The Dartmouth Memory Handbook
Section 9: Legal Issues
ESTATE PLANNING FOR EVERYONE
Timothy W. Caldwell, Esq.
Renee A. Harvey, Esq.
Lebanon, NH 03766
(Revised September, 2016)
Estate planning—everyone needs it, regardless of 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 your goals, your family and your community.
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?
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 in the future?
• Ongoing education, keeping your plan up-to-date, involving your “helpers,”1 to help ensure your expectations are met; and
• Transferring assets and values: Passing 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 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 and protect assets;
• Take care of my family;
• Support charity;
• Plan for nursing home costs/Medicaid;
• Take care of minor children;
• Take care of disabled children;
• Take care of divorcing children or children with addictions; • Minimize taxes; and
• Avoid probate.
We rarely get this answer: 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 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 other 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. It can lead to additional questions:
• Will our helpers 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?
• How will disagreements among our beneficiaries be handled?
In other words, will things be taken care of in the same way they would have had you remained competent? Can we plan for the inevitable wrinkles in life? Can we create a process to address these potential 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 our death—and then doing something about it before it is too late. Our motto, “Taking Good Care of Tomorrow,” captures the essence of planning:
• It’s about you (your care, your hopes, your dreams and your legacy); • It’s about your beneficiaries (how can I best help them?); and • It’s about process (“estate planning” not an “estate plan”) because your plans may change…laws, circumstances, and beneficiaries do too.
Plans must be adapted as conditions, beliefs, and laws change. To understand how your plan works, it must be reviewed regularly, revised and updated regularly, and sometimes it must be completely revamped. Helpers must be taught (and re-taught) how things are supposed to work—they must be ready!
One of our goals is for all of our clients to be able to answer “yes” to these 4 questions: • Do I understand my estate plan?
• Does it meet my goals and will it have a positive impact on my beneficiaries?
• Are my assets titled in a manner that is consistent with my plan? AND • Do my “helpers” understand their responsibilities?
II. Planning for Incapacity
A. Health Care Powers of Attorney, Financial Powers of Attorney & Living Wills
In order to maintain some control over our lives when we are faced with mental incapacity, it is important to decide now who we want to handle our financial affairs and whom we want to make medical decisions for us when we are no longer able to make these decisions for ourselves. There are legal documents we use to give authority to another person and to provide instructions about what your preferences and wishes are.
These include a General Durable Power of Attorney (sometimes called a Power of Attorney for Financial Matters) and an Advance Directive (frequently called a Health Care Power of Attorney or Health Care Proxy).
A General Durable Power of Attorney helps ensure your financial affairs are managed and maintained as you wish them to be. A General Power of Attorney may become effective immediately (while you are still capable of handling your own affairs) or it can become effective only upon your incapacity. The choice is yours to make. You need to carefully consider when you want your Agent to have authority.
The Agent under your General Durable Power of Attorney frequently has broad powers to deal with your property and property interests. Common powers include: check writing, investing assets, dealing with digital assets, and paying taxes. Additional powers may be granted such as authority for gifting and the authority to adjust your estate plan in the event of changed circumstances or changes in the law (for instance, Medicaid planning). We call these powers extraordinary powers.
An Advance Directive is the tool we use to empower a person, your Health Care Agent, to advocate for your preferences and wishes regarding medical treatment. Your Agent’s authority becomes effective when your doctor determines you are no longer able to make your own health care decisions.
An Advance Directive conveys broad general power to your Agent, your Agent may make all health care related decisions for you, and it typically includes specific instructions about continuing (or ending) life sustaining treatment and withdrawing medically administered nutrition and/or hydration.
An Advance Directive increases the likelihood your health care choices and instructions are followed once you can no longer advocate on your own behalf. It is a critical tool.
However, it alone is not enough. You must have conversations with your Agent (and your alternate Agents) about your wishes. And just like most things in life, there will be changes. It is important to revisit your decisions and conversations with your Agents regularly.
The power granted in General Durable Powers of Attorney and Advance Directives end at your death. Frequently Agents use the power post mortem—without knowing it has expired or in an effort to complete unfinished work. Sometimes this does not cause harm—but it is not authorized and can lead to personal liability.
