Essential Estate Planning: Understanding the Key Documents and Strategies That Protect Your Assets, Wishes, and Family’s Future.
Essential Estate Planning
Estate planning in its most basic form involves making a plan for the distribution of assets at death. However, good estate planning involves much more than that. A complete estate plan is a group of documents that includes a will, sometimes a trust, and a plan for the management of your assets and your healthcare should you become incapacitated. Below we list the most common estate plan documents and the purposes they serve. Virtually all adults should have a will, a power of attorney for finances, and a power of attorney for health care. Most people also choose to have a living will, which is an instruction to health care providers and not a will at all. Trusts are useful to achieve certain important objectives but are not necessary for everyone.
Will
A person who signs a will is called the testator. A last will and testament is a legal document that sets forth the testator’s instructions regarding the distribution of his or her property at death. A will typically names an executor, who is responsible for probating the estate assets, which involves paying the testator’s debts and expenses and distributing the remaining assets in accordance with the testator’s wishes under the supervision of a probate court. Probate refers to the court‐ supervised process of performing these tasks.
A person making a will must be 18 years of age or older. The person must also possess sufficient mental capacity and memory to execute a will. This is known as having “testamentary capacity.” A will must be signed by the testator (or signed by someone else at the instruction of the testator and in the testator’s presence) and witnessed by at least two other individuals who are at least 18 years of age. The witnesses should not be beneficiaries in the will, and it is a best practice to use only witnesses who are not related to the testator by blood or marriage.
A will should be used to nominate a person to serve as the guardian of the testator’s minor children. If parents do not nominate a guardian, the probate court will appoint someone to serve in this role who may not have been the parents’ first choice.
Consider changing your will after any significant personal or family change occurs, such as the birth of a child or a divorce. If you do not have a will, your property will pass in accordance with a statute known as the Statute of Descent and Distribution. This is the state’s default estate plan for those who die intestate (without a will) If you desire to give property to non‐family members or to charities, a will is a necessity.
Because many people now have accounts that they access exclusively online, we recommend that you speak with your estate planning attorney about granting your executor the authority in your will to access and exercise authority over online accounts, social media and other digital assets.
Durable Power of Attorney
A durable power of attorney is a document in which a person, who is called the principal, grants another person, who is called the agent, the authority to act on the principal’s behalf in the management of the principal’s property and financial affairs. For this reason, this type of power of attorney is often referred to as a power of attorney for finances or a power of attorney for property. Durable powers of attorney can go into effect immediately, or they can go into effect only when the principal becomes incapacitated. Incapacity in this context means the inability to manage one’s financial affairs and property due to mental infirmity. A power of attorney that goes into effect only if the principal becomes incapacitated is called a “springing” power of attorney. Both durable powers of attorney and powers of attorney for health care are valid only during the principal’s lifetime and are automatically revoked by the principal’s death.
A general durable power of attorney gives the agent broad authority to make financial decisions and handle financial transactions on the principal’s behalf. A limited power of attorney grants the agent specific powers that apply to just one or a few types of transactions. For example, a limited power of attorney might give the agent the authority to represent the principal at a real estate closing. In Ohio, there are seven powers that must be specifically listed in the power of attorney in order for the agent to have these powers. Broad language that might seem to grant these specific authorities, such as the authority to take any action the principal could take, will not suffice to grant the agent these powers. The authorities that must be specifically stated include the authority to make gifts with the principal’s money and the authority to create, amend, or terminate a living trust of which the principal is grantor (the person who establishes a trust). Another power that must be specifically stated is the power to alter the principal’s beneficiary designations on accounts and other assets.
We recommend that you speak with your attorney about granting your agent access to and authority over your online accounts, social media and digital assets and devices.
Health Care Power of Attorney
An agent appointed in a durable power of attorney for health care is authorized to make health care decisions for the principal when the attending physician of the principal determines that the principal has lost the capacity to make informed health care decisions. The health care power of attorney document can also authorize the agent to obtain information concerning the principal’s health, including protected health information as defined by federal law at any time, regardless of whether the principal has lost the capacity to make informed health care decisions. The principal decides whether or not the agent should be given this authority in the power of attorney.
Subject to any specific limitations in the document, the agent may make health care decisions for the principal to the same extent the principal could, with a few exceptions under the law. In exercising this authority, the agent is required to act consistently with the desires of the principal, or if the desires of the principal are unknown, to act in the best interests of the principal.
Living Will
A Living Will is a written declaration relating to the use of life‐sustaining treatment. It is a legally binding instruction to your physician that you do not wish to be kept alive by technologies and treatments if you are either in a permanently unconscious state or if you have an irreversible terminal condition and death is expected to follow in a relatively short period of time. A permanently unconscious state is defined under Ohio law as follows:
“Permanently unconscious state” means a state of permanent unconsciousness that, to a reasonable degree of medical certainty as determined by the declarant’s attending physician and one other physician who has examined the declarant, is characterized by both of the following:
- Irreversible unawareness of one’s being and environment
- Total loss of cerebral cortical functioning, resulting in the declarant or other patient having no capacity to experience pain and suffering
A terminal condition is defined as follows:
“Terminal condition” means an irreversible, incurable, and untreatable condition caused by disease, illness, or injury from which, to a reasonable degree of medical certainty as determined in accordance with reasonable medical standards by a declarant’s attending physician and one other physician who has examined the declarant, both of the following apply:
- There can be no
- Death is likely to occur within a relatively short time if life‐sustaining treatment is not administered.
