Why Plan Your Estate?
The knowledge that we will eventually die is one of the things that seems to distinguish humans from other living beings. At the same time, no one likes to dwell on the prospect of his or her own death. But if you postpone planning for your demise until it is too late, you run the risk that your intended beneficiaries – those you love the most – may not receive what you would want them to receive whether due to extra administration costs, unnecessary taxes or squabbling among your heirs.
This is why estate planning is so important, no matter how small your estate may be. It allows you, while you are still living, to ensure that your property will go to the people you want, in the way you want, and when you want. It permits you to save as much as possible on taxes, court costs and attorneys’ fees, and it affords the comfort that your loved ones can mourn your loss without being simultaneously burdened with unnecessary red tape and financial confusion.
All estate plans should include, at minimum, two important estate planning instruments: a durable power of attorney and a will. The first is for managing your property during your life, in case you are ever unable to do so yourself. The second is for the management and distribution of your property after death.
Your Durable Power of Attorney
For most people, the durable power of attorney is the most important estate planning instrument available – even more useful than a will. A power of attorney allows a person you appoint – your “attorney-in-fact” – to act in your place for financial purposes when and if you ever become incapacitated.
In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney, no one can represent you unless a court appoints a conservator. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under conservatorship, your representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney.
A power of attorney may be limited or general. A limited power of attorney may give someone the right to sign a deed to property on a day when you are out of town. Or, it may allow someone to sign checks for you. A general power is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself.
A power of attorney may also be either current or “springing.” Most powers of attorney take effect immediately upon their execution, even if the understanding is that they will not be used until and unless t he grantor becomes incapacitated. However, the document can also be written so that it does not become effective until such incapacity occurs in such cases, it is very important that the standard for determining incapacity and triggering the power of attorney be clearly laid out in the document itself.
However, attorneys report that their clients are experiencing increasing difficulty in getting banks or other financial institutions to recognize t he authority of an agent under a durable power of attorney. A certain amount of caution on the part of financial institutions is understandable. When someone steps forward claiming to represent the account holder, the financial institution wants to verify that the attorney-in-fact has the authority to act for the principal. Still, some institutions go overboard, for example requiring that the attorney-in-fact indemnify them against any loss.
Your will is a legal statement directing who will receive your property at your death. It also appoints a legal representative to carry out your wishes. However, the will covers only probate property. Many types of property or forms of ownership pass outside of probate. Jointly-owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans all pass outside of probate.
Why should you have a will? Here are some reasons:
First, with a will you can direct where and to whom your estate (what you own) will go to after your death. If you died intestate (without a will), your estate would be distributed according to your state’s laws. Such distribution may or may not accord with your wishes.
Many people try to avoid probate and the need for a will by holding all of their property jointly with their children. This can work, but often people spend unnecessary efforts trying to make sure all the joint account remain equally distributed among their children. These efforts can be defeated by a long-term illness of the parent or the death of a child. A will can be a much simpler means of affecting one’s wishes about how assets should be distributed.
The second reason to have a will is to make the administration of your estate run smoothly. Often the probate process can be completed more quickly and less expense to your estate if there is a will. With a clear expression of your wishes, there are unlikely to be any costly, time-consuming disputes over who gets what.
Third, only with a will can you choose the person to administer your estate and distribute it according to your instructions. This person is called your “executor” (or “executrix” if you appoint a woman) or “personal representative,” depending on your state’s statute. If you do not have a will naming him or her, the court will make the choice for you. Usually the court appoints the first person to ask for the post, whoever that may be.
Fourth, for larger estates, a well-planned will can help reduce estate taxes.
Fifth, and most important, through a will you can appoint who will take your place as guardian of your minor children should both parents pass away.
Your Medical Directive
Any complete estate plan should include a medical directive. This term may encompass a number of different documents, including a health care representative and a living will instructions. The exact document or documents will depend on your state’s laws and the choices you make.
A health care representative designates someone you choose to make health care decisions for you if you are unable to do so yourself. A living will instructs your health care provider to withdraw life support if you are terminally ill or in a vegetative state.
A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” The rules or instructions under which the trustee operates as set out in the trust instrument. Trusts have one set of beneficiaries during their lives and another set – often their children – who benefit only after the first group has died. The first are often call “life beneficiaries” and the second “remainderman.”
Uses of Trusts
There can be several advantages to establishing a trust, depending on your situation. Best-know is the advantage of avoiding probate. In a trust that terminates with the death of the donor, any property in the trust prior to the donor’s death passes immediately to the beneficiaries by the terms of the trust without requiring probate. This trust can save time and money for the beneficiaries. Certain trusts can also result in tax advantages both for the donor and the beneficiary. These are often referred to as “credit shelter” or life insurance” trusts. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid. Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust need know of trust assets and distribution. Provided they are well-drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes incapacitated.
