What is estate planning?


Estate planning is the creation of legally binding documents to control a person’s personal and financial affairs when they are dead or incapacitated.

Put another way, the purpose of estate planning is, as the name suggests, to plan what will happen to a person estate (meaning their money and property) when they are dead or no longer able to control their finances.

An estate plan typically comprises a living trust, a pourover will, a power of attorney for financial affairs, and an advance health care directive.  Although there are other documents related to the estate planning (such as abstracts of trust, deeds, or community property agreements), these four documents form the core of most estate plans.

A living trust is often the most import document in an estate plan.  A trust is a relationship among three parties—the settlor (who creates the trust), the trustee (who runs the trust), and the beneficiary (who receives the benefits of the trust).

While the settlor is alive and well, he usually serves in all three roles—he is the trustee, the settlor, and the beneficiary.  For most of the settlor’s life, the existence of the trust is not a significant factor in his financial or personal affairs.  His tax situation doesn’t change, he is still liable to creditors, and he can do whatever he wants with his money.

A trust provides that when the settlor becomes incapacitated, the person he appointed as “successor trustee” takes over managing the trust.  Most trusts provide that the successor trustee takes over when a physician (or two) determines that the settlor can no longer manage his financial affairs.  From that point on the successor trustee manages the trustee for the settlor/beneficiary’s benefit.

When the settlor dies, the successor trustee distributes the settlor’s trust assets to the beneficiaries named in the trust.

A pourover will differs from a “simple will,” which is what most people think of when they think of a will.  In most wills, the person creating the will (the “testator”) names his or her beneficiaries.  So, for example, a husband and wife would typically write wills that say:  “When I die, I give all my property to my wife.  If my wife is deceased, I give all my property to my children in equal shares.”

A pourover will gives all the settlor’s estate to his or her living trust.  The dispositive provisions of a pourover will usually say something like:  “I give all my personal and real property to the trustee of the Jones Family Trust to manage in accordance with the terms of that trust.”

The purpose of the pourover will is to ensure that assets that the settlor fails to title in the name of the trust will be “poured over” into the living trust and pass according to its terms.  A pourover will is inappropriate unless the testator also has a living trust.

In a power of attorney for financial affairs, a person (the “principal”) names a person (an “agent”) to manage the principle’s non-trust assets if the principal becomes incapacitated.  Because the power of attorney is only effective over non-trust assets, the role of the agent will be limited because most of the person’s assets are in their trust, which will be controlled by their successor trustee if they become incapacitated.

Although many powers of attorney become effective only upon the incapacity of the principal, some powers of attorney are effective immediately, which allows the agent to act for the principal as soon as the power of attorney is signed.

In an advance health care directive, a person names an agent to make health care decisions for them if they are incapacitated.  Usually, this is a spouse or child.  The directive is of course ineffective if the principal can make their own health care decisions.

Creating an estate plan is crucial to avoiding confusion, conflict, and unnecessary expense when a person dies or becomes incapacitated.