Estate Planning for Everyone


Table of Contents




Introduction


Estate planning — everyone needs it, regardless of his financial wealth — and yet, not many of us want to think about it and even fewer of us make decisions and create plans.  This summary describes selected aspects of estate planning and the process of estate planning.  It is not exhaustive.  It is meant to raise questions and lead to conversations.  We hope that as you consider and review your planning you will reflect on the goals you have set for yourself, your family and your community.  Your estate planning begins with you. 

  • What do you want to accomplish in the next three months? The next three years?
     
  • How do you want your life to look when it is finished?
     
  • How do you want to be remembered?
     
  • What does money mean to you?

We believe estate plans have three distinct phases, all of which are interconnected:

  • Counseling and designing your plan:  What can I do? What do I want to do? How do I want things to work today and into the future?
     
  • Ongoing education: keeping your plan up-to-date and assuring that expectations are met.
     
  • Transferring assets and values:  Passing on what I have in a manner that will be best for my beneficiaries.

This summary includes descriptions of some of the most common planning tools. It also discusses some basic administrative requirements of planning.  It asks you questions that we hope will help you focus on what matters most to you. 

Why prepare an estate plan? We ask this simple question at the beginning of each class we teach and when we first meet with our clients.  Over the years some of the most common answers are:

  • Peace of mind;
     
  • Assure efficient transfer of assets to family members;
     
  • Preserve assets and asset protection;
     
  • Take care of my family;
     
  • Support charity;
     
  • Plan for nursing home costs/Medicaid;
     
  • Minor child legal Guardianship;
     
  • Take care of special needs children;
     
  • Take care of divorcing children or children with addictions;
     
  • Minimize taxes;
     
  • Avoid probate.
We rarely get this answer:  Who will take care of me if I am unable to care for myself.

When thinking about estate planning, nearly everyone focuses on what happens after they die.  Undoubtedly this is an important question.  However, focusing on post mortem issues misses the most important person in your estate plan: You!  How do you want to live?  Where do you want to live?  How do you want to be cared for if you are unable to make decisions?  What do you want to accomplish in the time that is left to you?  Who do want to reconnect with?  What relationships do you need to tend to?

Never has planning for mental incapacity been more important, and its importance continues to grow.  We are living longer.  One cost of longevity is an increased likelihood that at some point we may be unable to make decisions for ourselves. 

If we suffer from Alzheimer’s or some form of dementia, or otherwise lose our ability to control our lives, who will make decisions for us?  This can be a difficult and unsettling question, which leads to additional questions:

 
  • Will our helpers[1] be able to assist us during our incapacity or disability?
     
  • Will our helpers know what we want?
     
  • Will they be able to assist our beneficiaries during our incapacity or disability? 
     
  • How will disagreements among our beneficiaries be handled?
In other words, will things be taken care of in the same way that they would have been had you remained competent?  Can we plan for the inevitable wrinkles in life?  Can we create a process that addresses these challenges?  This is a critical part of everyone’s planning.

Estate planning includes coming to terms with the fact that ultimately we all lose control, either because of our incapacity or death, and then doing something about it before this happens.  Caldwell Law’s motto, Taking Good Care of Tomorrow captures the essence of estate planning:
  • It’s about you: your care, hopes, dreams and your legacy;
     
  • It’s about your beneficiaries: How can I best help them? and
     
  • It’s about process:  estate planning rather than an estate plan because your plans will change.  Laws, circumstances and beneficiaries also change as time goes by.
Plans must be adapted as conditions, beliefs and laws change.  How your plan works must be reviewed periodically.  Frequently, the estate plan must be revised, and sometimes, it must be completely revamped.  Helpers must be taught (and re-taught) how things are supposed to work. They must be ready!
 

Disability/Incapacity Planning

Health Care Powers of Attorney, Financial Powers of Attorney and Living Wills

The way to maintain some control over our lives when we are faced with mental incapacity is to decide now, while we are still competent, who we want to handle our financial affairs and who will make medical decisions for us when we are no longer able to do so.  The most common tools used for these purposes are called Powers of Attorney.

For many people, Powers of Attorney for Financial Affairs and Powers of Attorney for Healthcare (frequently called Advance Directives) are the most important estate planning tools they will prepare.  A Power of Attorney grants power to a person, the Agent, to make or carry out instructions of the signer of the power, the Principal.  Agents under a Financial Power of Attorney frequently have broad powers to deal with the Principal’s property and property interests.  Common powers granted include: check-writing, investing assets, paying taxes and dealing with governmental entities, gifting, and defending or prosecuting lawsuits. 

