One of the most common estate planning tools is the Will. The basic purpose of a Will is to ensure that your assets go where you want them to go after death. In addition, Wills also have many other purposes and benefits outside of passing property. For example, a Will can:
1. Create testamentary trusts
Testamentary trusts are commonly created for the benefit of minor children in a parent’s Will in order to designate, and provide management for, assets for the children until they reach a certain age. There are other purposes as well, including providing for a surviving spouse during their lifetime.
2. Name Guardians for Children
3. Articulate Funeral and Burial Wishes
4. Designate the Fiduciaries (Executor/Trustee)
5. Plan for Estate and Gift Tax issues
When a person passes away, their estate often goes through a court directed process called probate or estate administration, where the assets of the deceased are controlled and distributed. The time involved in completing estate administration can vary, but it is not uncommon for it to take months or even in excess of one year.
Typically probating an estate involves:
Filing of a petition with the court, serving notice to beneficiaries under the will or to “statutory heirs,” petitioning to appoint the personal representative for the estate, taking an inventory and appraisal of estate assets, notifying creditors of the estate, paying estate taxes, and distributing the assets.
For various reasons, some people prefer to avoid the probate process, or at least not use probate to pass the vast majority of their assets. One way this can be done is to use
Revocable Living Trusts
A revocable living trust is an estate planning tool that allows someone to remain in control of their assets during their life and privately transfer these assets to beneficiaries at death, as the creator (the “grantor”) of the trust directs. Additionally, a revocable trust enables trust assets to be managed during any period of incapacity of the grantor.
A trust holds legal title to a person’s assets and provides for their management, use and enjoyment, and ultimate distribution. Oftentimes the grantor of the trust serves as initial trustee and a beneficiary of the trust. The trustee holds the legal interest in the assets while the beneficiaries have the right to use and enjoy the distributed assets.
A key step in creating a proper revocable living trust is the transfer of assets to the trust during the grantor’s life. Without a successful transfer of an asset to a trust, the asset, if subject to probate, will end up in probate. If it is desirable to avoid probate, then these assets must be transferred to the trust appropriately.
Finally, a revocable trust can be amended or terminated at any time during the grantor’s life.
Revocable living trusts allow for the immediate transfer of assets after death without involvement by a court. In other words, no probate is typically necessary for trust assets. A person can also manage his/her affairs if incapacitated, and avoid a guardianship or conservatorship. One can also avoid the expense and public nature of probate proceedings. (As a side note, in North Carolina, probate court fees are capped and are generally not as burdensome as many other states.) Since a probate file is a court proceeding, it is a public court file. A revocable living trust can offer privacy, efficiency and cost effectiveness.
Not all assets need to be transferred to a revocable living trust to avoid the probate process. For example, assets with beneficiary designations such as life insurance policies or annuities payable directly to a beneficiary transfer automatically and would not typically go through probate if no incidence of ownership resided with the deceased. IRAs, 401(k) accounts and most other retirement accounts also transfer automatically to the named beneficiaries, avoiding probate. Bank accounts that are payable-on-death (POD) with a named beneficiary also pass to the beneficiary, and may not necessarily need transfer to a trust. Assets jointly held with right of survivorship (i.e. Joint Tenancy with Right of Survivorship/Tenancy by the Entirety) typically pass to the survivor upon death without needing transfer to a trust. Finally stocks, bonds and brokerage accounts can be held in beneficiary form, called transfer-on-death registration (TOD). TOD assets will automatically pass upon death to the beneficiary.
It is important to keep up with these types of assets and make sure to update beneficiaries upon any important changes in one’s life, as well as naming contingent beneficiaries when necessary.
Durable Power of Attorney
A Durable Power of Attorney (POA) allows another person (the “Agent” or “Attorney-In-Fact”) to carry on the financial affairs of an individual (the “Principal”), should the Principal become disabled or incapacitated and unable to carry on his/her affairs. Without a Durable POA, a person’s loved ones may have to petition a court to be appointed as guardian or conservator in order to make decisions for them if they become incapacitated. The court guardianship process can be very time-consuming, expensive, and just plain exhausting.
There are generally two types of Durable POAs: 1) a present Durable POA, where the power is immediately transferred to the Agent; and 2) a springing Durable POA, effective upon someone’s later disability as determined by their doctor(s). Each of these has its own advantages and disadvantages and should be discussed with your lawyer prior to signing.
Typically, most people choose a spouse, a grown child, or a close relative to be their Agent under a Durable POA. It is important to have someone you trust completely as your Agent. It is possible to have multiple Agents named in the document, though it’s usually best to have a Primary Agent who would serve first, then a Secondary Agent in the event the first Agent cannot serve or is unwilling to serve.
Despite the wide availability of Power of Attorney forms on the internet, it is important to have a competent estate planning lawyer draft your Durable Power of Attorney. There are some powers normally available under a Durable POA, which your Agent may not have unless these powers are specifically noted in the document. Despite the form having standard language suggesting that your Agent can do anything you could otherwise do, many standard form Power of Attorney forms do not enumerate these powers specifically and this can have devastating consequences when you need them most.
Health Care Power of Attorney
A Health Care Power of Attorney allows a person to appoint someone else to make medical treatment decisions on their behalf if they lose the ability to do so. These documents can allow a health care agent broad authority to make decisions about all aspects of a person’s health care, or only limited authority about certain aspects of one’s care or treatments. Additionally, the health care agent may be given certain wishes and instructions in the document they must follow. Health care providers must follow your agent's decisions as if they were your own.
Living Will (Advance Directive)
A Living Will, also known as an Advance Directive, allows a person to document their wishes regarding medical treatment, typically at the end of their life, should they become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment.
In compliance with the 1996 Health Insurance Portability and Accountability Act (HIPAA), a HIPAA authorization form is commonly signed which allows release of medical information to one’s Health Care Power of Attorney Agents, successor trustees, family or any other individuals designated.
Other Estate Planning Tools
In addition to the basic estate planning tools listed above, in certain instances typically involving individuals of a higher net worth, more sophisticated tools may be desirable and may be able to 1) provide asset protection strategies, 2) remove assets from the probate process, and 3) limit or avoid exposure to estate taxes. A couple examples of these more complicated tools are:
Family Limited Partnerships/Limited Liability Companies
The purpose of a Family Limited Partnership (FLP) is to protect family assets and avoid full estate and gift taxes. In addition, an FLP allows for retention of control and the gifting of partnership interests to family members. A Limited Liability Company among family members can also be used for these same purposes. Sometimes these tools are unnecessarily used and it is important to discuss the benefits and burdens of these with your attorney.
Irrevocable Life Insurance Trusts
An Irrevocable Life Insurance Trust (ILIT) is a tool used to take ownership of a life insurance policy. Through a properly established and administered trust, an insurance policy can be excluded from one’s estate and thus help to reduce or avoid estate taxes.
There are many other estate planning tools not mentioned here. For more information, or to make an appointment to discuss your estate plan, please contact The Mitchell Law Firm, PLLC.