Estate Planning Terminology: Understanding What is Right for Your Family
As your parents age, you or another family member may become their primary caregiver. This can be a difficult transition for everyone involved. Questions may come up as to what role each person should play and who will be in charge of making important legal decisions.
Open communication and a spirit of collaboration between all family members can greatly reduce confusion, drama, surprises, and hurt feelings. This will also result in better care for your aging loved one.
It's hard enough to keep up with the medical appointments, medications, and daily caregiving tasks for our aging loved ones - let alone having to understand complex estate planning terminology. If you're feeling overwhelmed, you're not alone. Keep reading to learn more about common estate planning terms and what they mean for your family.
General Durable Power of Attorney
A General Durable Power of Attorney appoints an attorney-in-fact to act on your behalf in matters related to finances. Your attorney-in-fact can take any action regarding financial matters that you could legally do yourself. For example, your attorney-in-fact can pay bills, transfer funds between accounts, close financial accounts, sell property, and invest assets.
A power of attorney is a good idea because it allows you to take over your parents' finances if necessary. It also allows you to monitor your parents’ finances for signs of elder financial abuse.
However, you want to ensure that a power of attorney is a “durable” power of attorney. The durable clause contained in a power of attorney ensures that your parents’ incapacitation does not impact your authority to act. In other words, if your parents become incapacitated because of an injury or illness, such as dementia or Alzheimer’s, a power of attorney remains in full force and effect.
It is crucial to have the General Durable Power of attorney signed before the person loses the ability to make decisions for themselves. At that point, a power of attorney would not be legally enforceable because the person lacks the capacity to enter into legal contracts.
Last Will and Testament
A Last Will and Testament (usually referred to as a “Will”) states what your parents want to happen to their assets after their death. The Will appoints a personal representative to administer the probate estate and provides instructions for distributing your parents’ property to specific heirs and beneficiaries.
Without a Will, your parents’ property is distributed according to the intestate laws of the state where they resided at the time of their death. Intestate laws generally distribute property to the closes heirs. However, the laws do not include friends, charitable organizations, or distant relatives. Therefore, intestate laws might not align with your parents’ wishes for distributing their property after their death.
Probate is the process of transferring property after a person’s death. The probate estate consists of all of the assets the person owned at their death. Estate laws are enacted by states. Therefore, these laws may differ. Generally, the probate court or a similar court oversees and has jurisdiction over the probate estate administration.
As your parent ages, it can help to become familiar with the probate procedure in their state. In addition, understanding the probate process where they live can make taking care of final affairs easier and less stressful after their death.
A trust is a written, legally enforceable document that creates a separate entity for owning property. A legally created trust may own title to most assets. The Grantor or Settlor (person who creates the trust) appoints a trustee to manage the assets according to the terms of the trust. The trust beneficiaries are the individuals that benefit from the trust. For example, your parents may leave money in a trust for your children’s education, first car, or a down payment on a home.
A Revocable Living Trust is a popular type of trust that many individuals use for estate planning. The trust may be changed or dissolved at any point during the grantor’s life. However, at the grantor’s death, the trust becomes irrevocable. In other words, you cannot change the terms of the trust after the grantor’s death.
An Irrevocable Living Trust cannot be changed or dissolved after it is created, except in limited circumstances. While you cannot change this type of trust, an Irrevocable Living Trust has certain advantages. For example, it provides greater asset protection during the grantor’s life and avoids probate for the assets within the trust.
Many different types of trusts exist that can be useful for aging parents as they seek to protect the legacy they created for their children and grandchildren. Also, some trusts can protect assets if your parents need long-term nursing home care. However, because there are many different types of trusts and the laws governing trusts can be complicated, it is wise to seek legal counsel before creating a trust agreement.
Advance Directive or Living Will
Advance directives are written instructions regarding your preferences for health care. They are legally binding documents that health care professionals must follow in specific situations.
Everyone should be able to direct what treatment they receive or refuse, even when they cannot speak for themselves. Advance directives speak for you when you are incapacitated because of an illness or accident.
One type of advance directive is a Living Will. A Living Will describes your preferences for end-of-life care. That might include the use of ventilators, cardiopulmonary resuscitation, comfort care, and artificial nutrition and hydration. You may refuse one or more of these medical treatments by executing a Living Will.
Health Care Power of Attorney
Some sources refer to this document as a Health Care Proxy. A Health Care Power of Attorney appoints an attorney-in-fact to make medical decisions if you cannot communicate for any reason.
The person has full authority to make any medical decision you could make for yourself. However, the Health Care Power of Attorney does not override a legally valid Living Will or advance directive.
Do Not Resuscitate (DNR) Order
A DNR order directs health care providers not to take any action to restart your heart if your heart stops or you stop breathing. Your parents may sign a DNR order as part of their estate planning documents, or you may sign a DNR order as their health care power of attorney.
A guardian is a court-appointed person who makes decisions regarding a person’s physical care. The guardian decides where the person lives and how they go about their daily activities. Guardianships are necessary when a parent cannot make decisions for themselves and does not have any legal documents, giving someone the authority to make those decisions.
Some states include financial decisions in the powers given to a court-appointed guardian. Other states appoint conservators to handle financial matters for an incapacitated person. In either case, having a General Durable Power of Attorney can avoid seeking a court appointment to handle financial matters. Furthermore, court-appointed guardians and conservators must file annual reports with the court and account for all of the person’s money or property spent each year.