Powers of Attorney for Healthcare grant the Agent general authority to make healthcare
[2] decisions for the Principal and give specific direction with respect to continuing or ending life support and withdrawing medically administered nutrition and/or hydration when the Principal is no longer able to give informed consent to his care. 

With limited exceptions, a Power of Attorney expires upon the death of the Principal.  A Durable Power of Attorney continues to remain in effect during the Principal’s disability if (and only if) it contains specific language required by state law.  A Springing Power of Attorney takes effect only upon the happening of an ascertainable event, such as the declaration of incapacity of the Principal by his or her physician.  All health care powers of attorney are springing powers.

Many people assume that in the event of their incapacity, their spouse will have the legal right to make medical decisions for them and to handle their financial affairs.  People also assume that they may act on behalf of their children for as long as their children are dependent on them.  Neither assumption is correct.  In each case, Powers of Attorney are required.  Courts report a growing number of guardianships because of the failure to sign Health Care and Financial Powers of Attorney in advance of incapacity.

A Living Will is the document used to give your medical care providers instructions with respect to the continuation or termination of life-sustaining treatment
[3] and medically administered nutrition and hydration.  Generally, a Living Will is not considered until two physicians, including your attending physician, have determined that you are terminally ill or permanently unconscious.
 

Guardianship

When someone loses the ability to make good or safe decisions, the Probate Court having jurisdiction over the person may appoint a Guardian of the person’s estate and/or person. The appointment of a Guardian requires an adversarial proceeding to be initiated by an interested person in the appropriate Probate Court.

If you have executed a Durable General Power of Attorney for Financial Affairs and a Durable Power of Attorney for Healthcare, it is less likely that a guardianship will be required if you become mentally incapacitated.  However, sometimes a guardianship is necessary, even if you have executed these tools.  For example, if the person designated as Agent is not able to serve, or misuses his authority, or if the Principal refuses the medical treatment authorized by his healthcare Agent, someone may have to petition the Probate Court to be appointed Guardian of the Principal.

If the petitioner proves that the proposed ward is legally incompetent, the Probate Court will appoint a Guardian and grant him authority to make financial and/or healthcare decisions for the ward.  The Guardian’s authority can be very broad or it can be limited, depending on the circumstances.

Some states permit you to designate the person(s) whom you would like to serve as your Guardian, if that becomes necessary.  Perhaps just as important, you may designate people who you do NOT wish to serve as your Guardian.

Once a Guardian has been appointed, he will be advised of his duties by the Probate Court.  In addition, the Probate Court will require the Guardian to post a bond to ensure the Guardian’s faithful performance of his duties.

The Guardian of an estate must conduct an asset search and file an initial Guardianship Inventory soon after being appointed.  In addition, on each anniversary of the Guardian’s appointment, the Guardian must file an account showing all income paid to the ward or earned on the ward’s property, all expenses made on behalf of the ward and the amount of the ward’s assets being held by the Guardian.  If the Guardian has authority over the ward’s person then the Guardian will make healthcare decisions on behalf of the ward and file an annual report regarding the status of the ward’s health.

In addition to losing the ability to make decisions because of mental incapacity, physical disability needs to be planned for.  What if you are unable to take care of yourself at home?  Will you hire care providers? Will you move to an independent living or assisted living facility?  A nursing home?  Making a move before you need to is always easier—both for you and for your family.

 

Nursing Home Care

If you have to go to a nursing home, how will you pay for it?  There are three possible sources of funding for a nursing home stay:  your own assets, long-term care insurance or Medicaid.  With the average monthly cost of nursing home care hovering in the $6,000 to $10,000+ range, paying for this service is often a challenge.  Using your own funds (your savings) or having your insurance pay for all or part of your care is a reasonably straight-forward proposition.

Qualifying for Medicaid is another matter.  Because Medicaid is a needs-based program, the state does not want to pay for care unless you do not have the income or resources to pay for it yourself.  There are complicated rules about transferring assets, converting assets from countable to non-countable, and spending down one’s assets that must be considered when applying for Medicaid.  Because of strict transfer rules, planning for Medicaid should begin five years before an application is made.  Not surprisingly, most people do not plan ahead.  In our experience, most Medicaid planning is done at the time someone enters the nursing home.  We call this crisis planning. Planning options in crisis situations are more limited than they might otherwise have been. Whether planning ahead or planning in a crisis mode, there is tension between the family’s desire to preserve assets and the state’s desire to reach those same assets. For additional information on this topic, please see our “White Paper” on Long-Term Care Planning, which can be found on this website.

