What Estate Planning Documents Should The Average Family Have in Place?
Updated: May 18
I have spent the last 8 years as an estate planning attorney. During that time, I have had the privilege of working with many estate planning clients. I would like to share some information regarding the basic estate planning documents that I believe every family should have in place. Estate planning is easy and can be very affordable (depending on who you hire to do it). Unfortunately, because people often don't take the time to set up their estate plan, I have also seen some tremendous mistakes made by good intentioned individuals. I will illustrate some of those mistakes at the bottom of this article.
Over the past decade, our firm has observed what estate planning needs the standard family has, and as a result we created what we call our "Standard Estate Plan". When I say the standard family, I mean any couple who has a net worth less than $23.4 million (or $11.7 million if single), does not have any children with special needs and doesn't have other especially unique circumstances. If you have unique circumstances, there are a variety of options available to you that go slightly beyond our standard plan.
For almost all of our clients, we draft the following documents as part of their standard estate plan:
1: Revocable Living Trust (generally a simple probate avoidance trust)
A revocable living trust is the best, and most common, way to ensure that your assets avoid probate upon your death. Your trust will specifically delineate to whom your property will be given upon your passing, when they will receive it and how they will receive it. You have complete control of this process and remain in control of your property during your entire lifetime. Maybe you want to let one child live in a home for their entire lifetime, or give one child the option to buy out your business. A trust lets you do all that. A properly drafted trust can protect your assets in many ways during your lifetime and make sure your heirs don't pay any unnecessary taxes or fees upon your passing. Another major benefit of using a trust is your heirs obtain a step up in basis on your property. This is explained more later on.
2: Last Will & Testament (or "Pour Over Will")
A Pour-Over Will is used for two primary purposes. First, to specifically appoint who you would like to raise your minor children should something happen to you and your spouse (if applicable). Second, a Pour-Over Will also acts as a safety net below your trust, minimizing any risk your estate may be contested. We never draft a will without a trust or a trust without a will, they work hand in hand.
3: Durable Financial Power of Attorney (with "springing power" restriction)
Our standard estate plan includes financial powers of attorney for each spouse. A financial power of attorney will give your chosen agent(s) the authority to act on your behalf in all financial or legal affairs should you ever become incapacitated or otherwise unable to act on your own. Because authorizing someone to act and sign on your behalf is somewhat risky, we also offer a "springing power" option that requires the verification of your physician before your agent is allowed to use the power of attorney.
4: Healthcare Directives (also known as a "Directives to Physician" or "Living Will")
A healthcare power of attorney will give your chosen agent the ability to gain access to medical records, sign medical documents and otherwise act on your behalf for medical related issues. Healthcare directives will allow you to make very important healthcare decisions now, including end of life decisions and what type of treatment you would like to receive. This will alleviate the stress of family being forced to make these decisions on your behalf, as well as ensure your choices are honored during the most stressful of times.
5: Certificate of Trust
A certificate of trust is a short form (4 page) version of your full trust. It is used to prove to someone that you have a trust, but without sharing all the private information in your full trust. For example, if you buy a new home the title company will ask if you have a trust and request a copy of it. This document is designed specifically for that purpose.
6: Assignment of Personal Property
This is a simple, but important, document. It transfers all of your tangible personal property (i.e. anything other than real estate, titles assets and financial accounts) into your trust. Instead of making a list of all the forks, knives, TVs and couches you own, this document simply puts it all in your trust.
7: Handwritten Gift List
This is another simple, but very important, document. This document allows you to write-in (by hand) specific gifts that you would like to go to specific people/organizations. For example, if you have promised your grandmother's wedding dress to one specific child, you can write that on this document. It is designed to be filled out and revised throughout your lifetime and provides a great deal of flexibility as things change.
8: Standalone Nomination of Guardian for Minor Children (if applicable)
If you have minor children it is crucial that you have an estate plan. You may think your sister will raise your kids if something happens to you and your spouse, but it isn't that simple. A court must approve guardianship and if you haven't formalized your desires in a legally compliant manner, a court may appoint someone you do not approve of. When there is life insurance, retirement accounts, a house and other assets that come with the children, you'd be surprised who might want to raise your kids. This document solidifies your wishes and allows you to place back-up choices in case something happens to your first choice.
9: HIPAA Waiver
A HIPAA Waiver authorizes specific individuals to obtain copies of your medical records and pay bills for medical expenses.
10: Funeral and Burial Instructions
This document allows you to make decisions regarding burial/cremation preferences, burial plots, funeral directives, as well as appoints agents to make all the arrangements. If you haven't yet decided on all this, don't worry, the document does not need to be fully filled out right away. The main component is you are selecting an agent to make those decisions for you in case you don't ever make them yourself. This is yet another way to alleviate stress from your loved ones during a very emotional time.
