The Three Essential Estate Planning Documents

Many times, when I meet with estate planning clients for the first time, they ask that I tell them what they “need.” While I often preach the mantra that estate planning should not be “cookie cutter” and is not a one-size-fits-all approach, it is fair to say that there are three (sometimes four) essential estate planning documents that everyone needs at least by the time they approach retirement age. While the contents can vary between clients, the need for the documents applies to everyone. In this blog, I highlight these three documents.

Durable General/Financial Power-of-Attorney

The North Carolina Uniform Power of Attorney Act (Chapter 32C) governs the process for appointing someone to act on your behalf with respect to property and financial transactions.  A durable financial power of attorney, sometimes referred to as a durable general power of attorney, allows a person to appoint someone to have broad authority to manage their financial and property affairs. A power of attorney can also have a limited effect, providing authority for an agent to complete a single real estate or other transaction on the behalf of a person. However, for estate planning purposes, a general power of attorney granting broad ongoing authority is typically what is needed.

Remember, estate planning is about obviously “planning.” In most cases, when clients first come to my office, they are perfectly capable of managing their own property and financial affairs. So, why does one need a document appointing someone to act on their behalf? Well, if you wait until you need the document, it is typically too late to sign it due to lack of mental capacity or other physical constraints. In this scenario, your family would be required to petition the court for guardianship.  The purpose of executing a power of attorney in advance is to avoid these proceedings which are time consuming, public record, expensive and force the Court to appoint a guardian to act on your behalf.

Why is it called “durable”? The term durable means the power of attorney remains effective notwithstanding subsequent incapacity or mental incompetence. These are typically the scenarios under which the power of attorney is needed, so a power of attorney for estate planning purposes should always be durable. The current statute provides for automatic durability unless the instrument specifically provides otherwise.

A general power of attorney can be springing or effective immediately. By default, a power of attorney is effective immediately. A springing power of attorney is effective upon the occurrence of some event after its execution. For example, a springing power of attorney may provide that it will not become effective until the person giving the power becomes incapacitated. The power of attorney may provide how this should be determined or it may be governed by the statutory default. In any event, in most cases for estate planning purposes, and especially when a spouse, child or trusted loved one is to serve as the agent, I tend to discourage springing powers of attorney due to the delay they can cause in allowing your agent to act on your behalf. In my experience, when a power of attorney is needed, it is often urgent and springing powers of attorneys can often cause additional hurdles for individuals who are acting with good intentions. Additionally, a well-drafted power of attorney should also require the agent to provide an accounting for any transaction they conduct on behalf of the principal while the principal still has capacity and, in some cases, to the principal’s heirs and the attorney who drafted the document if the principal lacks capacity. In other words, there should be built-in protections for unscrupulous actors. Most individuals see acting as someone’s power of attorney as a chore as opposed to an opportunity to act in bad faith. 

Along these same lines, if specifically provided, a power of attorney can authorize the agent to undertake a wide variety of estate planning and gifting techniques even if the agent benefits from the transaction. Again, in most cases, this is generally a wise provision as it allows your spouse or child to work with an attorney to protect your assets and engage in further estate planning if you did not get around to doing such while you were capable. And as I mentioned, well-drafted powers of attorney should have built in mechanisms to help guard against the fairly rare occurrence of unscrupulous actors.

A power of attorney is only effective during your life and becomes automatically void and revoked upon the death of the creator of the power of attorney i.e. “the Principal.”  

Health Care Power-of-Attorney, Declaration for a Natural Death and Living Will

Chapter 32A-15 governs the process of appointing a health care power of attorney and Chapter 32A-26 allows such to be combined with a declaration for a natural death. Chapter 90, Article 23, provides for the creation of an independent advanced directive aka “living will.”

