13 Sep The “big three” estate planning documents

Q. What are important documents we should have? For example, will or living will etc.
— Planning

A. Estate planning documents are an essential part of your financial plan. They ensure that your wishes will be followed.

There are generally a “Big Three” of documents that almost everyone should have: a will, a general durable power of attorney and a health care proxy, said Frederick Schoenbrodt, an estate planning attorney with Bressler Amery Ross in Florham Park.

A will allows you to dispose of your property at your death in the manner you intend and in a way that is appropriate for your beneficiaries, Schoenbrodt said.

Importantly, it also allows you to name an executor to handle the administration of your estate.

“If you don’t name an executor in your will, then an administrator will need to be appointed to collect and distribute your assets and pay taxes, debts and expenses,” he said.

Typically, Schoenbrodt said, an administrator will be required to post a surety bond before the administrator’s appointment is effective and there is a cost to obtain that bond. The process can be substantially eased and the need for a bond avoided by executing a will in which you name an executor and waive any bonding requirement for that executor, he said.

In a general durable power of attorney, you will designate someone as your agent to act on your behalf in financial and property matters if you are unable to do so, Schoenbrodt said.

“If the power of attorney is drafted to be `durable’ — its effectiveness continues after your incapacity — then it will allow someone to act on your behalf if you become incapacitated in the future,” he said. “Granting this power to an agent, coupled with the designation of a health care agent in the health care proxy, may avoid the need for an expensive and challenging guardianship proceeding if you become disabled or incapacitated in the future.”

Schoenbrodt said the health care proxy allows you to name a person to act on your behalf with respect to medical decisions if you are unable to do so. Often, he said, a health care proxy is coupled with a living will, in which you state your wishes with respect to your continuing care under certain circumstances. Many people choose to execute such a combined document, he said.

While we’re talking estate planning, it’s a good idea to review all beneficiary designations to make sure they are current and reflect your wishes regarding the disposition of the related asset.

“Having a beneficiary designation generally makes an asset a non-probate asset, meaning it won’t be distributed under your will,” Schoenbrodt said. “Changes to your will should not change the disposition of that property.”

He said sometimes people assume that a will controls the disposition of all property and supersedes beneficiary designations, but that is incorrect. They work in parallel, he said, so it’s important to confirm that they are up to date as well.

“Retirement accounts and life insurance policies are the most frequent assets that pass by beneficiary designation, although POD (payable on death) and TOD (transfer on death) accounts also operate similarly and are not uncommon,” he said.

Beyond the “Big Three,” some people may benefit from creating a revocable living trust, Schoenbrodt said. This can hold property during lifetime.

Other people may want to establish irrevocable trusts, most often for estate tax planning purposes, he said.

“The most common of those is an irrevocable life insurance trust (ILIT), which can effectively remove the value of insurance proceeds from your taxable estate at your death,” he said. “This can be helpful if you own insurance and have an estate that is large enough that it is likely to be subject to estate tax at your death or your surviving spouse’s subsequent death.”

Sounds like now is a great time for you to sit down with an estate planning attorney to make sure you have all the documents you need.

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This post was first published in September 2016.