11: Deeds for Real Estate & Funding Letters
A trust works most efficiently only if you put your assets in the trust. As part of that process our office will draft a deed for your personal residence that transfers your home into your trust. Don't worry, you are not giving up any rights to your home and you can still sell it, mortgage it or do anything else with it that you would like. All this means is that when you die it will immediately transfer through your trust to your heirs without a probate (or court hearing) being required. We also provide letters for your financial accounts, retirement accounts and life insurance policies, instructing the account holders on what to do with those accounts. When you leave our office you will have everything you need so you don't have to chase it all down on your own.
If you are looking for estate planning, for a limited time we are offering our Standard Estate Plan for only $800 ($150 off our standard price). You can get started by clicking here and filling out the form on our website. The process is simple and can generally be completed in 48-72 hours.
Common Estate Planning Mistakes:
Not Using A Trust & Losing The Stepped-Up Basis:
A few months ago I had a client contact me about his recently deceased father who had, prior to passing, gone into the county recorder's office and deeded his home to my client and his siblings. This may not seem like an issue on the surface, but it is a very big issue. To illustrate why this is an issue we first need to understand some basic facts:
Dad bought his home and 10 acres in 1950 for $25,000. We call this $25,000 original amount the taxable basis in the property.
Dad's home and property are currently valued at $1,500,000. This is called the appreciated value of the property.
If a gift transfer of property is made from a living person to another living person we call that transfer an intervivos transfer. The person transferring the property is called a transferor, and the person receiving the property is a transferee.
If an individual transfers property through a trust (upon their death) the beneficiaries of the trust receive the property with a stepped-up basis, which would make the recipient's taxable basis in this example $1,500,000.
Because my client's father transferred the property while he was alive it is an intervivos transfer. As an intervivos transfer, my client and his siblings inherit the taxable basis of their father ($25,000). This means when my client sells the home he will need to pay taxes on the difference between his basis in the property ($25,000) and the appreciated value of the property ($1.5 million). Assuming they are taxed at the federal long term capital gains rate of 20% and then another 4.95% for the Utah tax, is means my client and his siblings will end up paying over $300,000 in taxes. Obviously there may be a bit more to the tax calculation here (such as lifetime gift tax allowances), but you get the idea. My client will pay a significant amount of taxes.
Now, imagine my client's father had set up a standard estate plan with a revocable living trust. How would that change things? The answer is my client would owe exactly zero in taxes. The reason is my client would have inherited the property (through the trust) and received a stepped-up basis in the property. It would be as if he had purchased the home for $1.5 million. As we only pay taxes on increases (or profits) that means when my client sells his fathers home for $1.5 million there would be no difference between his basis and the sell price, thus no taxes. A simple trust could have saved my client hundreds of thousands in taxes.
Only Wanting a Will & Not a Trust:
Trusts and wills perform similar functions - passing your property to your heirs after your death - so they are often confused with one another. Although somewhat similar, trusts and wills also perform different functions, which is why we include both in our standard estate plans.
There are virtually no downsides to using a revocable living trust to pass assets to your heirs, but often we see clients reluctant to use a trust because they don't believe they have assets significant enough to justify a trust. If you own a home (regardless of how much you owe on it) you will certainly want a trust. If you want your heirs to avoid probate, a trust is the easiest and most functional way to transfer all your property (including real estate) outside of probate.
Probate is the court process to transfer ownership of your assets to the people you would like them to go to (and sometimes people you don't). For example, the probate court would supervise the sale of your home and the distribution of the proceeds. Probate can have significant costs, is open to the public, and can cause a lot of delays. The average family we create a trust for is nowhere near being a millionaire. Trusts aren't just for rich people, they're for anybody who doesn't want the government involved in how their children receive the property they inherit.
Thinking You Don't Need An Estate Plan Yet
Most of our clients are either retired or nearing retirement. They certainly need an estate plan, but the people who likely need it the most are younger couples with minor children. Who will raise your children if something happens to you? You shouldn't wait to set up an estate plan. The plan grows with you. As you buy new homes, have more children, and other life events occur, your estate plan is designed to already take those events into consideration. It generally doesn't ever need to be updated unless you want to make changes to the individuals you have chosen to act as your agents (i.e. who would raise your children). In the event it needs to be updated, in most cases we are able to simply fill out a single page amendment and have you sign it.
Not Putting a Business Interest or Other Asset in a Trust
Many people who own a business don't consider what will happen to their interest in the business if they pass or become incapacitated. Our estate plans take that into consideration and allow you to transfer your interest to your trust (and thus your Trustees) in the event you pass away or become incapacitated.
If I can help answer any estate planning questions please feel free to reach out by email at Phil (at) NLOLegal (dot) com or visit www.GetEstatePlanning.com
Phillip Nelsen is an attorney at Nelsen Law Offices, college professor, author, entrepreneur, father and husband.