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May 24, 2021

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The 4 Core Estate Documents: What they are and why they’re essential for your clients

According to a survey from Caring.com, 2021 marks the first year that young adults ages 18-34 are more likely to have a will than those ages 35-54. COVID-19 seems largely responsible for this shift, but the pandemic hasn’t just impacted the younger generation.

Participants of all ages agreed that the advent of COVID-19 has caused them “to see a greater need for estate planning.” As a financial advisor, this means you can expect more clients to turn to you for estate planning guidance in the coming days.

With this influx of client needs, it’s important that you understand and can communicate the purpose of the core estate documents. But understanding the core estate documents isn’t just good for advising incoming clients. It’s also critical for improving client retention.

One of the top four reasons clients leave their financial advisors is that advisors aren’t providing “good ideas and advice,” according to an E-Trade survey. If you have a handle on the core estate documents and how they benefit your clients’ finances in the long term, you’ll be more likely to provide “good ideas and advice” that will strengthen ongoing relationships with clients and their families.

Let’s get familiar with four of the most important estate documents.

The trust: Distribute assets and protect against probate

At its simplest, a trust is an estate document wherein a trustor (or “grantor” or “settlor”) legally assigns a trustee to hold the title of assets for a beneficiary. Thus, your client, as a trustor, might create a trust to assign their best friend (the trustee) to hold the title of their wealth for the benefit of their minor children (the beneficiaries) to whom the trustee will distribute your client’s wealth when their children come of age.

One of the key benefits of having a trust is that, unlike a will (see next section), a trust ensures that your clients’ assets won’t be subject to state probate processes, which can be long, laborious, and costly. On average, probate processes last 8-12 months and cost 2-5% of an estate, but as financial writer Brian O’Connell has stated, the cost and time can be even higher, with probate lasting “as long as three years and tak[ing] up to 10-to-15% of an individual’s estate’s value.” Quite a high price to pay.

There are a few different categories of trusts, some of which will likely be more relevant than others for your clients.

Living trusts (also known as “inter vivos trusts”) are trusts that go into effect while a trustor is alive and hold assets until the trustor dies. At the time of the trustor’s death, the assets are distributed according to their wishes.

Living trusts can either be revocable or irrevocable. A revocable living trust allows a trustor to revoke, change, or cancel the trust at any time during their life. Additionally, the trustor maintains ongoing access to the assets in the trust.

An irrevocable living trust, on the other hand, cannot be altered once it’s been established, and assets move from the hands of the trustor into the hands of the trust. These types of trusts shelter assets against certain types of taxes and also protect against creditors.

The will: Support a trust and specify details like funeral arrangements and minor guardianship

Wills function very differently depending on whether or not your client has a trust in place.

If your client has a trust in place, the will’s function is simple: it ensures any assets not already included in the trust at the time of death get included in the trust. This type of will is called a pour-over will.

If your client doesn’t have a trust, the role of the will is slightly more complicated. First, like a trust, the will allows your client to specify where and to whom they’d like their assets to go. It can also be a place for your client to express desires for funeral arrangements and assign guardianship for minor children.

Unlike a trust, however, a will on its own does not prevent estates from going through state probate processes. Only a trust can do that.

Dying without a will is called dying “intestate.” If a person dies intestate and also doesn’t have a trust in place to prevent their estate from entering probate court, the courts will distribute possessions in accordance with state laws rather than in accordance with the person’s wishes. That means that even if your client expressed aloud that they wanted their house to go to their youngest daughter, state intestacy laws might dictate that the house must go to their estranged eldest son instead.

Beyond this, dying without a will can cause problems if your client leaves behind minor children. As Suze Orman has written:

‘If you die without a will that establishes your children’s guardians, decisions about the care of your kids are going to fall to the court system. That’s what happens when parents die without a legal guardian ready to step in. Sure, a sibling or cousin or dear friend might end up as the guardian, but only after a draining court process, and potentially ongoing court oversight.’