 

Planning for Death


Planning for the transfer of assets at death is another focus of estate planning.  Assets may be transferred at death by Will, Living Trust or other will substitutes.  “Will substitutes” is not a legal term, but a term of convenience that describes a variety of means by which assets may be transferred upon death.  The most commonly used forms of will substitutes are beneficiary designations, such as those on life insurance policies; annuities or retirement accounts; in trust for bank accounts; payable on death securities or investment accounts; and accounts held as joint tenants with rights of survivorship.

Wills

A will is the written instrument in which you express your wishes about how your assets are to be disposed after your death.  Because a will is effective only after death, it is not considered a decision-making document during one’s life.
To be assured of its validity, the will must be signed by the person making the will, (the Testator) and by two witnesses who witness and sign in the presence of each other and of the Testator. The basic structure of a will includes the following elements:

 
  • An introductory clause that identifies the Testator and his family.
     
  • A paragraph naming the Executor.  The Executor is responsible for administering the will. This includes collecting the assets the decedent owned at his death, using those assets to pay the decedent’s debts and the debts and expenses of the estate, (including taxes and the costs of administration), and distributing the remaining assets in the manner set forth in the will. If someone dies without a will, an Administrator is appointed and the decedent’s property is distributed in accordance with the rules of intestacy established by the respective state(s).
     
  • A paragraph authorizing payment of debts, called distribution provisions. This section may be something simple such as “I leave everything to my wife.” Alternatively, you may name a variety of beneficiaries. You can also create a trust under your will. What is a trust? A trust is a legal entity that establishes rights and responsibilities for the property titled in the trustee’s name. A trust is used when you want to provide asset protection for your beneficiaries.
     
  • A paragraph naming minor child legal guardianship. Basic considerations in naming a Guardian include: What if your chosen Guardian(s) gets divorced? How will the Guardian be paid? You must also consider issues related to the Guardian’s family.

Trusts

Trusts are created for the purpose of managing, using and protecting assets over a period of time.  Trustees, rather than Executors, carry out the intent of the Trustmaker.  (The Trustmaker can also be referred to as Donor, Grantor or Settlor.)  The Trustee, like the Executor, is a fiduciary[4]. The trusts discussed in this summary are sometimes referred to as “Living Trusts” because they are created during the life of the Trustmaker.  Living Trusts are revocable  trusts (may be changed or cancelled by the Trustee) but become irrevocable trusts (cannot be changed or cancelled) upon the death of the Trustmaker. 

The basic structure of a trust includes the following elements:
  • An introductory clause that identifies the Trustmaker and his family.
     
  • A paragraph naming the Trustee(s).  The Trustee is responsible for administering the trust.  During his life, the Trustmaker is in control of the trust assets.  After the Trustmaker’s incapacity or death, a Successor Trustee, who is named in the will, takes over the administration of the trust.  Some of the operative provisions of a trust are similar to those included in a will.  This is particularly true for the articles or sections of the trust that deal with the payment of expenses and dispositions of specific bequests. 
     
  • The provisions of a trust that give direction regarding the distributions of assets to beneficiaries are frequently very different from the terms of a will.  In these cases, the Trustee must exercise discretion (sometimes a lot of discretion) and determine whether or not a distribution is in the best interest of the beneficiary and is in keeping with the Trustmaker’s intent.
     
  • Property already owned by the Trustee does not require Probate Court supervision.  Rather, a Successor Trustee appointed by the terms of the trust administers the trust after the Trustmaker’s incapacity or death.
Generally, trusts are created when the Trustmaker wishes to protect property for himself and for his beneficiaries, whether they are a spouse, children, further descendants, friends or charities.  The Trustmaker may wish to provide asset protection for a number of reasons, including: the Trustmaker’s incapacity, a beneficiary’s poor or failed marriage, risks associated with the beneficiary’s profession, risks associated with the beneficiary’s behavior (fast driving, drinking, drugs, spending), taxes, or a beneficiary’s illness or disability.

Once a trust is created, title to the Trustmaker’s assets is typically transferred from the Trustmaker to the Trustee(s) of the trust.  More often than not, the Trustmaker is also the Trustee.  While the Trustmaker is alive and competent he can do whatever he wants with the property in the trust, without regard to the trust’s terms.  

