FAQ Estate Planning
Q: What is estate planning?
When someone passes away, his or her property must somehow pass to another person. In the United States, any competent adult has the right to choose the manner in which his or her assets are distributed after his or her passing. (The main exception to this general rule involves what is called a spousal right of election which disallows the complete disinheritance of a spouse in most states.) A proper estate plan also involves strategies to minimize potential estate taxes and settlement costs as well as to coordinate what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event of death or disability. On the personal side, a good estate plan should include directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you know and trust would do that for you, and know when you would want them to authorize extraordinary measures, if any.
Q: Why is it important to establish an estate plan?
Sadly, many families don’t do proper estate planning because they don’t believe that they have “a lot of assets” or otherwise believe that their kids can just come in and divide their assets by themselves. If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death or incapacity. This often results in the wrong people getting your assets as well as higher estate taxes.
If you pass away without establishing an estate plan, your estate would undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.
Q: What does my estate include?
Your estate is simply everything that you own, anywhere in the world, including:
- Your home or any other real estate that you own
- Any interests you may have in any business
- Your share of any joint accounts
- The full value of your retirement accounts
- Any life insurance policies that you own
- Any property owned by a trust, over which you have a significant control
Q: Who do I trust to take care of my children if both my spouse and I are gone?
So daunting is this question, that many parents avoid it altogether, and have no idea who they would list as a guardian, or if they each agree on the same people. I am reminded of a story from a colleague that brings the importance of not only making this decision together as parents, but having the difficult discussion in the first place:
An 11 year old boy lost both parents in a tragic car accident. Mom and Dad had seen an attorney to complete their estate planning, but had put off completion until after the trip that killed them.
Three people fought for guardianship of the boy: An uncle, who was the “dark horse” because he lived out-of-state; an aunt who was very close to the boy, but has a loser husband and no stable home environment; and the biological father’s sister. Biological father had given up all legal rights to the boy at birth. Sister had no legal relation to the boy, and had no relationship with the boy at all.
Sister won guardianship.
Based on an independent evaluator’s assessment, the court found that the boy should stay in the state, and that the aunt was too unstable. No one was allowed to present evidence at the hearing. It was based solely on the evaluator’s recommendation, which was accepted as gold.
The boy did not get to express his opinion or his desires in this matter, because he had not yet reached the magic age for which the court would listen and give weight to his wishes. He was so upset at the prospect of living with someone he barely even knew, over the family that he knew and loved, that he spent the entire morning prior to the hearing throwing up.
No one knows what Mom and Dad would have wanted for this boy, because they had not discussed it between themselves, had not informed their attorney, and had put off executing documents that would have put the world, and the court, on notice of who they believed should raise their son.
Q: How do I name a guardian for my children?
If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.
Q: What estate planning documents should I have?
A comprehensive estate plan should include the following documents, prepared by an attorney based on in-depth counseling which takes into account your particular family and financial situation:
A Living Trust can be used to hold legal title to and provide a mechanism to manage your property. You (and your spouse) are the Trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor Trustees to carry out your instructions as you have provided in case of death or incapacity. Unlike a Will, a Trust usually becomes effective immediately after incapacity or death. Your Living Trust is “revocable” which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate. Read the FAQ section on Living Trust for more information.
If you have a Living Trust-based estate plan, you also need a Pour-Over Will. For those with minor children, the nomination of a guardian must be set forth in a Will. The other major function of a Pour-Over Will is that it allows the executor to transfer any assets owned by the decedent into the decedent’s trust so that they are distributed according to its terms.
A Will, also referred to as a “Last Will and Testament”, is primarily designed to transfer your assets according to your wishes. A Will also typically names someone you select to be your Executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a Guardian as well as alternate Guardians in case your first choice is unable or unwilling to serve. A Will only becomes effective upon your death, and after it is admitted by a probate court.
A “Durable Power of Attorney for Property” allows you to carry on your financial affairs in the event that you become disabled. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you when you are disabled. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.
There are generally two types of durable powers of attorney: a “present” durable power of attorney in which the power is immediately transferred to your attorney in fact; and a “springing” or future durable power of attorney that only comes into effect upon your subsequent disability as determined by your doctor. When you appoint another individual to make financial decisions on your behalf, that individual is called an “attorney in fact”. Anyone can be designated, most commonly your spouse or domestic partner, a trusted family member, or friend. Appointing a power of attorney assures that your wishes are carried out exactly as you want them, allows you to decide who will make decisions for you, and is effective immediately upon subsequent disability.
The law allows you to appoint someone you trust – for example, a family member or close friend to decide about medical treatment options if you lose the ability to decide for yourself. You can do this by using a “Durable Power of Attorney for Health Care” or Health Care Proxy where you designate the person or persons to make such decisions on your behalf. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent’s decisions as if they were your own.
A Living Will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment. Almost all states have instituted living will laws to protect a patient’s right to refuse medical treatment. Even if you receive medical care in a state without living will laws this document is useful to a court trying to decide what an unconscious patient would want. In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.
Some medical providers have refused to release information, even to spouses and adult children authorized by durable medical powers of attorney, on the grounds that the 1996 Health Insurance Portability and Accountability Act, or HIPAA, prohibits such releases. In addition to the above documents, you should also sign a HIPAA Authorization Form that allows the release of medical information to you.