Many married couples assume that in the event of their incapacity, their spouse will have the legal right to make all decisions for them. Parents frequently make the same assumption with respect to their dependent children. As with many assumptions, this may not be correct. While New Hampshire has recently adopted a law permitting surrogate decision making for people without an Advance Directive it is no substitute for planning and creating an Advance Directive. The Probate Courts have a growing number of guardianships due, in part, to the failure to sign Health Care and Financial Powers of Attorneys in advance of incapacity.
Who you choose to be your helpers is critical to the success of your plan. It is important to choose wisely and to the extent possible to avoid basing your decisions on “political” considerations. Rather focus on these questions: Knowing what I know today, who is in the best position to make health care decisions for me? Who is in the best position to make financial decisions for me? If the persons I choose today are unable to serve, who should serve in their place?
Serving as a helper is a big deal. Your choice of helper is also a big deal. As you choose your helpers it is critical to make sure they are willing and able to serve. It is equally important to ask yourself: Do my helpers understand my wishes and their responsibilities? Do they have a clue? If not, what can you do to help inform them of their duties?
Regardless of your choice of Agent or the breadth of power granted to your Agent, we recommend you update your Advance Directive and General Durable Power of Attorney at least every two or three years.
No one likes to think about the possibility of his or her own incapacity or the incapacity of a loved one. Regardless, we should all plan for it. Study after study confirms that nearly everyone will face some form of incapacity during his or her lifetime. Could you and your family survive the financial and emotional challenges of your incapacity? The bottom line is to be prepared. Make certain Powers of Attorney for Health Care and Financial Decisions for every adult in your extended family are in place.
If you have signed a General Durable Power of Attorney and an Advance Directive, it is less likely a guardianship will be required if you become mentally incapacitated.
However, sometimes a guardianship is necessary, even if you have executed those tools. For example, if the person designated as Agent is not able to serve or misuses their authority, or if the Principal refuses the medical treatment directed by his or her Agent, someone may have to petition the Probate Court to be appointed guardian of the principal.
Because a guardianship takes away a person’s rights to make decisions for themselves, a guardianship proceeding is a court proceeding and it is adversarial. An “interested person” in the appropriate Probate Court initiates it. An attorney is appointed to represent and defend the rights of the proposed ward. Frequently, an attorney represents the person petitioning for the guardianship, the petitioner. If it is proven the “proposed ward” is legally incompetent, the Court will appoint a guardian and grant the authority to make financial and/or health care decisions for the ward.
A guardians’ authority can be very broad or it can be limited, depending on the circumstances. Some states permit the nomination of the person(s) you would like to serve as your guardian, if it becomes necessary. Perhaps just as important, you may also designate people who you do not wish to serve as your guardian.
Once a guardian has been appointed, the Court will advise them of their duties. The Court will require the guardian to post a bond to ensure the guardian’s faithful performance of their duties to the ward. The guardian must conduct an asset search and file an initial 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 by the ward’s property, all expenses paid 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” the guardian will also make health care decisions on behalf of the ward and file an annual report regarding the status of the ward’s health.
C. Nursing Home
It is one thing to plan for the challenges of managing your affairs if you become incapacitated. It is an entirely different challenge to plan for and pay for any required specialized care. This isn’t just a concern if you become mentally incapacitated. There are plenty of scenarios where you may be fully capable of managing your affairs, but may be incapable of physically caring for your own needs. Some of the most common causes may be chronic illness, a stroke, a disability, and other mobility issues.
According to the U. S. Department of Health and Human Services, almost 70% of people turning age 65 will need long-term care at some point in their lives. This creates a risk to your estate that should be addressed and planned for. Living assistance is an important topic for everyone. Some important questions to ponder:
• Do I want to continue to live at home? Is that possible?
• How can I maintain my independence and autonomy?
• Will my children or other concerned people let me decide what’s best for me?
• Where am I going to live if I am unable to live independently?
• Do I have the resources and the right environment to stay in my own home by hiring help to provide services for me during the day and possibly during the night?
• If I need to use a wheelchair at some point, is my current home wheelchair accessible?
• What are my options (such as living with family or a nursing facility) if I require assisted living?
The next big question is:
How will I pay for any temporary or permanent long-term care and living assistance I may need?
The expected cost of a nursing home or assisted-living facility can easily range from $78,000 – $120,000 per year. Some facilities are even higher. Having around-the-clock care in your own home could cost in excess of $150,000 per year.
