Regardless of whether you have an estate plan in place or are just starting to think about one, there are some key elements everyone should know about (or refresh their thinking about). It will be worth your time to refresh yourself (or educate yourself) on some core goals you should consider when thinking about estate planning. You will also find some helpful information in how we use our specific and customized documents to help us achieve those goals.
It’s important to remember that estate planning is a process, not an event. In order to work effectively, estate plans should be updated on a regular basis…usually when there are changes in your life. Even a minor change can signal the need for an update to ensure your plan does what you designed it to do. These updates, over time, allow your plan to accurately reflect your circumstances and wishes.
At the heart of an estate plan is a combination of legal strategies that capture the essence of your life and legacy goals and ultimately enhance important relationships. An effective estate plan includes both lifetime and at–death planning components. To accomplish this, there are four essential pillars a strong estate plan needs to contain to be effective.
The Four Pillars of Estate Planning
To achieve the overall strategy and outcomes you desire to achieve with your estate plan, there are a host of legal documents designed to help you achieve your financial and personal goals. Since there’s nothing basic or simple about estate planning, we don’t label these documents as “basic”. Instead, we refer to these documents as the “pillars” of estate planning since they are fundamental components to any estate plan.
While each of these documents has its own purpose and goals, when used in conjunction, they make up a comprehensive planning strategy that can provide you with the following benefits:
1
Wills
Perhaps one of the most well-known estate planning tools, wills are a set of instructions that dictate how a client would like their estate to be handled after their death. Wills can determine who will inherit what assets, appoint guardians for underage children, and protect inheritances by appointing a person to oversee asset disbursement.
It’s important that the will you create meets all of the formal requirements to be considered valid in a court of law. The three most important requirements are that a will be: 1) in writing; 2) signed by the testator or testatrix (or by a proxy in their presence); and 3) attested by the number of witnesses required by state law. In order to avoid a will contest, it’s also important that you meet the requirements of sound mind, no undue influence and that you are acting freely and voluntarily under no duress.
If the document does not meet the requirements of state law, the decedent will be treated as having died without a will and the estate will be administered as an “intestate estate”. This means that your state’s intestacy laws will dictate how and to whom your estate will be distributed, as well as who is appointed as guardian of any minor children. Letting a court decide who should be appointed guardian is rarely in the best interests of the child in question, so it’s best to avoid this scenario by including your wishes for guardians in your will. It’s important to note that during probate an estate can be partially intestate. This can happen because the will didn’t address all of the your wishes, or if a court finds part of the will to be invalid.
You should also be aware of the limitations of a will. For instance, wills cannot control the disposition of all property, such as joint tenancy property, property governed by beneficiary designations, and property in “POD” (pay on death) or “TOD” (transfer on death) accounts.
2
Healthcare Directives
Healthcare directives are a critical part of an estate plan, not just for you, but also for your family. By planning ahead of time for incapacity or death, these documents relieve family members of the burden of having to make important decisions during an acute time of emotional stress. Healthcare directives do this by providing two specific functions: 1) dictating instructions for healthcare treatment and end-of-life wishes, and 2) appointing a healthcare agent who makes decisions on the client’s behalf (in many states this is accomplished through a separate power of attorney for healthcare and a HIPAA Authorization).
While this can be a tricky topic to navigate, formally memorializing your their wishes is imperative to avoid family disagreements or default planning. Begin by addressing end-of-life issues, such as whether you would like to:
- have/avoid life support treatment, such as ventilators, artificial nutrition/hydration, tube feeding, CPR and defibrillation;
- be an organ donor or accept an organ transplantation;
- how you would like you remains to be disposed of;
- address any religious issues, like receiving the last rights; and
- address any family or other emotional issues.
The last step is to appoint a healthcare agent. While you may choose a close family member or friend, ultimately the appointee should be trustworthy, someone who stays calm under pressure, communicates well with the family, and can advocate on your behalf. Ideally this person would be geographically approximate to you. Typically, an agent can be given the power to hire or fire healthcare providers, consent or deny recommended medical treatment, authorize pain relief, and obtain ancillary services including long-term care placement. The primary function of the health care agent is to manage your care and quality of life.