— SUZE ORMAN

Definitely not a soft landing for recently bereaved children.

The financial power of attorney (POA): Let someone else manage assets

Generally, a power of attorney (POA) is an estate document that allows one person (the “principal”) to grant another person (the “agent” or the “attorney-in-fact”) power to act on their behalf in certain legal matters and under certain conditions.

In the case of a financial POA, your client would be authorizing an agent to make financial decisions for them. Although the agent’s decision-making powers may extend to everything, from signing checks and filing tax returns to managing investment accounts, your client can also narrow the scope of the agent’s power to only cover very specific aspects of finance with a limited financial POA.

While a financial POA can go into effect the moment it is signed, your client might also wish to stipulate a “springing” event — a specific event or condition that triggers the POA to go into effect. Often, this “springing” event is something like the client becoming mentally incapacitated or falling into a coma.

Additionally, a financial POA can be used on a more temporary basis. If your client is going to be working abroad for a year, for instance, and needs someone who can regularly sign checks or pay bills at home while they are gone, a financial POA can cover this.

In the absence of a financial POA, if a person becomes incapacitated, the state courts will step in to appoint a conservator — someone designated to take care of the person’s affairs. In the same way that probate court can be costly and time-consuming for your client’s family, so can conservatorship. As Bivens & Associates PLLC notes: “Without a valid financial power of attorney in effect at time of need, a Court may need to appoint a Conservator over your assets. Conservatorship is an often lengthy and expensive legal proceeding under which the Court, not you, will designate another to handle your financial matters and account to the Court and your family for so-doing.”

Having a financial POA in place prevents all of this.

The healthcare power of attorney (HCPOA): Let someone manage healthcare

Aside from finances, your clients might also need a power of attorney for healthcare. The healthcare power of attorney (HCPOA, also known as medical power of attorney, healthcare proxy, or advance healthcare directive) is an estate document whereby your client, as the principal, designates another person (the “agent”) to make medical decisions on their behalf if they become mentally or physically incapacitated.

Beyond designating an agent, the HCPOA is a place where your client can stipulate their healthcare and end-of-life wishes. The agent’s job is to carry out these wishes, making decisions about treatments, which doctors and facilities to use, whether or not to have surgery, and whether to disconnect life support.

Without an HCPOA in place, if your client should become incapacitated, the state courts assign someone to help make healthcare decisions. Unfortunately, these decisions may not always follow the wishes of the client or the family they leave behind.

If you or your clients were following the news during the early 2000s, you probably remember Terri Schiavo — a young Florida woman who slipped into an irreversible vegetative state following an earlier cardiac arrest. Lacking an HCPOA or a living will (a similar document), Terri Schiavo’s fate was left up to the courts while her family and husband’s lives were thrown into dramatically publicized chaos.

The better you know the core estate documents, the better you serve your clients

A recent Accenture survey of 200 financial advisors found that clients now depend on advisors to wear more hats than ever, including therapist, relationship manager, life coach, and portfolio manager. At the end of the day, though, it’s alright to keep things simple.

What your clients really need from you is guidance that helps them secure their futures and gives them peace of mind. While you can help clients understand what the core documents help them accomplish, it’s crucial that you refer clients to a licensed estate planning attorney who will advise clients on the best strategies for putting those documents into place.

As the unpredictability of COVID-19 continues to inspire more people to take action to tidy up their financial affairs, you are uniquely qualified to serve this new wave of potential clientele. With a broad understanding of the core estate documents, estate intelligence tools like Vanilla, and an estate planning attorney on-call, you can position yourself as the expert your clients can come to and rely on for advice in all financial matters. If you want to learn more about how Vanilla helps you standardize the estate planning process, get in touch.

Change the way you serve your clients

This article is for educational purposes only and should not be considered legal advice. If you feel that the information in this article is pertinent to your situation, you may wish to consult a qualified attorney for advice tailored to your circumstances.