Your living will goes into effect only when one of the above conditions exists and when you are no longer able to make health care decisions for yourself and there is no possibility that you will regain the ability to do so. The living will does not authorize your physician to withdraw treatments designed to relieve pain and provide comfort.
Revocable Living Trust
Not every client needs a trust, but trusts are useful for many clients. Revocable living trusts are established primarily to achieve the following objectives:
- Control of assets after death
- Provide for a blended family
- Minimize estate taxes
- Protection of privacy
- Protection from creditors
- Planning for incapacity
- Probate avoidance
Because the administration of a living trust is not court‐supervised, when the person who establishes the trust (the grantor) dies, the trustee appointed in the trust document simply carries out the settlor’s instructions in the trust, keeping records of all receipts and disbursements and complying with the other statutory legal duties applicable to trustees (to the extent those duties have not been effectively waived in the trust). Wills are often public records that anyone can access, while living trusts are not filed with any court.
A testamentary trust is a trust within a will. Testamentary trusts are used most often in the wills of parents with minor children. Unlike a living trust, a testamentary trust is subject to ongoing probate court supervision for the lifetime of the trust. Testamentary trusts cost less to establish than revocable living trusts in terms of attorney fees, but future court costs and administrative inefficiencies associated with testamentary trusts may well overrun the benefit of the legal fee savings. The privacy protection and probate avoidance benefits of revocable living trusts are lost with testamentary trusts. Nevertheless, there may be occasions when a testamentary trust is a reasonable option for parents with limited resources who have minor children.
A living trust is a will substitute in the sense that it explains how a person’s assets are to be distributed. However, unlike a will, a trust allows a grantor to control trust assets for many years after his or her death. In a trust document a grantor can place conditions on the distribution of assets to the trust beneficiaries. The most common condition is the attaining of a particular age; however, trusts can be used to incentivize beneficiaries to accomplish certain milestones such as obtaining a college degree or earning employment income. Because of the ability to postpone distributions to beneficiaries to any age the grantor chooses, trusts are popular with clients who have young children. Most parents shudder at the thought of their children receiving a substantial amount of money at ages 18 or 21, which is what typically happens in the absence of a trust.
Ohio legislation, effective April 6, 2017, makes it possible to postpone the distribution of assets to children until age 25 under the Ohio Transfers to Minors Act. Very specific language must be used to effect such a transfer. Assets transferred to children pursuant to the Ohio Transfers to Minors Act are held in a “custodial” account until the child reaches the age specified by the parent (or other person making the transfer) in the will or other instrument of transfer. The adult custodian of a custodial account, who is usually selected by the person making the transfer, is required to use the funds for the child’s benefit; however, parents can leave detailed and legally binding instructions about how the funds are to be used only if they have a trust. Trustees are also subject to more legal requirements designed to prevent financial abuses than are custodians of custodial accounts.
Parents sometimes establish trusts for adult children who are spendthrifts, to prevent them from spending through an inheritance quickly. Trusts also provide protection from the creditors of trust beneficiaries; however, while the grantor is living, the assets in a revocable living trust are not protected from the grantor’s creditors. Trusts have traditionally offered protection from the spouse of a trust beneficiary in a divorce action. However, certain recent court decisions demonstrate that courts may stretch to find rationales that will enable them to take trust assets into consideration when deciding on an equitable division of property in a divorce. If you are interested in a trust to achieve creditor and divorce protection for your beneficiaries, a fully discretionary trust may offer the most protection, and this is a concern you should bring to your attorney’s attention.
Trusts can also be useful for blended families. In a trust a grantor can provide for a second or subsequent spouse without giving the spouse unfettered access to the trust assets, and can ensure that amounts remaining in the trust will go to the grantor’s children from a prior marriage when the spouse dies. Trusts are rarely needed these days for estate tax minimization because of the $5 million+ per person exemption from estate tax. Revocable living trusts with A/B tax planning provisions continue to be a first line of defense against estate taxes for married individuals.
The passage of the SECURE Act in December of 2019 implemented several changes to rules governing retirement accounts and particularly introduced new challenges when a trust is named beneficiary of a retirement account. Specific language should be included within the trust to enable the trustee to achieve the most advantageous tax treatment of the inherited account for your trust beneficiaries. This is a concern you should bring to your attorney’s attention if you have retirement accounts to ensure your trust is drafted properly should you decide to name your trust as a beneficiary of your tax-deferred accounts.
The word “living” in the name of this type of trust signifies that the grantor transfers assets to the trust while the grantor is living. Placing the assets in trust during life will allow for a smooth transition of the management of assets to the trustee if the grantor becomes incapacitated and will keep the assets out of probate court when the grantor dies. (Note that there are other ways to avoid probate, so setting up a trust for the sole purpose of avoiding probate may not be warranted.)
The word “revocable” means you can revoke or amend the trust any time you wish without the consent of or notice to the beneficiaries.
There are many other types of trusts that serve specialized purposes, often related to tax minimization. If you are interested in discussing more sophisticated trust planning to achieve particular goals, please contact our office.
If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.
MEET THE AUTHOR
Tracy E. Travis, CES™, CEPA, CFP
Financial Planner
Tracy E. Travis joined Waverly Advisors in November of 2024 following the acquisition of Buckingham Advisors by Waverly Advisors, LLC. As a Financial Planner at Waverly, Tracy brings several years of experience in Retirement Planning, Estate Planning, Social Security, Generational Wealth Planning, and Charitable & Family Gifting. Tracy enjoys working alongside her Waverly team to provide clients with a complete financial plan…Learn More
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