Fundamental building block for having your life in order.
This is another one of those topics that has a major financial component to it as well as a significant emotional component.  In an attempt to overly simplify this topic I see three reasons for establishing Wills and Trusts:

1. Minimize tax liability when transferring an estate to heirs and beneficiaries.
2. Establish how you want your estate to be transferred to beneficiaries and heirs both while you’re still living as well as upon your death.
3. Reduce the risk your wishes will not be followed
4. Squarely falls in the category of “getting your affairs in order”.
5. Once complete Jules will be a great place to store all these documents

Don’t forget that once you’re gone the estate transfer process can be a huge benefit and positive experience for those receiving what you’ve worked your whole life to provide them, but it can also (if not handled properly) become a “family buster” if people feel cheated and relationships get strained as a result of poor planning or a lack of forethought.
Let’s start with the basic set of documents and instruments that need to be put in place:

1. Will for Spouse #1.  Determines what happens to Spouse #1 personal property upon death & Guardian assignments for the minor (under age of 18) kids
2. Will for Spouse #2.  Determines what happens to Spouse #2 personal property upon death & Guardian assignments for the minor (under age of 18)kids
3. Durable Power of Attorney for property management Spouse #1.  Legally empowers someone (often Spouse #2) to make legal decisions regarding Spouse #1 personal property upon death of Spouse #1,
4. Durable Power of Attorney for property management Spouse #2.  Legally empowers someone (often Spouse #1) to make legal decisions regarding Spouse #2 personal property upon death of Spouse #2,
5. Durable Power of Attorney for Health Care Spouse #1.  Same as 3 above but for Health Care decisions should Spouse #1 become in capacitated.  In California this is a standard form.
6. Durable Power of Attorney for Health Care Spouse #2.  Same as 4 above but for Health Care decisions should Spouse #1 become in capacitated.  In California this is a standard form.
7. Declaration for Natural Death Spouse #1.  States the wishes of Spouse #1 as to how they would like to die.  Primarily whether you would like a Do Not Resuscitate declaration.  In California this is a standard form and can be found here.
8. Declaration for Natural Death Spouse #2.  States the wishes of Spouse #2 as to how they would like to die.  Primarily whether you would like a Do Not Resuscitate declaration.
9. Family Living Trust.  This is where all your significant Family Assets should be held.  Used to avoid the costly and time consuming state probate process when spouse #1 dies.
10. Various other Trust funds can be set up for the kids, for grandma or anyone you like.  Used to transfer and hold assets for the benefit of certain individuals.
11. Charitable Trust.  Used to more efficiently gift assets to charities.  I have no real experience here so will only list as something many people do.

I suspect most of you have all or a subset of these already in place.  If you don’t you should.  My recommendation is the first time you do this you hire an experienced Wills, Trusts and Estate lawyer to prepare them.  Depending on how complicated your situation is this can cost as little as $2,500 and up to a big number if your situation is very complex.  I would guess most of you will fall in the range of $5,000 to $25,000 for a full set of first time instruments and documents.  Secondly I recommend you instruct the attorney to draft them in a way that you can easily edit the parts that will change over time so as your family situation changes over time you can edit them yourself without risking the legal integrity of the various documents.  We will cover more of the detail below.  For most of you there is no need to overly complicate this process or these documents.

My most important recommendation is that regardless of how many pages long the legal documents become,  that you maintain a written set of notes that accompany these documents in your own words that describe what you feel the intent is that should have been captured in the legal documents.  Most good Attorney’s will either interview you for this information or ask you to write this up anyway.  This is very important as most of these documents leave a great deal of latitude in judgement to the Trustee.  Once you’re gone if the Trustee is left with only the legal documents to go by in trying to carry out your wishes a lot can get lost in the translation to legal speak.  I suggest that at least every 2 years you update these notes and at least every 5 years you carefully review whether the legal documents still reflect your written wishes.  When your written notes and the legal documents are no longer in sync it’s time to update the legal documents.  If the initial set was prepared properly you can do this update yourself very easily not incurring any cost other than Notary costs to execute them.  This approach also avoids the time consuming back and forth with a lawyer trying to be sure the legal documents represent your  wishes.

