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UNDERSTANDING ESTATE PLANNING DOCUMENTS

By:  Susan Marra

We have discussed the importance of estate planning, and periodic plan review in a separate article. In this article, we discuss the common estate planning documents. At a minimum, all estate plans should include a power of attorney, will, and an advance directive for health care.  These documents, as well as other common estate planning devices, are discussed below.

POWER OF ATTORNEY

In a power of attorney, you appoint an “attorney-in-fact” or “agent” to act in your place for financial purposes.  A power of attorney can be effective immediately or upon legal incapacity and it can be general or limited.  A general power of attorney gives the attorney-in-fact all the rights and powers you have yourself regarding your property.  A general, durable power of attorney is immediately effective and will remain effective after your disability. A general springing power of attorney is only effective after you become legally incapacitated. A limited power of attorney may give the attorney-in-fact the right to take specific action, such as to sign a deed for sale of property on a date you are unavailable.  If you become incapacitated and do not have a power of attorney, there will be no one with the authority to attend to your financial affairs, and it will be necessary to apply to a court to appoint a guardian.  Such an application invites family conflict as loved ones may compete for appointment.  In addition, the court may not appoint someone you would have preferred.  The court process inevitably will cause delays and result in unnecessary expenses.  A properly drafted power of attorney can avoid this dilemma.

WILL

A will is a written instrument that directs how your property will be distributed after your death.  It also appoints legal representatives to distribute your property in accordance with the instructions in your will.

It is important to have a will for numerous reasons:

  • With a will you can choose to whom and by what method your assets will be distributed upon your death.  Without a will, your property will be distributed in accordance with state law.  Applicable law may result in distribution of your property in a way that is contrary to your wishes.  Second marriages and blended families frequently require special attention that is not provided by statute.
  • Having a will makes administration of your estate proceed efficiently and reduces the likelihood of disputes over your estate.  In addition, you can avoid additional expenses such as posting of a surety bond.
  • For certain estates, a will with proper tax clauses can reduce estate and inheritance taxes.
  • If you have children, a will allows you to appoint a guardian for your minor children if both parents die.  In addition, you can control how your assets are used for your children by specifying your wishes in trusts established for the property you leave to your children.
  • You can provide protection for mentally or physically challenged heirs.
  • A will allows you to appoint an individual whom you trust to act as your legal representative or executor for carrying out the provisions in the will.  If you do not appoint a legal representative in your will, the court will appoint such a party.  This frequently increases the cost of administration.

It is important to note, however, that the will covers only what is called “probate property”.  Many types of property and forms of ownership pass outside of probate.  For example, jointly owned real estate, property held in a trust, life insurance proceeds, and 401K and IRA plans with named beneficiaries all pass outside of probate.  This means that notwithstanding the provisions of your will, these assets will be distributed in accordance with their own terms.  Consequently, incorrectly titled property may result in an unplanned and unhappy outcome.  For example, if you have a joint savings account with the right of survivorship with your son, upon your death your son is legally entitled to the money even if your will divides everything among your three children.

ADVANCE DIRECTIVE FOR HEALTH CARE

Also known as a “living will”, an advance directive for health care is a document by which a person expresses his or her wishes concerning medical treatment.  Since people have differing attitudes and beliefs about what constitutes quality of life and appropriate medical treatment, an advance directive for health care is an important planning document.  New Jersey law provides for the use of two instruments.  The first is an instruction directive.  An instruction directive sets forth the person’s intent with regard to treatment or refusal of treatment in the event a person is unable to actively participate in decisions at the time the medical treatment becomes necessary.  The second instrument is a proxy directive.  Because not all future circumstances can be anticipated at the time of the execution of the instruction directive, you should consider executing a proxy directive.  A proxy directive appoints another individual to make health care decisions when you are unable to do so.  Either or both of these instruments can be executed.  An advance directive for health care may also include a provision under the Uniform Anatomical Gift Act, which allows a person to set forth their wishes with respect to donation of organs and tissue.

PERSONAL PROPERTY MEMORANDUM

A personal property memorandum is a written statement referenced in a will but prepared separately from the will that is used to dispose of tangible personal property not specifically disposed of in the will.  It is a convenient way for individuals to distribute items such as jewelry, furnishings or art to specific individuals.  If you change your mind about the distribution of your personal property after you complete the personal property memorandum, you can simply destroy the old form and execute a new one.  Alternatively, if specific bequests were made in a will, a new will or a codicil would need to be prepared by your attorney.

LETTER OF INSTRUCTION

It is important that the person administering your estate have information available with respect to your personal affairs.  In order to assist them, it is advisable to give your legal representative or attorney a letter of instruction.  This document is separate and apart from your will and sets forth information with respect to your assets and their location, your wishes with regard to funeral and burial, location of income tax information, life insurance policies available, debts owed by you and/or payable to you and other matters that will facilitate a smooth probate process.

TRUSTS

A trust is a legal arrangement whereby a person or entity, called a “trustee” holds legal title to property for the benefit of another, a “beneficiary”.  The specific terms of the trust are set forth in a trust instrument.  Trusts provide some of the most effective and flexible estate planning options.  A trust can be revocable or irrevocable and may be effective during your life or may be contained in your will and become effective upon your death.  Certain trusts can avoid probate.  A trust allows you to protect your loved ones by restricting distribution of assets so that they are not immediately payable at the time of your death.  In a trust, you may place conditions on receipt of the funds or delay payment until a certain age is reached or a certain accomplishment is attained (such as a college degree).  Trusts may provide for the continuing care of disabled loved ones.  A trust can result in tax advantages for both the donor and the beneficiary.  For example, qualified personal residence trusts and irrevocable life insurance trusts can remove the value of your home and your life insurance, respectively, from your taxable estate.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.