a revocable trust usually give the creator, who also serves as trustee, the right to do anything with trust property that an outright owner of the property can do.

More on Living Trusts: Pros and Cons of Power of Attorney versus Living Trusts

 

Estate Planning Documents/Forms: Pour-Over Will

A pour-over will (as mentioned above) is an estate planning document that directs some or all of the assets in the estate to be transferred to an existing trust. Most often, the trust that receives assets from a pour-over will was established as a revocable living trust during the decedent’s lifetime. The trust usually is converted into an irrevocable trust upon the death of the trust creator.

A pour-over will works together with a trust to provide a way to minimize the probate process and maximize privacy. For example, a couple wishes to distribute an estate to their children and grandchildren. They establish a living revocable trust and transfer most of their assets to it. Along with the trust, the couple drafts pour-over wills directing any remaining assets to be added to the trust after they die. When the husband passes away, his car, which the couple titled only in his name, transfers into the trust. The wife still acts as a trustee. When the wife passes away, assets that were in her name get placed into the trust. After the husband and wife die, a named successor trustee manages or distributes the assets as outlined in the trust’s terms.

 

Estate Planning Documents/Forms: Advance Medical Directive or Medical Power of Attorney

An advance medical directive allows you to designate a health care agent to make medical decisions on your behalf when you cannot make them.

An advance medical directive may go by different names in different states, such as:

  • Medical power of attorney
  • Medical directive
  • Health care power of attorney
  • Designation of health care surrogate
  • Durable power of attorney for health care

More Medical Document Resources: How to Make Health Care Directives Work

 

Estate Planning Documents/Forms: Living Will

A living will is a written set of instructions that informs a person’s physician whether or not the person wishes to receive life-sustaining procedures in certain circumstances. This estate planning document also provides members of your family with guidelines to follow if you become terminally ill.

 

Estate Planning Documents/Forms: Financial Power of Attorney

In a financial power of attorney, you appoint one or more people to manage your financial affairs. In most cases the person, known as an agent, manages the affairs when you are disabled or otherwise unable to perform the actions. But many people, as they get older, appoint agents because they want or need help and want to see how the person will perform the job.

This estate planning document comes in two forms:

  1. Durable Power of Attorney
  2. Springing Power of Attorney

 

Estate Planning Documents/Forms: Durable Power of Attorney

A durable power of attorney activates as soon as you sign it. A durable power of attorney is intended to be used when the person executing it is unable to make decisions or handle the affairs, but legally it takes effect as soon as it is signed.

This estate planning document gives your agent the power to take any actions specified in the document just as you can. But you don’t have to give the agent a general power of attorney. If you only want the agent to be able to take certain actions or want to disallow certain types of actions, you can give a limited power of attorney. The disadvantage of a limited power of attorney is you can’t fully anticipate the future. Your inability to act on your behalf could last longer than you anticipate or necessitate actions you didn’t expect.

The principal can revoke a durable power of attorney whenever he or she chooses.

 

Estate Planning Documents/Forms: Springing Power of Attorney

This estate planning document allows you to appoint an agent to transact business on your behalf.

A springing power of attorney activates when an estate holder passes away or becomes incapacitated and can no longer manage their accounts.

This estate planning document won’t be triggered if the estate holder is capable of handling his or her own affairs. Only a minority of states recognize the validity of a springing power of attorney.

More Power of Attorney Resources: Power of Attorney: The Most Important Document in your Estate Plan

 

Estate Planning Documents/Forms: Other Trusts

Why a Trust Is Important in Estate Planning

Trusts are created to provide legal protection for the trustor’s assets, to ensure those assets are distributed according to the trustor’s wishes, to save time, to reduce paperwork and to avoid or reduce inheritance or estate taxes. A trust also can provide professional management of assets and other benefits.

 

Why a Bypass Trust Is Important in Estate Planning

A bypass trust is created in the will and goes by other names, such as the A/B trust. In the standard estate plan that includes a bypass trust, the trust receives a portion of the estate no more than the federal estate tax exempt amount. The rest of the estate goes to the surviving spouse. This makes the entire estate pass free of federal estate taxes.

