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April 18, 2022 | money-management

Estate Planning Documents and What They Mean

Katie Duncan

Finance Writer

Estate planning can be a hard topic to talk about. After all, nobody likes to think about the end of their life and what will happen after they are gone. However, taking the time to get your affairs in order can save your loved ones a lot of trouble in the event of your death.

So where do you start?

There are several estate planning documents you may need, regardless of your age, health, or wealth. In this article, we’ll discuss five basic documents that can put you on the right track with your estate plan.

5 Estate Planning Documents to Know

While this certainly isn’t an exhaustive list of estate planning documents, these are among the most common and most important.

1. Durable Power of Attorney

A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is ready to look after your financial affairs when you can't, your property may be wasted, abused, or lost.

A DPOA allows you to authorize someone else to act on your behalf, so they can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes. A durable power of attorney is effective immediately and remains in effect even if you become physically or mentally incapacitated.

Note that not all powers of attorney are the same. Here are a few common ones you may see and how they differ:

  • General power of attorney: A general power of attorney is effective unless you become mentally or physically incapacitated, in which case it is voided.
  • Springing power of attorney: A springing power of attorney, sometimes known as a conditional power of attorney, is not effective until you have become incapacitated.
  • Limited power of attorney: A limited POA, also referred to as a special power of attorney, gives the agent the authority to handle only a specific matter or for multiple matters for a limited period of time.

Note that some states may have specific laws regarding power of attorney. These documents can be drafted by an attorney and must be signed by a notary public.

2. Advance Medical Directives

Advance medical directives let others— like doctors, hospitals, or care facilities— know what medical treatment you would want or allows someone to make medical decisions for you in the event you can't express your wishes yourself. If you don't have an advance medical directive, medical care providers must prolong your life using artificial means, if necessary.

There are three types of medical directives. Like power of attorney, states may have specific laws regarding these documents. You may find that one, two, or all three types are necessary to carry out your wishes for medical treatment. Just make sure all documents are consistent.

  • A living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, one can be used only to decline medical treatment that "serves only to postpone the moment of death." In those states that do not allow living wills, you may still want to have one to serve as evidence of your wishes.
  • A durable power of attorney for health care (known as a health-care proxy or medical power of attorney in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will or won't have.
  • A "Do Not Resuscitate" order (DNR) is a doctor's order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital.

Having these documents in place can make tough decisions easier for your loved ones and can ensure that your wishes are carried out.

3. Will

A last will and testament is often said to be the cornerstone of any estate plan. The main purpose of a will is to disburse property to heirs after your death. If you don't leave a will, disbursements will be made according to state law, which might not be what you would want.

Two other important things that a will states are:

  1. An executor: You can name the person (executor) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose.
  2. Legal guardian(s) for your children: You can name a legal guardian for minor children or dependents with special needs. If you don't appoint a guardian, the state will appoint one for you.

Keep in mind that a will is a legal document, and the courts are very reluctant to overturn any provisions within it. Therefore, it's crucial that your will be well written and articulated, and properly executed under your state's laws. It's also important to keep your will up-to-date.

4. Letter of Instruction

A letter of instruction (also called a testamentary letter or side letter) is an informal, nonlegal document that generally accompanies your will and is used to express your personal thoughts and directions regarding what is in the will.

It may also include or about other things, such as your burial and funeral wishes or where to find other documents. This can be the most helpful document you leave for your family members and your executor. Unlike your will, a letter of instruction remains private. Therefore, it is an opportunity to say the things you would rather not make public.

A letter of instruction is not a substitute for a will. Any directions you include in the letter are only suggestions and are not binding. The people to whom you address the letter may follow or disregard any instructions.

5. Living Trust

A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it's meant to function while you're alive. You control the property in the trust, and, whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.

Not everyone needs a living trust, but it can be used to accomplish various purposes. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate.

Depending on your situation and your state's laws, the probate process can be simple, easy, and inexpensive, or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas.

Further, probate court takes time, and your property generally won't be distributed until the process is completed. A small family allowance is sometimes paid, but it may be insufficient to provide for a family's ongoing needs. Transferring property through a living trust provides for a quicker, almost immediate transfer of property to those who need it.

Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management.

Finally, avoiding probate may be desirable if you're concerned about keeping private information out of the public eye. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not.

Here are a few things to keep in mind when it comes to living trusts:

  • Although a living trust transfers property like a will, you should still also have a will because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children.
  • There are other ways to avoid the probate process besides creating a living trust, such as titling property jointly.
  • Living trusts do not generally minimize estate taxes or protect property from future creditors or ex-spouses.

Not sure if a trust is right for you? A financial planner or estate planning attorney will be able to point you in the right direction.

Get Started Today

The most challenging part of estate planning is getting started. Tomorrow isn’t promised, so the best time to start your comprehensive estate plan is today. Whether you’re 30 or 80, getting these important documents in order is one of the best things that you can do for your family and friends. To learn more about how you can transfer financial assets to a loved one, reach out to CUSO Financial Services, L.P.*

* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

CUSO Financial Services, L.P. (CFS) does not provide tax or legal advice. For such guidance, please consult your tax and/or legal advisor.

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