There are three sources of funds that may be available to pay for long-term care needs: 1. Your own resources – “self-insuring”
2. Long-Term Care (LTC) Insurance that must be purchased prior to the need 3. Medicaid
Self-Insuring or paying your own way, may be an option if you have sufficient assets and income. Remember, the annual costs will likely range from $100,000 to $150,000.
These costs will increase. Increases in the cost of health care rival increases in the cost of college education—both are increasingly unattainable for many of people.
Long-Term Care (LTC) Insurance requires preplanning. It is difficult, if not impossible, to get insurance once you are sick. There are a variety of products ranging from “reimbursement” plans to “cash” policies. There are a growing number of “hybrid” options which combine life insurance with LTC insurance. Sometimes premiums may be paid with so-called “qualified” assets (IRAs).
Some of the factors to look for in a LTC policy include:
• Nursing home and home care coverage;
• Sufficient daily payouts ($250.00/day is a good start);
• Low elimination periods (number of days you must be in the nursing home before benefits begin);
• Acceptable duration of benefits (number of years);
• Renewability (make sure it is guaranteed renewable);
• Waiver of premiums; and
• Inflation protection.
Benefits under most long-term care insurance plans begin when you are unable to perform 2 of the 6 activities of daily living (ADL). These are: • Bathing and showering (washing the body)
• Eating/feeding (including chewing and swallowing)
• Functional mobility (moving from one place to another while performing activities)
• Personal hygiene and grooming (including brushing/combing/styling hair) • Toileting
Medicaid is a government program that pays medical costs and long-term care costs.
Medicaid is designed as a payor of last resort. For those who are unable to self-pay and who do not have LTC insurance protection, the last resort is to seek government assistance through Medicaid. To qualify, you must meet strict clinical and financial eligibility requirements. 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 (5) years before an application is made.
This rarely happens.
In our experience, most Medicaid planning is done at the time “Mom” or “Dad” enters the nursing home. We call this “crisis” planning. While planning options remain in crisis situations, they are more limited than they might otherwise have been. Whether planning ahead or planning in a “crises mode” there is a tension between the family’s desire to preserve assets and the state’s desire to access those same assets.
III. 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, by trust, or by 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.
A Will is a written instrument in which you express your wishes about how your assets are to be distributed after your death. Because a Will is effective only after death, it is not considered a decision-making document during one’s life.
To make it valid, a Will must be signed by the person making the Will, known as the “testator,” and by two witnesses who witness the testator’s signature, and sign in the presence of each other and of the testator.
The basic structure of a Will includes:
• An introductory clause identifying the testator and his/her beneficiaries.
• A paragraph naming the executor. The executor is responsible for administering the Will. This includes collecting the assets the decedent owned at his/her 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 states.
• A paragraph authorizing payment of debts.
• Possible beneficiaries of a Will are: individuals, trusts, and charities.
• A paragraph naming a guardian of minor children, if necessary. Basic considerations in naming a guardian include: What if your chosen guardians get divorced? Will the guardian be paid? You must also consider issues related to the guardian’s own family.
Trusts are created for the purpose of managing, using and protecting assets over a period of time. The primary purpose of a trust is to protect assets for the benefit of a beneficiary or beneficiaries.
A trust is a legal entity that establishes rights and responsibilities for the property titled in the Trustee’s name. Trustees, rather than executors, carry out the intent of the “Trustmaker.” (Sometimes referred to as “Donor,” “Grantor,” or “Settlor.”) The trusts discussed in this summary are revocable when created. These trusts become irrevocable on the death of the Trustmaker.
Trusts have gained wide use over the last 30-40 years. A trust provides instructions for the use of assets over some period of time. A trust controls assets titled in the name of the trustee and accounts naming the trustee as the beneficiary, such as a life insurance policy or a retirement account. A trust does not control jointly titled assets. A trust may control assets such as life insurance and retirement accounts if the trust is named as the beneficiary.
Generally, trusts are created when the Trustmaker wishes to protect property for him or herself and for his or her beneficiaries, whether a spouse, children, (or further descendants), friends, or charities. The Trustmaker may wish to provide asset protection for a number of reasons, including: the Trustmaker’s incapacity; second marriage (“blended family” issues); a beneficiary’s poor (or failed) marriage; risks associated with a beneficiary’s profession; risks associated with a beneficiary’s behavior (fast driving, drinking, spending); taxes, or a beneficiary’s illness, incapacity or disability. A fully funded trust also has the benefit of avoiding probate, which can take a long time.