Make sure all the above documents are properly executed in accordance with the requirements of the state you live in.  I’m shocked by how many times I hear of these documents being prepared but the final step of properly executing them was not taken.  Store the original executed versions of each of these documents in a fireproof safe or safe deposit box and note in your notes where the originals are stored.  Make sure the key people involved in the vehicles are also aware of where these documents are held and how to access them in the event of your death.  In particular make sure the designated Trustee knows they are the Trustee and where your written description of your wishes can be found.
What goes into each instrument/document:

Special disclaimer;  I make no representation that I have any Legal experience in this area nor do I consider myself a Tax professional.  I’m simply going by my own experience handling our own family situation recently as well as hearing from many others about their experiences.
Wills (one for each Spouse):

1. Remember any assets held in the Family Living Trust are dealt with in the Trust instrument and not in the Will.  The Will itself only considers the personal property not included in the Family Trust.  As stated earlier all bank accounts , all real estate and investment properties, anything of significant value (above $25,000) should be held in the name of the trust not in the name of the individual.  The only exception to this in my own experience was when we bought a condo in Australia.  We bought it in the name of the trust and as a result the Australian government levied additional taxes on the trust that we would not have had to pay if we bought it in our own names.
2. Named Executor.  Normally the first in line is your spouse, if there’s no surviving Spouse then you name a close friend or Family member.  You may have several in succession before finally naming a Bank that handles Estates, in the event all named Executors are no longer living or able to perform the duties.  The Executor basically executes your desires as spelled out in the Will.  Remember it’s important to have your own set of written instructions that can help make clear what is stated in the Will.
3. Named beneficiary (s).  In most cases where you have established a Family Trust you will name this trust the beneficiary.  If no Trust is established most often the surviving Spouse is named the beneficiary.  We’ll cover the case where there is no surviving spouse in the Trust section.  The same rules will apply to both the Will and the Trust.
4. Named Guardians of Minor Children (Children under the age of 18).  Normally the first choice is the surviving Spouse.  If there is no surviving spouse the next choice becomes more complicated.  This is obviously an important decision and one that warrants careful consideration and discussion amongst the family and the considered guardians.  Choosing a Guardian should not be thought of as bestowing an honor on someone.  Whoever you choose will certainly think of it as an honor that you would entrust your children to their care and judgement but this does not mean this should factor into your choice of who would be best to guard your minor children if you and your spouse are gone.  Nobody wants to think of this decision in terms of it really might happen but despite the low probability of both spouses dying simultaneously you must think of it in  “what if” terms.  When talking to potential guardians they must accept it might happen and would they really be in a position to handle it should it actually happen?  Don’t just list someone in your Will assuming it will not happen and neglect to even inform them of their designation.  Again, very important to have a set of written instructions that accompany the Will making sure the Guardian knows your wishes as they pertain to caring for your children.  Even though the named guardians only legally have guardianship over the minor children they should also be prepared to support the older children as well.  Make sure the Trust instrument makes appropriate financial support available to the new Guardians.
5. Execution.  In California the execution can be done in witness by two witness (each over 18 and not family members).  Other states may require Notary.

Durable Powers of Attorney (Property and Health), (One per Spouse):

1. These instruments legally empower your spouse or someone you designate to make legal decisions regarding your personal property and health care should you not be able to make these decisions yourself.
2. It is customary to appoint backup “attorneys in fact” should the primary appointee not be able to fulfill their duties.  You can appoint as many as you like with the final entity in the chain being a bank with this capability.  Normally you would designate 1 or 2 backups before the bank.  Remember you can always update this document over time.
3. In the state of California these documents require a Witness by a Notary to be properly executed.  Other states may vary.
4. Each Spouse should have one each for Property and Health Care.
5. If one Spouse or the other appoint someone other than the other Spouse be sure that person knows they have been appointed and has a copy of the document and knows where the original is kept and how to access it.

Declaration of Natural Death (One per Spouse):

1. This is the infamous DNR (Do Not Resuscitate) declaration.  Everyone loves thinking about this one…  This documents details the circumstances or conditions whereby you are unnaturally being kept alive and you would prefer to be allowed to die.
2. In California it requires two adult witnesses of your signature to be considered legal.
3. Make sure whoever you granted the Power of Attorney to for Health Care decisions has a copy of this document and knows where the original is kept and how to access it.
4. In California this is a standard form and can be found here.