Proper execution of a legal instrument requires that the person signing have sufficient mental “capacity” to understand the implications of the document. While most people speak of legal “capacity” or “competence” as a rigid black line – either the person has it or doesn’t – in fact it can be quite variable depending on the person’s ability and the function for which capacity is required.
One side of the capacity equation involves the client’s abilities, which may change from day-to-day (or even during the day), depending on the course of the illness, fatigue and the effects of medication. On the other side, greater understanding is required for some legal activities than for others. For instance, the capacity required for entering into a contract is higher than that require to execute a will.
This is relatively “low threshold,” meaning that signing a will does not require a great deal of capacity. The fact that the next day the testator does not remember the will signing and is not sufficiently “with it” to execute a will does not invalidate the will if he/she understood it when he/she signed it.
The standard of capacity with respect to durable powers of attorney varies from jurisdiction to jurisdiction. Some courts and practitioners argue that this threshold can be quite low. The client need only know that he trusts the attorney-in-fact to manage his financial affairs. Others argue that since the attorney-in-fact generally has the right to enter into contracts on behalf of the principal, the principal should have capacity to enter into contracts as well. The threshold for entering into contracts if fairly high.
Probate Probate is the process by which a deceased person’s property, known as the “estate,” is passed to his or her heirs and legatees (people named n the will). The entire process, supervised by the probate court, usually takes about a year. However, substantial distributions from the estate can be made in the interim.
The emotional trauma brought on by the death of a close family member often is accompanied by bewilderment about the financial and legal steps the survivors must take. The spouse who passed away may have handled all of the couple’s finances. Or perhaps a child must begin taking care of probating an estate about which he or she knows little. And these tasks may come on tope of commitments to family and work that can’t be set aside. Finally, the estate itself may be in disarray or scattered among many accounts, which is not unusual with a generation that saw banks collapse during the Depression.
Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor or personal representative in the deceased family member’s will. Matters can be a bit more complicated in the absence of a will, because it may not be clear who ahs the responsibility of carrying out these steps.
First, secure the tangible property. This means anything you can touch, such as silverware, dishes, furniture or artwork. You will need to determine accurate values of each piece or property, which may require appraisals, and then distribute the property as the deceased directed. If property is passed around to family members before you have the opportunity to take an inventory, this will become a difficult, if not impossible task. Of course, this does not apply to gifts the deceased may have made during lie, which will not be part of his or her estate.
Second, take your time. You do not need to take any other steps immediately. While bills do need to be paid, they can wait a month or two without adverse repercussions. It’s more important that you and your family have time to grieve. Financial matters can wait.
Every adult is assumed to be capable of making her own decisions unless a court determines otherwise. l If any adult becomes incapable of making responsible decisions due to a mental disability, the court will appoint a substitute decision maker, often called a ”conservator”. Conservatorship is a legal relationship between a competent adult (the “conservator”) and a person who because of incapacity is no longer able to take care of his/her own affairs (“the ward”).
The Conservator is authorized to make legal, financial, and health care decisions for ward. Depending on the terms of the conservators, the conservator may or may not have to seek court approval for various decisions. A person appointed only to handle finances is called a “conservator.”
The standard under which a person is deemed to require a conservator differs from state to state. In some states, the standards are different, depending on whether a complete conservatorship over finances only is being sought. Generally a person is judged to be in need of conservatorship when he/she shows a lack of capacity to make responsible decisions. A person cannot be declared incompetent simply because he/she makes irresponsible or foolish decisions, but only if the person is show to lack the capacity to make sound decisions. For example, a person may not be declared incompetent simply because he/she spends money in ways that seem odd to someone else. Also, a developmental disability or mental illness is not, by itself, enough to declare a person incompetent.
In most states, anyone interested in the proposed ward’s well-being can request a conservatorship. An attorney is usually retained to file a petition for a hearing in the probate court in the proposed ward’s town of residence. Protections for the proposed ward vary greatly with from state to state, with some simply requiring that notice of the proceeding be provided and others requiring the proposed ward’s presence at the hearing. The proposed ward is usually entitled to legal representation at the hearing, and the court will appoint an attorney if the allegedly incapacitated person cannot afford a lawyer.
At the hearing, the court attempts to determine if the proposed ward is incapacitated and, if so, to what extent the individual requires assistance. If the court determines that the proposed ward is indeed incapacitated, the court then decides if the person seeking he role of conservator will be responsible a conservator.
A conservator can be any competent adult – the ward’s spouse, another family member, a friend, a neighbor, or a professional guardian (an unrelated person who has received special training). A competent individual may nominate a proposed guardian through a durable power of attorney in case she ever needs a guardian.