A health care power of attorney allows you to appoint someone to make major health care decisions for you if you are incapacitated as determined and documented by two physicians, or by some other criteria you specify for determining your incapacity e.g. one physician, a specific physician, a board certified neurologist etc.  It can also allow the person/s appointed to have immediate access to medical records (including protected health care information under HIPAA), authority to admit or discharge you from a health care facility and the authority to speak to doctors, make appointments and other day-to-day tasks. For estate planning purposes, my general practice is to have the day-to-day tasks and the HIPAA waiver effective immediately. I also believe it is wise to include, within the health care power of attorney, a declaration of natural death including the situations in which it will apply and instruction for your health care providers to defer to your agent, withhold or withdraw life sustaining procedures or provide maximum treatment. In my practice, you are covered by a single health care document appointing your agent and providing end of life instructions.  But in certain cases, you may opt for a separate living will/advanced directive. Therefore, I say there are three, but in certain cases, there may be four essential estate planning documents.

Additionally, Chapter 122C-75 allows a person to give advanced instructions regarding mental health care if they so desire. A person will execute this document if they have specific wishes regarding the administration of psychoactive medication, admission to a mental health care facility and visitors to such, or a mental health condition that may require specific instructions or information to be understood properly. In many cases, if a spouse or child is acting as your health care power of attorney, they will likely already know this information.

Despite popular belief that it belongs in your Will, your health care power of attorney is the appropriate legal document to include wishes regarding the disposition and donation of remains, parts and organs. While powers of attorney are generally revoked upon death, health care powers of attorney remain effective for a short period after death for the sole purpose of allowing the health care agent to exercise any authority with respect to anatomical gifts, autopsy and disposition of remains. While it is perfectly fine to put such wishes in your Will, in most cases, the disposition of your remains will be long dealt with before your Will is probated. Any specific instructions or limitations on your health care agent’s ability to dispose of your remains or donate organs or parts should be included in your health care power of attorney. 

Like a durable general power of attorney, a health care power of attorney is signed well before it is needed to avoid guardianship proceedings.

Last Will and Testament

Finally, a Will is a well-known essential estate planning document that is often one of the first items that comes to mind when a person begins thinking about estate planning. A Last Will and Testament controls property you own on your date of death which will pass via probate. I find there is much confusion surrounding what a Will does and does not do. There are still many antiquated notions about the “reading of the Will” and a belief that a Will controls many aspects of a person’s estate which it does not. All that aside, a Will remains an essential document for estate planning purposes. In most cases, some form of probate will be required to administer a person’s estate. To make this process easier on your loved ones, a Will is vital. In a Will, you appoint a personal representative of your estate (sometimes referred to as an Executor). A personal representative is a catch-all phrase which encompasses any type of fiduciary who will be in charge of your probate estate. In NC, an Executor may not be necessary for smaller estates. Small estates can be administered by affidavit in NC.

Property which typically does not pass via probate (and therefore a Will) includes retirement accounts, life insurance, payable or transferrable on death accounts, life estates, property held in trust, joint bank accounts with rights of survivorship and other assets owned jointly with rights of survivorship. However, even accounts which may have beneficiary designations, may rely on the terms of a Will in the event all of the beneficiaries on the policy or account have predeceased the account owner. Personal effects, heirlooms and furnishings, automobiles and real estate typically do not fall into these non-probate categories unless advanced estate planning is undertaken. For these reasons, a Will is a critical safety net.

To avoid these nuanced issues involving probate and non-probate assets, a living trust provides a more seamless approach to estate planning that does not involve this bifurcation when properly funded and named as a beneficiary on certain assets. I do not include a living trust in the list of essential estate planning documents simply because it can sometimes be cost prohibitive for clients and requires a greater time and detail-oriented investment into estate planning whereas the other essential estate planning documents allow for more of a transactional approach which tends to suit the masses.

Nevertheless, in another blog entitled “Last Will and Testament versus Living Trust” I dive deeper into the benefits of a living trust and why the investment is worth it for many clients.

Estate Planning & Admin