Family Living Trust:
The primary purpose of this instrument is to avoid the state probate process when one spouse dies.  This avoids having to legally transfer all assets from one (the deceased) spouse, to the living (surviving ) Spouse through the state probate process.  Since both spouses are designated as Trustees of the Trust when one dies the other assumes full Trustee responsibility for the Trust and no probate process is required.  Saves time, money and stress.
Components of the Trust instrument:

1. Included Assets.  Ideally this should include everything you own together (between spouses).  Practically speaking this should be limited to the big items like bank accounts, real estate, investments and large $ value purchases.  When you first set up the trust you need to transfer all these assets over to the name of the trust.  Once the trust is established you simply make the original purchase of large assets in the name of the trust.
2. Revocable.  This trust can be changed or cancelled at any time by both Trustees signing a new trust to replace the old one or agreeing to cancel it.
3. Trustees.  Normally the two spouses are designated as the initial Trustees.    Total control of the assets lies with the Trustees.  It gets a little more complicated if the initial Trustees and the Settlors are not one in the same.  Again, there is a  succession of Trustees if one can’t perform the duties then it passes to another and so on until it lands with a Bank.  Normally you should name at least 2 or three trustees to succeed yourselves (as original spouses) before it lands at the Bank.  Remember this is a changeable document and as time goes on and you feel a different order of Trustees makes more sense that can be changed.  It’s my personal feeling that you should not designate a Trustee that is also an ultimate beneficiary of the trust as the assets get divided upon your death.  This sets up a conflict of interest situation when the Trustee is required to make a “judgement” call on something.  I realize in many cases your most trusted people in your lives are the ones closest to you and so likely to be the beneficiaries of the trust distribution and therefor in some ways the most logical to name as the Trustee.  Tough call and many people chose Trustees that will ultimately be a beneficiary as well.  I think the risk of interest conflict and damaged relationships outweighs the argument in favor.  Just my feeling.
4. Settlors.  Normally the Trustees and the Settlors are one in the same but not always.  If you designate Trustees other than the primary Spouses of the estate then the Settlors would be the spouses of the estate and would be the beneficiaries of any income or principle distributed from the Trust while the Settlors are still living.  The trust document defines the rules by which this income or principle would be divided amongst the settlers while they’re still alive.
5. Division of Trust estate upon the death of the Settlors (the spouses).  This is the critical issue the Trust deals with.  When you and your spouse are both gone who gets what.  This is also where it is critical to write up in your own words your wishes in this regard.  Try to write up in the simplest terms you can.  As unambiguous as you can.  you want the Trustee at the time to know what you really intended to happen.  Most Trust documents are written with quite a bit of latitude for the Trustee to make judgement decisions.  you want these judgements to be as closely aligned to what you would have done had you been around to do it.  Some flexibility is needed as circumstances can change drastically once you are gone that you could not have foreseen.  You want  a Trustee you feel will make the same sort of judgements you would have made given the changed circumstances.  Give them that flexibility but at the same time make your wishes well known.  This division can be done very simply like half to Mary and half to Betty.  It can also get very complicated with the use of contingencies and percentages requiring a Math PhD to work out.  Your personal situation will dictate.  I’m not going to attempt to describe all the possibilities in between.
6. Generation skipping provision.  Can be very useful to allow the Trustee to skip a generation when dividing the assets to insure no double tax risk of generation one then later on to generation two.  This can be included in the Living Trust or set up as a separate trust from the beginning.

Various other Trust fund structures exist:

1. Grantor Trust fund often used to transfer assets to kids that are considered “under valued” at the time like equity in privately held companies that might one day go public at a much higher value than was originally paid.  With the emergence of the social media bubble maybe this form of Trust will become popular again.  It was commonly used in the last bubble.
2. Charitable Trusts.  Families can set up a trust fund to make charitable donations out of.  This structure allows you to transfer highly appreciated assets into  a Trust for Charitable donation purposes only and sell those assets not having to take on the tax liability.  Essentially it assumes the charitable gift status up front for tax purposes.

In conclusion I don’t know if the description above makes this whole area sound more complicated or less.  Regardless, it’s important everyone takes care of it.  This falls squarely under the category of “having your affairs in order”.  When your affairs are not in order it’s something you think about and worry about constantly again leading to another stress accelerator.  It’s your heirs that also benefit or are harmed by the degree to which you have your affairs in order.