The Essentials of Estate Planning

It is fairly common for clients to dismiss the need for estate planning by stating that it is too complex for their needs or that they are too busy to deal with it until later. Fortunately, most people do not have to employ complex or expensive planning techniques to accomplish their goals. In fact, the following documents are considered essential to the implementation of any estate plan.

Durable Power of Attorney. A Durable Power of Attorney (“DPOA”) allows a person (the “Principal”) to appoint another person or entity (the “Agent”) to handle the Principal’s financial affairs. Colorado allows DPOAs to become effective upon one of two events. First, DPOAs can be drafted as becoming effective upon the incapacity of the Principal. The second option is to draft a DPOA that becomes effective immediately upon the Principal’s signing the document.

An Agent can engage in any activity authorized by the DPOA without the need for court oversight or approval. DPOAs are often drafted to provide broad authority. Given this broad authority, it is important that only trustworthy and reliable persons or entities be named as Agents.

The reason that DPOAs are important is that they avoid costly court proceedings. Without a DPOA, if the Principal becomes sick or is otherwise incapacitated, the Principal’s family or friends will be required to file a petition with the local court to be appointed as the conservator (the person responsible for taking care of the Principal’s financial affairs). This process often costs several thousand dollars just for the initial appointment as conservator. After appointment, the conservator is required to obtain court approval for expenditures made on behalf of the Principal. Of course, this results in even more costs and attorney fees. Obviously, it is wise to pay a relatively small fee for a DPOA rather than risk thousands of dollars in legal fees and court supervision of your financial affairs in a conservatorship proceeding.

Medical Power of Attorney. A Medical Power of Attorney (“MPOA”) allows the Principal to name an Agent to make medical decisions upon the incapacity of the Principal. Again, it is always wise to name an alternate Agent in case the primary Agent is unable or unwilling to act. Without an MPOA, there is a chance that the court will have to appoint a guardian to make medical decisions on your behalf. The costs of a guardianship are similar to those in establishing a conservatorship. In other words, it is expensive.

Living Will. In Colorado, a living will enables a person to state whether or not they want artificial means of life support removed should they be terminally ill. The person creating a living will makes this decision rather than delegating this decision to someone else. This saves your family and friends from the agony of making this decision.

Wills. A will is the most recognizable estate-planning document and is essential for every adult, regardless of age or wealth. A will dictates the persons or entities that will receive a decedent’s assets at death. Wills also designate the persons responsible for transferring a decedent’s assets to their heirs at death. Without a will, a decedent’s estate is distributed according to the laws of the state where the decedent lived. Needless to say, it is not advisable to rely upon a government-imposed schedule of distribution.

An often-cited criticism of wills is that they are subject to probate. Although probate is a costly and lengthy process in many states, Colorado’s probate system is extremely efficient and cost-effective. Moreover, probate can be a valuable method of extinguishing creditor claims against the decedent’s estate.

Trusts. A basic trust achieves the same result as a Will by distributing your estate to the beneficiaries of your choosing. A common misperception is that a basic trust provides estate tax savings. Although that can be true with special drafting, a basic trust does not provide any more estate tax benefits than a properly drafted Will. There are two types of basic trusts: (1) revocable living trusts, and (2) testamentary trusts.

The main benefit provided by a basic revocable living trust is probate avoidance. In states with high probate costs, this achieves significant cost savings. A revocable living trust can also be tailored to provide creditor protection to trust beneficiaries and avoid attachment by a beneficiary’s spouse in divorce proceeding. The trust creator can maintain control of the trust while they are alive and all trust income is reported on the creator’s individual tax return.

Another common misconception of trusts is that they provide protection against creditors. This is only partially true for irrevocable trusts created for the benefit of individuals other than the person contributing value to the trust.

A testamentary trust is created by a decedent’s will upon death. Testamentary trusts work the same as revocable living trusts except they are not funded until death and they are subject to probate. In states with relatively low probate costs, such as Colorado, some attorneys believe that revocable living trusts are not necessary due to the lower cost of creating a will containing a testamentary trust.