The process of transferring ownership of the Trustmaker’s property to his trust is termed funding or retitling.  This consists of sending instructions to banks, departments of motor vehicles and other title-holding entities that the Trustmaker’s property is now to be held in a fiduciary capacity, as in John Smith, Trustee, John Smith Trust. 

The failure to retitle assets during the Trustmaker’s life is one of the most common mistakes of trust-based plans.  Failure to properly title assets can lead to unintended consequences and missed opportunities, including payment of unnecessary taxes and reduced asset protection.

Taxes at Death

Much has been written about transfer taxes, sometimes referred to as the estate tax.  In late 2010 a new “2-year” law which increased what is called the “applicable exclusion amount” sometimes referred to as the transfer tax exemption, to $5,000,000.  The estate tax rate was reduced from 45 percent to 35 percent for amounts in excess of $5,000,000.  If Congress does not change the law prior to January 1, 2013, the law in effect in 2001 will become the law again and the exemption will be $1,000,000, with the rate of taxation ranging from 45 to 55 percent.  Given the current environment in Washington, it is unlikely this will happen.  Expect a transfer tax exemption between $3,500,000 and $5,000,000 after 2012.  (Because very few estates are subject to a tax under the current scheme and the rate is so low, some commentators believe the estate tax may be eliminated at the end of 2012.)  A few key points about the current transfer tax:

  • Decedents may leave an unlimited amount to their spouses without their estates being subject to the estate tax, but the property has to be left outright or in a special type of trust. Thus, in the typical “I Love You Will” (one leaving everything to the surviving spouse) there is no estate tax due at the first spouse’s death.
     
  • Decedents may leave $5,000,000 to any persons other than the spouse without paying the federal transfer tax of 35 percent.
     
  • Some states, such as Connecticut, Maine, Massachusetts, New York, Rhode Island and Vermont, (and others) have their own transfer taxes. Today, estates valued at less than $2,750,000 are not subject to Vermont’s tax.  However, as soon as an estate exceeds this amount, the entire estate (not just the amount over the exempt amount, which is the case with the federal estate tax) is subject to Vermont’s tax.
     
  • Currently, New Hampshire has no estate tax.  Its estate tax is tied to the tax credit the federal government used to give estates that paid state estate taxes.  Today, there is no credit.  However, if the 2001 federal law returns, the New Hampshire estate tax will return. This is sometimes called the “sponge” or “pick-up” tax.  It does not increase the overall tax burden to the estate.
     
  • For 2011 and 2012, the gift tax and generation skipping transfer tax exemption (other transfer taxes) are both $5 million with a top rate of 35 percent.
     
  • For deaths in 2011 or 2012, the executor of an estate may transfer any unused estate tax exemption to a surviving spouse.  This is called “portability.”  Because the election to do this is made by filing a timely estate tax return, it is frequently advantageous to file a return even for smaller estates on the death of the first spouse in order to transfer the unused exemption to the surviving spouse. Only the most recent deceased spouse’s unused exemption may be used by the surviving spouse.
Prior to portability, to take advantage of each spouse’s estate tax exempt amount, married people typically established trusts to hold assets transferred at the first spouse’s death for the benefit of the surviving spouse.  Doing this assured each spouse’s exemption could be used.  Technically, portability eliminates this requirement.  However, portability does not apply to the Generation Skipping Transfer Tax (GSTT) exemption. Therefore, if a married person wishes to utilize both the estate tax exemption and the GSTT exemption, a trust should be used.

Where a trust is used, the trust is frequently designed so the assets in it (including their appreciation, if any) are not subject to a transfer tax at the death of the beneficiary for whom the trust was originally created. 

Many of the tax planning principles describe above apply to spouse and non-spouse beneficiaries. For instance, if a beneficiary does not want his inheritance included in his estate when he dies, then giving him all (or part) of his inheritance in a trust that allows him to use the assets but not own them can save his beneficiaries thousands, and in some cases millions of dollars, in transfer taxes.  A common name for this type of trust is a Generation-Skipping Transfer Tax Trust.  It is important to remember that what is skipped is the tax, not the use of the assets.  In New Hampshire, it is possible to create a trust that can last “forever” and never be subject to transfer taxes. 

As noted above, taxes are only part of the equation.  Often asset protection for a surviving spouse or other beneficiaries is a planning goal.  For instance, protecting assets from creditors, predators, divorce, the high cost of nursing home care and other risks are important for some clients. A trust created to protect assets from these life risks is a common goal. Structuring a trust to provide the correct balance of “protection” on one hand and “use” and “control” on the other requires consideration of a variety of factors.