The terms of the bypass trust are that it pays income and principal to the surviving spouse as needed to maintain his or her standard of living. After that spouse passes away, the remainder of the trust benefits the children of the trust creator or other beneficiaries he or she named in the trust agreement.

The bypass trust is less important as a tax planning strategy than it was before most estates were exempted from the tax by the 2017 tax law. Now, the bypass trust still has value. The bypass trust can ensure that the surviving spouse is taken care of, but any remaining assets go to beneficiaries intended by the trust creator. The bypass trust also can ensure professional management of assets, shield assets from creditors and protect the assets from fraud, scams and financial abuse.

More Estate Tax Information: Estate Taxes

Estate Planning Bypass Trust Objectives

  • Increase the use of the decedent’s estate tax exclusion amount to minimize estate tax when the surviving spouse dies.
  • Ensure that the decedent spouse’s property will be distributed according to the decedent’s wishes.

More about Trusts: Types of Trusts and Reasons for Using them

 

 

Estate Planning Documents/Forms: Beneficiary Designation Forms

Beneficiary designations determine who inherits or benefits from certain types of assets after the death of the original owner. Beneficiary designations override any information regarding inherited assets provided in your will. Assets governed by these forms avoid probate. But if you don’t designate one or more individuals as beneficiary of the account, the estate might be deemed the beneficiary. Then, the account would go through probate.

Beneficiary designation forms are used most often with qualified retirement accounts (such as 401(k)s and IRAs), annuities and life insurance.

You need to ensure that your current beneficiary designations reflect your most recent wishes because your will cannot override them.

The designated beneficiary needs to make a claim to receive assets left to him or her. That’s why it’s important that your beneficiaries know about their status or that your executor has access to the beneficiary designation forms. The company that manages the assets supplies the claim form. The form should be returned with a copy of the account holder’s death certificate.

 

Estate Planning Documents/Forms: Letter of Intent

A letter of intent (LOI) is a document a person leaves to his or her executor or beneficiary expressing what they want done with an asset after they pass away or become incapacitated.

LOIs generally are not legally binding on the executor or anyone else but often are respected and used to guide decisions. An LOI informs a probate judge of a person’s intentions and may assist in the distribution of a person’s assets if the willis deemed invalid.

A letter of intention often is used regarding the disposition of special types of assets, such as collections. The LOI also can be used to give instructions regarding pets and other items that merit special instructions that aren’t appropriate to include in a will.

 

Estate Planning Documents/Forms: List and Details of Digital Assets

A list of all digital accounts including user ids and passwords including your computer, digital photos, cloud accounts, and online accounts such as Facebook, Google, Twitter, YouTube, etc.

 

 

Estate Planning Documents/Forms: List of Financial Accounts and Assets

You should have a list of financial accounts that heirs might need to access.

___ Bank and brokerage accounts

___ 401(k) accounts

___ IRAs and Roth IRAs

___ All automatic payments including list of payees

___ Safe-deposit box

___ Pension documents

___ Annuity contracts

___ Savings bonds (with copies of the bonds)

___ Life insurance policies

___ Long Term Care insurance policies

If there are online usernames and passwords that someone will need to access, print out a list, stash it in a safe or secure location, and make sure that your executor or heirs know where to find it.

Estate Planning Documents/Forms: Other Documents

Other paperwork that, if applicable, can be necessary for executor, trustee, or heirs:

___ Previous year’s tax returns

___ Housing and land deeds

___ Mortgage accounts

___ Proof of loans made

___ Vehicle title documents

___ Partnership, business and corporate operating agreements

___ Marriage license and/or divorce papers, if applicable

___ Military discharge information

___ Contact Information: Names and current addresses for all people named in the above documents, and the contact information for estate attorney and CPA (if applicable) who will be handling the estate.

Estate Planning Checklist

Let me finish with a link to the Retirement Watch comprehensive Estate Planning Checklist

 

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