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Estate planning involves creating a strategy to direct one’s health care and property when he or she is unable to do so. The goal of an estate plan is to provide clear and detailed instructions to those who are appointed to help. These instructions are simply the wishes of the person whose estate is being planned (referred to as the "principal"). Some wishes are assumed, such as minimizing federal and state taxes, and maximizing flexibility, but all directions of the estate plan are at the discretion of the principal.
Because the process of estate planning is thought of as complex, many people try to avoid an estate plan. However, complexity is not the burden of the principal. To the principal, the process of estate planning is as straightforward as creating a manual for the care of his or her health and property.
There are several mechanisms available to accomplish the wishes of the principal. Those that are address in this article are powers of attorney, living wills, medical orders, wills, and trusts.
For many principals, powers of attorney are the most important estate planning instrument available. Powers of attorney come in two basic forms: powers of attorney for health care and powers of attorney for property. A power of attorney for health care nominates a person, an attorney-in-fact (referred to as a "patient advocate" in Michigan and an "agent" in Illinois), to make health care decisions for the principal. It also gives the attorney-in-fact directions as to what should be done in the event the principal cannot direct his or her own medical treatment. The ability of the attorney-in-fact to act under a power of attorney for health care usually commences upon the disability or incapacity of the principal. Generally speaking, a principal is deemed disabled or incapacitated if he or she is incapable of making informed decisions regarding his or her health care.
If the attorney-in-fact needs to act for the principal, he or she must act pursuant to the directions of the Power of Attorney. These directions (referred to as "directives") should be very detailed and thorough, and may give instructions on everything from religious requests to comfort care.
Alternatively, a power of attorney for property appoints a person, an attorney-in-fact (referred to as an "agent"), to direct the principal’s affairs concerning property and finances. Unlike a power of attorney for health care, an attorney-in-fact under a power of attorney for property could be given the ability to act for the principal even if the principal is not disabled or incapacitated. Much like a power of attorney for health care, however, if the attorney-in-fact needs to act for the principal, he or she must act pursuant to the principal’s directives. Again, these directives should be very detailed and thorough, and may give limited or general power to the attorney-in-fact to conduct the principal’s property and finances.
A living will is another means by which a principal can direct his or her health care. A living will does not grant decision making power to an attorney-in-fact, instead it is a list of directions for the attending medical practitioners. A living will allows the principal to specify the kind of treatment he or she would want in specific situations.
Medical orders are reserved for patients that are terminally ill. Although there are several variations of medical orders, the most widely used is a Do Not Resuscitate order (referred to as a "DNR"), which specifies that if the principal’s heart stops, or if the principal stops breathing, he or she is not to be given CPR. It is standard procedure for medical care facilities to attempt to resuscitate all patients if they experience heart failure or stop breathing; a DNR would relieve the medical care facility from this duty.
A will is a legally-binding instrument that directs the principal’s property in the event of his or her death and appoints a legal representative to perform the principal’s wishes (referred to as a "personal representative" or "executor"). A will applies only to property that passes through the probate process. There are many interests in property that pass outside of the probate process, thus are not directed by a will. Some examples of this type of property include, but are not limited to, jointly-owned property, property that is held in a trust and property with a named beneficiary, such as life insurance proceeds, individual retirement accounts or 401(k) plans. Regardless of how complex or simple the estate, a will should always be included in an estate plan.
Finally, a trust is a legal arrangement in which the principal gives legal title of property to a person or entity (referred to as the "trustee") to hold for the benefit of another person (referred to as a "beneficiary"). A trust contains instructions that the trustee is bound to follow in safekeeping the trust property. There are three main reasons to employ the use of a trust arrangement: first, a trust, for the most part, keeps the principal’s estate from having to endure the probate process; second, a trust can be used to shelter property from people or entities such as creditors, children who are too young to handle large amounts of money, and even the government; last, a trust can have significant tax-saving advantages by reducing the taxable portion of the principal’s estate.
Each of the estate planning mechanisms noted possesses great benefits to assist all of us in the estate planning process. The combined use of some, or all, of these tools provides for a dignified means to carry out the principal’s wishes.