3
Financial Powers of Attorney
Like healthcare directives, financial powers of attorney address a person’s inability to make decisions for themselves if they become incapacitated. However, instead of instructions for healthcare related decisions, these documents appoint an individual who is authorized to manage a person’s property and finances. As we all know, bills must be paid, tax returns must be filed, investments must be managed, etc even during acute health episodes.
While this responsibility often falls to the spouse, parent or adult child, there are many inherent risks if you do not have a financial power of attorney. The person carrying out this responsibility may be unaware of all the financial decisions which need to be made, and/or may not be authorized to access bank accounts or investment portfolios.
Appointing an agent, who has the legal authority to access accounts and make financial decisions, can alleviate the above issues. Depending on your needs, an agent’s power can either be general or limited to a certain role, durable or non-durable (a limited scope of action), immediate or springing (triggered upon a certain event).
4
Trusts
The fourth pillar of estate planning is the Revocable Living Trust (RLT). Contrary to popular belief, trusts are not just for the wealthy, but rather can be utilized by anyone for tax and non-tax related purposes. Trusts are legal entities that hold title to certain assets, which are then managed by a 3rd party—the trustee—for the benefit of the named beneficiaries. Trusts are “funded” by having the client transfer assets into the trust upon its creation, or by designating the trust as transfer on death beneficiary. “Revocable” means that the trust can be modified by the person who creates the trust (the trustmaker) and “living” means it was created during your lifetime.
There are three major players in the establishment and execution of an RLT— the grantor/trustmaker, trustee, and beneficiary. Initially, you will likely fill all three roles and control the terms of the RLT (as grantor), manage the property (as trustee), and enjoy the property (as beneficiary).
RLTs can be used to achieve several estate planning goals, including bypassing death probate, providing lifetime incapacity planning, helping grantors in meeting their charitable giving goals, assisting with estate tax saving strategies, and providing for intended beneficiaries (it is obviously problematic for minor children to inherit your house, business, car, bank accounts and other assets). Adding sub-trusts to an RLT, which are funded at the grantor’s death, is a common strategy to achieve some of these goals. For example, when creating a trust that will ultimately pass to a spouse or minor child, the grantor may want to include asset protection, estate savings, and spendthrift provisions. Two common sub-trusts are:
Marital trust: while this type of sub-trust does provide an opportunity for estate tax savings, it is commonly used for asset protection and to prevent unintended beneficiaries. For example, if a spouse dies and leaves all of their assets outright to the surviving spouse, he or she may later remarry and name the new spouse as a beneficiary. To prevent this, the deceased spouse’s assets instead go directly into the trust, where the income generated can provide for the surviving spouse during his or her lifetime. At the surviving spouse’s death, the assets in the trust will pass to the contingent beneficiaries as designated by the grantor.
Spendthrift trusts: along the same lines, a spendthrift trust can be used to protect assets by ensuring that a beneficiary—perhaps a surviving spouse, minor child, disabled beneficiary or a financially irresponsible adult child—doesn’t misuse their inheritance by giving it away to a new spouse or creditor, being wiped out from a bankruptcy or divorce, or using it to buy a sailboat for a friend. To keep a beneficiary from squandering their inheritance, the chosen trustee can provide the beneficiary with enough income and/or principal to maintain their lifestyle, while not allowing them direct access to the trust’s principal.
What To Do Next...
If you don't have an estate plan in place, my recommendation is to get your attorney to put these together ASAP. If you don’t have one you feel would understand your situation, feel free to CONTACT ME and I can give you some insight and assistance to get this done right away.
If you do have a plan in place, ask yourself one key question, “Is your life and situation exactly the same as it was when your plan was developed?” If it is, you are probably still in good shape with regard to your plan. If there have been any changes in your life (even minor ones) since your plan was designed, I would strongly recommend you get it reviewed to ensure it will do what you expect it to. Unfortunately, the majority of plans we see are not in sync with the current situation and won’t do what people expect they will do. Lower your Risk and get your plan reviewed to ensure it is going to do what you want (and hope) it will do.
I hope this has been helpful. If you do the proper work on this, I can guarantee you will have NO. MORE. TEARS. A little bit of effort here can help you sleep much better at night knowing you can still be involved if something happens to your (adult) children.