Decoding Your Estate Plan
When people think about estate planning, they usually think about a will or a trust that says who gets what when they die.
But a successful estate plan is more than just making sure that your assets efficiently end up with the right people. It’s also about making sure your family has the right level of access and control if you become incapacitated or if you are not able to manage your own affairs.
Let’s look at some of the documents we often draft for our clients as part of an effective estate plan:
Wills
Although we generally advise against having only a will, since it usually requires an expensive and time-consuming probate court process at death, every estate plan starts with a will, even those that use a trust. There are three different types of wills that we generally utilize, depending on your needs:
A “simple will” is the classic one with which most folks are familiar. It names an executor – the person who will carry out your instructions in the document – and then stipulates who should receive your property and assets at your death. This type of will is called “simple” because conceptually it is – it simply directs where your possessions should go at death. It is generally suitable for small estates, with relatively few assets. Although simple, the document still delves into a multitude of elements to help reduce costs, handle creditors, and deal with numerous “what if” scenarios so that ultimately the process is as smooth and easy as possible for your family. This type of will generally requires a probate court process (depending on the nature of your assets, and overall estate value at your death).
A “complex will” similarly manages your assets at death but is better suited to handle special circumstances or more intricate distribution preferences for your assets. Still used for relatively small estates, it provides greater control. For instance, if you have minor children or even young adults, you normally will not want to distribute your assets to them outright. Rather, you will want to lay out some “rules” as to when, and how, they can spend their inheritance, while they mature and learn to make better decisions, without undue influence by others. Another use of a complex will is to provide for a beneficiary with special needs who will require ongoing care after your death. Yet another use of a complex will is to give you control over how your pets are handled at your death. Just like with a simple will, a complex will generally requires a probate court process.
Finally, a “pour-over will” is a particular type of will used in conjunction with a trust. When used correctly, this type of will does not require the intervention of a probate court. By the terms of the pour-over will, all the property you owned at death is “caught” and is “poured-over” into your existing trust. This type of will is a safety net of sorts, since a properly drafted and funded trust will handle all your assets without the need for any will. But if, for instance, you neglected to properly title a bank account in the trust, that account will be caught by the pour-over will (potentially through the probate process) and eventually be distributed according to the instructions laid out in your trust. Whenever a Trust is used, a pour-over will is essential.
Revocable Living Trust
The Revocable Living Trust is a more comprehensive document that names a trustee and gives them the legal right to manage and control the assets held in your trust. Like the simple and complex wills described above, the trust names beneficiaries who are to receive your trust's assets when you die. But a trust does something more. It instructs the trustee to manage the trust's assets for your benefit during your lifetime. Because the trust handles your estate both while you are alive and at your death, it is an infinitely flexible document that works well to simplify your life and the life of your loved ones.
While you are alive, you are generally the named trustee of your own trust. Thus, having a trust normally does not change how you manage your assets, does not require you to seek permission from anyone as you spend your money, and doesn’t have any tax implications. Essentially, once signed, there is hardly any difference in how you maintain your life and assets.
But should you become incapacitated, the trust rules kick in and give your successor trustee – the person you named to act after you in the trustee role – the ability to manage your assets on your behalf. Without the need for court intervention, they can now help you with your financial needs using your assets.
And at death, a well drafted and funded trust can provide substantial additional benefits:
It avoids the probate process, and so greatly reduces legal fees, costs, and the time it takes to pass your property to your beneficiaries at your death.
A trust also gives you the ability to “pull strings from the grave” – set specific rules for when and how assets should be spent. In essence, it includes within it many of the concepts of a complex will, but without the requirement of a probate court process – for instance, it ensures that minors and young adults receive more protection while they mature, and can distribute assets to a separate special needs trust for a beneficiary with disabilities.
The trust has special provisions and mechanisms to better protect your beneficiaries from creditors. For instance, if your spouse was in a car accident just before your death and has creditors pursuing them, or your child is in the midst of a messy divorce, the last thing they will want is to inherit anything from you since those assets will very likely go right to the hands of those creditors. A well-drafted trust helps protect their inheritance, while still making it available for their use without handing it over to creditors.
A revocable living trust can also maximize the benefits of tax rules and provide flexibility to your heirs to help provide tax relief depending on the nature of your assets and family makeup.
Durable Power of Attorney for Management of Property and Personal Affairs
This type of power of attorney allows you to name an “agent”, also known as an “attorney-in-fact” (although it has nothing to do with being an attorney), to deal with matters affecting your property. Your agent is given the power to act on your behalf, as if you were present and acting, with respect to your assets, finances, and general personal affairs. This is the person who can deal with your credit cards, retirement accounts, and talk to your accountant and lawyer. They can sign your name to contracts, make gifts of your property, open and close investments, and take your dog to the vet. The authority of the agent can be effective immediately upon proper execution, or it can kick in only upon your incapacity. Each option has its own benefits and drawbacks, and is a matter of personal preference. Either way, being “durable” means that the agent is authorized to continue to act during any period when you are incapacitated.
Advance Health Care Directive
An advance health care directive is also a power of attorney – where you name someone (also called an agent) to do things on your behalf – but it is limited to medical decisions. This authority can also start immediately upon signing, or go into effect only upon incapacity, and again each has its drawbacks. A well-drafted health care directive goes beyond the simple “pull the plug” directive. They can include decisions about pain management, safety, and in-home care. They can address sharing information with family members, organ donation, and burial wishes. They can deal with nuances about what you value most, about religion or spirituality, and just about anything you want to communicate in the eventuality where you cannot make your own decisions.
Nomination of Guardians
If you have minor child, a nomination of guardian document names the person who will have legal and physical responsibility for that child on your death. They won’t necessarily have direct financial responsibility – since your child’s financial needs will be taken care of generally through your trust – but they will need to work with your trustee to request funds for your child’s needs. Beyond simply naming the person who will be in charge, this legal document also spells out some of the rules that you may want to apply to the guardian. For instance, do you want information about your child shared with family members? Do you want your child to be raised in a specific religious or spiritual environment? As with other parts of your estate plan, this document is specifically tailored to your individual needs and concerns.
-oOo-
The above represents a few of the documents we draft for our clients as part of their comprehensive estate plan. Depending on specific needs, assets, and tax issues, we have many other “tools” in our toolchest to handle various nuances, complexities, and eventualities. As always, if you need specific advice as to your own circumstances, speak with a trusted lawyer.