Key elements of an estate plan

Advisors often ask clients whether they have an estate plan. If the answer is “No,” the advisor will recommend that the client put one in place.

A client might then wonder: What is an estate plan? What purpose does it serve and what does it consist of? How do I begin putting one together? How can I ensure that the one I create is complete?

We tackle these questions here.

What is an estate plan? What is its purpose and what does it consist of?

An estate plan is a coordinated set of legal, tax and financial arrangements designed to ensure that your assets and control rights transfer according to your wishes upon your death. While specifics differ from individual to individual (and couple to couple), there are some relatively universal truths. At a minimum, a sound estate plan consists of:

1. A signed and properly witnessed will (coupled, in many states, with a signed revocable trust agreement that has been funded) that directs
   • Which beneficiaries get what assets (for instance, specific dollar amounts; any art or other specific property, such as real estate; any digital assets; and the balance)
   • Who are the executors of the will and trustees of any trust created under the will or the revocable trust
   • Guardians for any minor children
2. An estate plan may include one or more documents related to medical decision making. An advance health care directive (sometimes referred to as a living will) states preferences for future medical treatment. Power of attorney for medical decisions (sometimes referred to as a healthcare proxy) identifies a person who will make medical decisions on your behalf if you are unable to do so. A HIPAA (Health Insurance Portability and Accountability Act) form authorizes medical professionals to disclose information about a patient’s condition to third parties.
3. Power of attorney for finance authorizes an agent to execute financial and other transactions on behalf of a principal.

A sound estate plan also includes:

• Proper account titling: Should assets be titled in an individual’s name or in joint form (such as joint tenants with right of survivorship or community property with right of survivorship)?
• Updated beneficiary designations: These are especially important with respect to retirement accounts and insurance policies.
• A current, even if informal, family tree
• A current, even if approximate, statement of assets and liabilities
• Adequate insurance—life, property and casualty

How do I begin putting an estate plan together?

The first step is critical and unavoidable: Hire an estate planning attorney. He or she will ask for the information we’ve discussed. Some people try to create estate plans on their own, often using online tools. But in our view, the relevant medical and legal issues are best left to trained professionals.

Most important, an attorney will ask how you would like your assets to be disposed of upon your death. That question may be posed delicately or bluntly. Whatever the tone, the question is at the core of all initial estate planning conversations. You’ll want to be prepared for it.

Most married couples, especially if it is a first marriage for both, want all, or nearly all, of their wealth to pass to a surviving spouse. The couple will usually want the aggregate wealth to pass in equal shares to their children on the survivor’s death. Often, the couple will want wealth to be held in trust for the benefit of a child until he or she reaches a certain age (or perhaps for the rest of the child’s life).

An attorney will want to anticipate all contingencies, no matter how remote. For example: What should happen to a client’s wealth if no family member survives (this is known as a “wipeout” provision)? An attorney will also inquire about whom you wish as successor executors and trustees.

Identifying a future guardian of any minor child is perhaps the most sensitive question an attorney will pose. Delays in the execution of wills often occur because couples cannot decide who should be the guardian in the highly unlikely event that both spouses die before their youngest child is 18. 

We strongly advise not to allow this remote contingency to impede the prompt execution of your will. Without the parents’ guardianship nominations, the courts will be forced to decide whom to appoint.

Other sensitive questions arise in selecting healthcare proxies and other agents in case a spouse becomes disabled. The other spouse is invariably the first appointee; the successors are not always clear. Again, we advise: Make a decision. If you change your mind later, you can update your documents.

Unmarried individuals usually have more complicated estate plans because the natural transition of wealth (spouse, then children) is not as obvious. If an individual has children, they are the natural recipients of an inheritance. If not, other family members are usually the recipients, though often one or more charities receive bequests as well. And increasingly, individuals in committed relationships that have not been formalized by marriage will provide for one another.

In all cases, the tax impact of the transfer of wealth should be a secondary consideration. Once an estate plan has been established, at least in principle, the estate planning attorney can advise on the many ways the transfer(s) can be made to minimize the estate taxes (and sometimes the income taxes) that are due.

How do I make sure the estate plan I’ve put together is complete?

An estate plan is complete at a moment in time, and ideally reflects its creator’s wishes at the time the documents are executed. But of course plans may change as lives change: People get married and divorced, have children and grandchildren. They receive inheritances, move, change jobs and retire. They start businesses and sell businesses and go through a range of welcome and unwelcome life events. And sometimes people simply change their minds.

In one sense, then, an estate plan is never “complete,” because there is always a possibility that the plan is not a true reflection of anyone’s current wishes. For that reason, you should always see your estate plan as a living set of documents that will change as you change. The plan will require regular review and, as necessary, documents will change.

Of course, an estate plan is in many senses finalized upon someone’s death. However, the plan—especially if it includes trusts for the benefit of a spouse or members of younger generations—could live on for generations. For that reason, care should be given to identifying, among other things, one’s goals with respect to the assets being bequeathed, the circumstances under which a trustee should make distributions to beneficiaries, and trustee succession in the event trusts last longer, or trustees last shorter, than anticipated.