 

Probate

What is probate?  When is probate required? Probate is the judicial process by which an Executor or Administrator is appointed, gathers assets, pays creditors and taxes and distributes assets.

The length and expense of probate varies.  Lengthy probate administration is sometimes viewed as its chief disadvantage. The fact that there is judicial supervision is viewed as its chief advantage.  In probate, the judge will consider the following matters:
  • Initial petitions,
     
  • The compiling of an inventory,
     
  • The selling of assets, and
     
  • Lawsuits.
A number of assets are not subject to probate, such as: property held jointly with rights of survivorship; annuities; retirement account or other types of individual retirement accounts; life insurance payable directly to a beneficiary other than the decedent’s estate; and assets held in a trust created outside of a will.

Joint tenancies are the easiest and simplest form of probate avoidance.  No fancy documents are required, and in some jurisdictions it is the assumed mode of ownership.  However, joint tenancies can lead to unexpected, and sometimes disastrous, results.  Special care should be taken when considering joint tenancy, especially when the joint tenants are not married.


 

Designing Your Estate Plan


A well designed estate plan requires a team effort.  Client, attorney, financial, insurance and tax advisors all have a role in the design of a plan.  Some of the first issues you and your advisors need to consider include:
  • Create a list of your assets. Are these assets going to grow or decline? Are you retired and drawing on your retirement accounts?  Can you prepare a projection of growth?

  • What do you want done with your assets? Some questions leading to further discussions include:

  • Are you married?  If so, is it your first, second or third marriage?

  • Do you have children from a former relationship?

  • What does money mean to you and your beneficiaries?

  • What impact do you want your estate to have on your beneficiaries?

  • Would leaving assets in trust for your beneficiaries be more beneficial to them?

  • Is one or more of your beneficiaries disabled, have an addiction, in a bad relationship, in a risky profession or subject to other liabilities?

  • Are you and your spouse comfortable with the potential survivor’s ability to manage the inherited assets?  If not, this indicates the need to create a trust.

  • Do you want your children to immediately inherit all of your assets at your death?

  • Do your children have children? How do you want to take care of your grandchildren? You may need to consider the consequences of a young adult with large sums of money left to his own devices.

  • Do you have married children? You may need to consider protecting your child’s inheritance from the claims of ex-spouses.

  • What charities have been important to you during your life?  What charities do you want to remember at your deat?

  • Will your or your beneficiary’s estate be subject to estate tax?  If yes, your estate plan should include asset protection trusts and perhaps other tax-saving techniques.

  • An issue not to miss:  Are either you or your spouse NOT a U.S. citizen? If yes, the spousal disposition has to be in the form of a special kind of trust in order to qualify for the marital deduction described above.

The Decision Makers – Your Helpers

Agents, executors and trustees are all fiduciaries.  A fiduciary has an obligation to act in the best interest of the Principal, Trustmaker and other beneficiaries.  The choice of helper is critical to the success of every plan.  Sometimes one person is best suited to be the Healthcare Agent while another may be better suited to deal with property and financial decisions.  As well, Alternates should always be named. 

If the estate is large or complicated, if family members lack the necessary skills, or if family relations are strained, a third party or Professional Trustee, such as an attorney, accountant or corporate trustee, may be appropriate as one of your helpers.  Or, a plan may provide that a family member makes investment decisions and a Professional Trustee oversees the distributions and accounting.

Because legal, tax, family and economic circumstances constantly change, there has been an increased use of what is sometimes called a Trust Protector in trust-based plans. A Trust Protector is given powers to amend the trust after it becomes irrevocable. This gives the trust added post mortem flexibility.


Conclusion


Estate planning covers a variety of issues that require careful consideration by everyone involved. Like life, plans are rarely static: Circumstances change, one’s outlook changes, beneficiary’s lives and circumstances change, the law changes.  Keeping you and your plan (and the people helping you with your plan) up-to-date is a critical part of any plan. We hope this summary will help you begin the process of planning or reviewing your plan. If you have further questions or need advice, visit our website:  http://www.estateandelderlawgroup.com/.
 

[1] Helper(s) is the term we use for agents, executors and trustees.

[2] Healthcare in this instance means any treatment, service or procedure to maintain, diagnose or treat your physical or mental condition.

[3] Life-sustaining treatment includes mechanical respiration, kidney dialysis or the use of other external mechanical and technological devices, drugs to maintain blood pressure, blood transfusions and antibiotics.

[4] An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another's benefit.



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