Estate Planning Documents Explained

One of the most common misconceptions about estate planning is that the process is only valuable to the extremely wealthy — that the only people who need to procure documentation for proper distribution of assets are those with a tremendous amount of assets to worry about. However, this is far from the case. Everyone should at least have a will, and individuals who take care of their assets before they pass ensure the financial security of those left behind. Entrepreneurs who own small, family-owned businesses or startups need to make time to plan the future of this vital asset for the worst-case scenario. 

In this article, we explain the importance of five types of estate planning documents for the continued success of your loved ones and your business in the event of your passing. 

The six standard estate planning documents

• Last Will and Testament

Of the items on this list, the will is the most widely-recognized estate planning essential. A will dictates how a person’s assets are to be distributed after their passing — addressing everything from personal items to expensive properties. 

A personal representative is appointed to act as a fiduciary for the will upon the subject’s passing to ensure that the assets are distributed according to what is written. It’s possible to appoint more than one executor to handle different aspects of your estate — for example, your spouse may distribute your personal and financial assets, while your close business partner may be put in charge of a business that is left behind. 

• Advance Medical Directive 

In the event that illness or disability renders a person incapable of making decisions about their own health, an Advance Medical Directive appoints a healthcare agent to make those decisions. These also usually list protocols for specific situations, such as whether or not a person wants to be put on life support even if their chances of survival are extremely low. 

• Durable Power of Attorney

In the event that a person’s mental functioning is impeded — by the onset of a disabling event or as a result of illness — a Durable Power of Attorney appoints a trustworthy attorney-in-fact as the fiduciary for financial decisions. Often the attorney-in-fact is a relative or close friend and generally is consistent with the individual appointed as personal representative under the Last Will and Testament. 

• Revocable Living Trust

Revocable trusts help avoid the hassle of probate (the court supervised distribution of assets at death). Created during the lifetime of the Grantor, assets are re-titled to the revocable trust.  The Grantor maintains control and benefit over the trust assets as they are typically named as the trustee and beneficiary during their lifetime. Because the trust is revocable, the Grantor can also amend the trust terms or even disband the trust during their lifetime. Upon passing all assets in the trust are distributed to the intended beneficiaries without the need for court supervision.  A revocable trust also acts as a safeguard that ensures a smooth transfer of authority to trustees if the Grantor becomes incapacitated.

• Updated Beneficiary Designations

Finally, individuals who are putting together their estate planning documents should remember to update the beneficiaries listed under any retirement account or life insurance policy each time there is a significant life change, such as a birth, death, marriage, or divorce. Beneficiary updates are the most overlooked estate planning procedure, but they are essential to ensuring your benefits are transferred according to your preferences. Assets with beneficiary designations will supersede the distribution set forth in the last will and testament and/or revocable trust.

Failure to plan: risks for families and businesses  

Reluctance to sort out estate documents is understandable, given the often stressful circumstances that would put them into effect. However, failure to procure each document can lead to confusion and misunderstandings for loved ones: 

• Lack of a will leads to intestate succession — default distribution of assets between spouses and children or parents and children. Most people would agree that they prefer to have a say in this matter. 
• Without a power of attorney, a court appoints a guardian of the property. 
• Court-mandated guardian appointment occurs for incapacitated individuals without an advance medical directive. 

Along with potential losses for families, neglecting to prepare estate planning documents creates a risky outlook for small businesses and their futures. While it may be hard to consider a future where you are no longer involved in your own business, failure to address the possibility can lead to: 

• An intestate succession of your business. Often, state law splits business rights between beneficiaries — a spouse and children, for example — and this can become a complicated situation. 
• The need to liquidate the business at below market values due to loss in market value from failing operations or to provide funds for payment of estate taxes.

How to know when it’s time to update documents 

Once estate planning documents have been arranged completely, it is recommended that they be reviewed every 2-3 years.  In addition, documents should be reviewed each time a major life event indicates a change in family dynamics. This can mean the birth of a child, a marriage, a divorce, ​​or a death in the family — in all of these cases, it’s worth revisiting the assets distributed to each beneficiary. 

Estate planning for all of your family’s needs 

If you’re a small business owner interested in gathering estate planning documents, Chesapeake Growth Network is here to help. Our team of trust and estate lawyers specializes in successful estate planning for everyone who needs it, from young entrepreneurs to well-established business leaders. We’ll support you as you plan for your future and the future of your business, and provide representation where necessary for estate beneficiaries. We understand the importance of keeping your assets in good hands and recognize the difficulties that families undergo after the death of a loved one. We’ll treat you and your family with respect, whether you’re planning your estate for the first time or making your expected final adjustments. 

Contact Chesapeake Growth Network for more information on how our attorneys can help secure essential estate planning documents for you and your loved ones. We simplify issues in the accounting, financial, and legal sectors for small businesses throughout Maryland and the D.C. area. 

In our next article, we’ll discuss different types of financial statements in-depth and explain why they matter for your business.