Basic Estate Planning Documents

Estate planning involves establishing a plan to execute your wishes in the event of your incapacity or death.

Absent any estate planning documents, a probate court judge would oversee the process of deciding who manages your assets and takes care of you during your incapacity, who raises any of your dependent children, and who receives your assets upon your death.

This article discusses several estate planning documents which may avoid the probate process.

Beneficiary designations on contracts such as life insurance, annuities, 401(k)s, and Individual Retirement Accounts can pass these assets, or their death benefits, to the named beneficiary upon your death outside of probate, but do not address any incapacity issues.  However, if there are no living named beneficiaries or beneficiary entities such as a charity upon your death, these assets are included in your probate estate and would require probate for distribution.

Assets owned as Joint Tenancy with Rights of Survivorship (JTWROS) pass automatically to the remaining living joint tenant(s) outside of probate upon your death.  However, if all joint tenants die simultaneously, probate is required, and each decedent's ownership interest would pass through their own probate estate.  JTWROS does not address any incapacity issues.

Assets owned Tenancy by the Entirety (TE) pass automatically to your surviving spouse outside of probate upon your death.  However, if both spouses die simultaneously, each decedent's ownership interest would pass through their own probate estate.  TE does not address any incapacity issues.

Pay-on-Death (POD) bank accounts and Transfer-on-Death (TOD) investment accounts pass automatically outside of probate to your named beneficiary if they are alive at the time of your death, otherwise they pass through your probate estate.  POD and TOD accounts do not address any incapacity issues.

If you are found to be incapacitated, usually requiring two medical doctors to sign off that you are unable to make decisions for yourself, and have a Living Will (also called an Advance Medical Directive), a Durable Health Care Power of Attorney (DHCPOA), a Durable General Power of Attorney (DGPOA), and a Revocable Living Trust (RLT), you and your family will usually avoid needing to attend a probate court competency hearing.

Next, let us briefly discuss the terms incapacity and incompetency.

Incapacity is typically established by two medical doctors signing off that you are unable to make health care or financial decisions for yourself and can trigger certain estate planning documents such as a springing DHCPOA, springing DGPOA, and RLT to allow others to make decisions on your behalf and manage the assets in the RLT during your incapacity without probate court involvement.  The preceding estate planning documents must be properly set up before you become incapacitated.

Incompetency is determined by a probate court judge after conducting a competency hearing, upon someone, such as a family member, petitioning the court who is concerned you may no longer be able to take care of yourself or manage your financial affairs.  A competency hearing involves a probate court judge appointing who should take care of you, make decisions on your behalf, and manage your assets if you are deemed incompetent by the probate court judge.

A Living Will lists your wishes for end-of-life care, in situations where you are found to have a terminal condition, typically defined as a life expectancy under six months, are in a coma from which you are not expected to recover, or are in a persistent vegetative state.  For example, if you listed “no G-tubes” in your Living Will and you subsequently enter into a persistent vegetative state, the doctors would not be allowed to place a G-tube if your Living Will is honored by that medical institution.

A DHCPOA names another person, your agent or attorney-in-fact, to make medical decisions on your behalf, if you are incapacitated but are not terminal, not in a coma (or are in a coma but are expected to recover), and not in a persistent vegetative state.  These documents can be made effective immediately, or they may be springing, such that only upon your incapacitation, and not meeting any of the three criteria listed above, does the agent have the authority to make medical decisions on your behalf.

A DGPOA names an agent to make non-health care decisions on your behalf, such as managing certain types of your assets (held outside of an RLT) during your incapacity.

DHCPOAs and DGPOAs can only address incapacity issues; the powers provided to your agent end upon your death.

Assets owned by the trustee of a properly drafted and fully funded RLT, upon your death, pass outside of probate.  RLTs can be drafted to bypass probate as well during your incapacity, such as naming a successor trustee to manage the assets within the trust on your behalf during your incapacity.  An RLT is a private contract which generally cannot be viewed by those other than yourself (the grantor), the trustees, and the beneficiaries listed in your RLT.

Other basic estate planning documents commonly used include a Will, a Personal Property Memorandum, a Nomination of Conservator/Guardian, and a Precatory Letter.

A Will conveys to the probate court judge who you would like to serve as the executor of your estate, who you would like to serve as the guardian of any of your dependent children, and provide your wishes regarding the disposition of your probate assets upon your death.  All Wills must go through probate and must be validated before being considered by the probate court judge.  A Will does not address any incapacity issues.  A Will is a public record and may be viewed by anyone who requests to view it.  For those with RLT-centered estate plans, they should also have what is known as a Pour-Over Will, a discussion of which is beyond the scope of this article.

A Personal Property Memorandum is a written document, usually attached to an RLT or Will, which directs who is to receive your personal property items (e.g., non-titled household items) upon your death.  If a Personal Property Memorandum is attached to an RLT, to be effective, those personal property items must be transferred into the RLT prior to your death.

A Nomination of Conservator/Guardian provides your written wishes to a probate court judge in the event you are required to undergo a competency hearing.  If found to be incompetent, the probate court judge will appoint a Conservator to manage your property/business affairs and a Guardian to physically take care of you.

A Precatory Letter (or a Side Letter of Instruction) is an informal non-legally binding letter which, upon your death, describes your wishes or provides other helpful information to your family members or those settling your estate.  For example, your Precatory Letter may include your wishes regarding funeral arrangements, the reasons you made certain estate planning decisions, a detailed list of your assets and liabilities, and the location of important documents.

If you are a prospective client and would like to learn more about hiring us for a financial consultation, where, among other things, we would determine your estate planning goals, evaluate your current estate plan, and further educate you on estate planning issues, please visit our Schedule Meeting page.



Mike McErlane, DO, MBA, CFP^®, CFA^®, RICP^®, EA, MCEP^®

Mike McErlane is the owner and founder of Comprehensive Financial Planning for Doctors, LLC based in Frisco, Texas.

Comprehensive Financial Planning for Doctors, LLC (CFPFD) is an Investment Adviser registered with the Texas State Securities Board.  Registration of an Investment Adviser does not imply any specific level of skill or training.  CFPFD only transacts business in states or jurisdictions in which it is registered or exempt from registration.  A copy of CFPFD's current disclosure brochure is available through the Securities and Exchange Commission's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

The opinions and analyses described are subject to change at any time without notice.  Any information is considered general and is not intended to provide any specific advice or recommendations.  Your use of the information is at your sole risk.  You should consult with your financial advisor, attorney, tax advisor, insurance agent, or other professional advisor before taking action on any information or implementing any strategy.