Estate planning fundamentals: Key documents and fiduciaries

This is the first blog in a three-part series, designed to help you understand estate planning fundamentals from creating the documents to implementing the plan. In this first part, we focus on the documents that make up an estate plan and the fiduciaries who will carry out your estate plan. In the next two parts, we will look at ways to dispose of your assets and how to implement your plan once it is executed.

Part two: Beneficiary and distribution decisions Read
Part three: Implementing your estate plan Read

Estate planning can be a daunting task and one many people want to avoid. After all, it necessarily leads to the contemplation of one’s disability and death — not everyone’s favorite topics. Yet, everyone should consider where they want their assets to go at death and who they want to manage those assets in the event they no longer can do so. These can be difficult questions to answer, but it is important to think about them and then have your attorney capture the answers in the appropriate legal documents.
The documents:

If you have never created an estate plan or haven’t looked at your estate plan in several years, it can be helpful to first understand what documents make up an estate plan and the purpose of each. There are four core documents that typically make up an estate plan:

Will–  A will outlines how your assets will be distributed after your death. It allows you to name guardians for minor children and an executor or personal representative to manage your assets after you die.

Living or revocable trust – A living trust holds your property during your life and/or receives assets at your death pursuant to your will. It specifies how your assets should be distributed at your death and names a trustee to manage those assets in the event of disability or death. Assets held in the trust can avoid the probate process, and the terms can be more private than a will (which will be filed with the court at your death).

Durable power of attorney– This document grants someone the authority to make financial decisions on your behalf. The power of attorney may be effective from the moment you sign it, or it may be activated by a specific event such as disability.

Healthcare power of attorney– A healthcare power of attorney (also called a healthcare proxy, healthcare agent or healthcare directive) allows you to appoint someone to make medical decisions for you if you are unable to do so.

In addition to the above, there are other documents that can be part of your plan depending on your assets, the state where you live and the attorney’s preferred approach. These documents include:

Personal property memorandum– This document provides guidance or direction (depending on the state) to your executor or trustee regarding who you wish to receive particular items of personal property. It is typically easier to change than your will or revocable trust.

Beneficiary designations – Certain assets, such as life insurance policies and retirement accounts, pass according to beneficiary designation forms rather than by a direction in your will or revocable trust. If you have assets passing pursuant to beneficiary designations, it is important to coordinate those beneficiary designations with your will and revocable trust.

Living will– A living will outlines your preferences regarding certain aspects of end-of-life care, rather than leaving them up to your healthcare agent. Although it is difficult to address every contingency, living wills typically cover pain relief and whether you would want a ventilator, feeding tube or resuscitation. These provisions may also be included in your healthcare power of attorney.

HIPAA release – Based on the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this document allows your health care agent and potentially other fiduciaries the right to access your medical records. This language may also be included in your healthcare power of attorney.
The fiduciaries:

A fiduciary is an individual or institution appointed under your estate planning documents to carry out your plan. Here are some key points to consider when appointing a fiduciary:

1. Types of fiduciaries

Executor (also called a personal representative) – The executor is the individual or institution responsible for administering your will and distributing the assets owned in your individual name and not governed by a beneficiary designation.

Trustee– A trustee is the individual or institution that manages the assets held in a trust. The trustee invests the trust property and makes distributions of income and principal to beneficiaries under the terms of the trust document.

Guardian of minor children– A guardian is the person who takes care of children during minority if both parents are deceased.

Agent under power of attorney – An agent under a durable power of attorney handles financial matters on your behalf.

Healthcare agent– This type of agent makes medical decisions for you if you are unable to do so.

1. Choosing the right fiduciary

The role of a fiduciary can sound simple enough, but selecting a fiduciary is a complex decision with many nuances. The following considerations may help you fill these important fiduciary roles:

Trustworthy – You should select an individual or institution you trust implicitly, as they will have significant control over your financial and/or healthcare decisions.

Skills – The role of a fiduciary can involve complex financial and/or health matters so it is important to choose an individual or institution that can competently handle those matters or who will be willing to build a team of advisors — e.g., an attorney, accountant, investment manager — to help them handle those matters.

Also, the fiduciary you appoint in one role may not be the right choice for all fiduciary roles. For example, the person you may want to make healthcare decisions for you may have a strong background in the medical field, but not financial matters, so you can choose someone else to handle the financial decisions. The reverse is also true: the person you may want to handle your financial matters may not be willing or able to make tough healthcare decisions.

Options – Fiduciaries are often one of the following: (i) family member, (ii) friend, (iii) lawyer,  accountant or other advisor, or (iv) corporate trustee. Each of these options should be considered in light of the responsibilities and skills of a fiduciary. For example, while a family member might be familiar with your beneficiaries, an institution with substantial fiduciary experience offers the expertise, objectivity and permanence that individual fiduciaries often cannot provide.

The fiduciary decision can be particularly difficult if you do not have an obvious family member or friend to name in one or more of those roles. In those situations, professional advisors or corporate fiduciaries are often good alternatives. While a corporate fiduciary will typically not act under durable and healthcare powers of attorney, there are organizations outside of bank and trust companies who are willing to take on these types of roles for a fee. If this is of interest to you, your local estate planning attorney or other advisors can help you find that type of service in your area.
Conclusion

Effective estate planning involves creating the essential planning documents and appointing fiduciaries under those documents who will act in your best interests to carry out your plan. By doing so, you can ensure that your wishes are honored and that your loved ones are taken care of. It is important to consult with an estate planning attorney to navigate the complexities of the process and ensure that all documents are legally sound and consistent with your intentions.

Theresa Marx is the director of wealth planning and a senior wealth strategist for CIBC Private Wealth in Chicago, with over 20 years of industry experience.