There are many different instruments and documents that can be included in an individual’s estate planning portfolio, such as a last will and testament, revocable living trusts, testamentary trusts, and more. However, there are five (5) key components that should be included in every estate plan, and we will discuss them below.
Revocable Living Trust
A trust essentially represents a relationship between the trustee, who holds title to the property, the beneficiaries for whose benefit the trustee manages the property, and the property that is put into the trust.
Think of a trust as a watering can with a lid and spout–the spout has a valve on it, so the flow through the spout is regulated. When property is put into the watering can through the open lid, it becomes trust property by giving trustee title to the property. Beneficiaries who have a present interest in the trust property are entitled to benefits at any given time, meaning that they benefit from what flows out of the can’s spout. The property that flows out of the spout is the income that is produced by the trust property, and the trustee controls the value and manages that income according to the settlor’s directions–these directions are the terms of the trust. The trustee is given the authority to turn the valve on or off, or to open it part way and to vary the amount of opening (i.e., the amount of trust assets that should be distributed to the beneficiaries and when). In doing so, the trustee must act in accordance with the trust terms.
In Texas, the default rule is a trust is deemed revocable unless the settlor expressly states otherwise in the trust document, meaning that its provisions can be altered depending on the wishes of the settlor during his or her lifetime. By setting up a revocable living trust, you can avoid your family having to go through the probate process upon your death. Ultimately, a trust will avoid the time and financial burden placed on your loved ones upon your death in administration and distribution of your estate.
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Last Will and Testament
A Last Will and Testament avoids your estate being subject to intestacy statutes, which distribute a decedent’s property when no valid will exists. A Will sets forth who will step into your shoes as your personal representative in order to pay your debts and obligations and distribute your assets, and instructs your personal representative on how to go about doing so. This is also the document that transfers to your Revocable Living Trust any assets that you do not transfer to your Trust during your lifetime. In addition to providing for your children financially, you can nominate a person(s) to become guardian of your minor children upon your death.
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Power of Attorney (Durable and Medical)
A Power of Attorney (POA) is a document that designates someone to step in and manage your affairs in the event you become incapacitated. A Durable POA designates someone to manage your finances, and a Medical POA authorizes someone to make decisions for your medical care if you are unable to make such decisions yourself. These documents are crucial in an effective estate plan, as it ensures your financial and medical well-being in the event of incapacitation.
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Living Wills and Advance Healthcare Directives
These are legal documents that explicitly specify your preferences for your medical care if you are unable to make such decisions yourself due to illness, serious injury, a coma, late-stage dementia, or other such conditions. A living will or advance healthcare directive ensures that you get the type of treatment you want and do not receive any medical treatment that you do not want, as well as eliminates confusion and any burden placed on your loved ones to make these decisions for you when the time comes.
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Beneficiary Designations
The final key component to an effective estate plan is designation of your beneficiaries–that is, who you want to receive your assets upon your death. Beneficiaries must be named in order for them to receive benefits that are paid directly to them without going through the estate, such as life insurance policies. Be sure to keep your beneficiary designations up to date to reflect your wishes.
An effective estate plan allows you to explicitly state your wishes and ensures that your estate is distributed in accordance with those wishes. Consult an experienced estate planning attorney today and give yourself peace of mind when it comes to your estate plan.