The basic ingredients of a trust are simple:
• Naming of beneficiaries
• Possible beneficiaries of a trust are: individuals, (sub) trusts, and charities, just like a Will.
• Instructions for the use of the trust property
• A trustee(s)
• Powers granted to the trustee
• Property held by the trustee
The trustee has 3 basic duties, which must be exercised “prudently” and in the interest of the beneficiaries:
1. Investing trust property
2. Accounting for trust property, including preparing income tax returns for the trust
3. Distributing trust property
How a trustee invests property will depend on the terms and goals of the trust. For instance, is it a short-term trust designed to protect the trust property during minority? If yes, then the investments will likely be conservative and made with an eye toward preservation of the assets as opposed to growth. On the other hand, a trustee of a trust with a long-term horizon is likely to invest for growth.
Regardless of the term of the trust, it is important for the trustee to have a process for making investment decisions and to follow the process. At a minimum, the trustee should meet with a financial professional (an advisor to the trustee) annually to review the beneficiary’s circumstances, the appropriateness of the investments, and to make adjustments accordingly.
C. Taxes at Death
Much has been written about transfer taxes, sometimes referred to as the estate tax.
Early in 2013 federal legislation on the estate tax finally was enacted and made “permanent.” The “applicable exclusion amount” sometimes referred to as the transfer tax exemption, is now $5,000,000, indexed for inflation.2 The estate tax rate is now 40%.
A few additional key points about the estate tax:
• Decedents may leave an unlimited amount to their spouse without their estate 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.
• Following the US Supreme Court’s decision in U.S. v. Windsor in June 2013, a “spouse” includes same sex spouses.
• Some states, such as Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, and others have their own transfer taxes. Today, estates valued at less than $2,750,000 are not subject to Vermont’s tax. Amounts in excess of that amount are subject to a 16% tax.
• Currently, New Hampshire has no estate tax.
• The federal gift tax and the generation skipping transfer tax exemption (other transfer taxes) are $5,000,000, just like the estate tax—both indexed for inflation.
Likewise, the tax rate is 40%.
• The federal transfer system now permits “portability.” Portability is the ability to transfer a deceased spouse’s unused transfer tax exemption to his or her surviving spouse. For people with substantial estates this can save a significant amount of tax at the survivor’s death and may eliminate it altogether.
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. 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, trusts should be used.
Where a trust is used, the trust is frequently designed so the property in it (including appreciation, if any) is 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 described 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 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 to open an estate.
• The compiling of an inventory.
• The selling of assets.
• Paying debts.
• Distributing assets.
A number of assets are not subject to probate, such as: property held jointly with rights of survivorship (assuming the survivor is alive), annuities, retirement accounts or other types of individual retirement accounts, and 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 to each other.
IV. Designing Your Estate Plan
A well-designed estate plan is the result of a team effort. Client, attorney, financial, insurance, medical 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: • How will I be cared for if I am unable to care for myself?
• Who will make decisions for me if I am unable to make them myself?
• What is really important to me?
• Create a list of your assets. Are these assets going to grow? Decline (i.e., 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:
o Are you married? If so, is it your first, second, third marriage?
o Do you have children from a former relationship?
o Would leaving assets in trust for your beneficiaries be more beneficial to them?
o Is one or more of your beneficiaries disabled or incapacitated, have an addiction, in a bad relationship, in a risky profession or subject to other liabilities?
o Are you and your spouse comfortable with the potential survivor’s ability to manage the inherited assets? If no, this indicates the need to create a trust.
o Do you want your children to immediately inherit all of your assets at your death? If not, this indicates you may want a trust.
o 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 or her own devices.
o Do you have married children? You may need to consider protecting your child’s inheritance from the claim of an ex-spouse.
o What charities have been important to you during your life? What charities do you want to remember at your death?
• Will your (or your beneficiary’s) estate be subject to estate tax? If yes, your estate plan should include a credit shelter trust and perhaps other tax saving techniques.
• An issue not to miss! Are you and your spouse U.S. citizens? If not, spousal gifts may be limited and may require special planning.
V. The Decision Makers – Your “Helpers” As noted, 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 health care agent while another may be better suited to deal with property and financial decisions. Alternates should always be named.
If the estate is large or complicated or if family members lack the necessary skills or because of “strained” family relations, a third party or professional Trustee, such as an attorney, CPA 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.
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.