Estate planning isn’t something reserved only for the wealthy or those persons with substantial assets. It’s important for everyone to have a comprehensive estate plan that sets out exactly how the individual would like to manage the individual’s personal financial and medical affairs during her or his lifetime and distribute her or his property or “estate” after passing away.
If an individual does not have a Last Will and Testament (a “Will”), then the state will decide for the individual how the individual’s estate will be distributed at death. Most states have statutes that dictate how an individual’s property is to be divided if the individual dies “intestate,” meaning without a valid Will. The state’s statutory distribution scheme may or may not coincide with the individual’s actual wishes. The result can be disastrous for the surviving spouse or children.
Also, appropriate estate planning can, in some cases when appropriate and suitable, help an individual avoid having to open an estate and appoint a personal representative through the county court – referred to as “probate” – or facilitate qualification for Medicaid Assistance while preserving some assets for a Medicaid recipient’s children or spouse.
Various estate planning techniques include to name a few, a “Trust” established and funded during the individual’s lifetime (an “inter vivos trust”) or a trust established and funded at the individual’s death (a “testamentary trust”) or “transfer on death” (“TOD”) methods of transferring assets (such as contractual beneficiary designation, joint tenants with rights of survivorship designations, or TOD Deed), or, in the case of Medicaid qualification planning, a “Medicaid Asset Protection Trust” (“MAPT”), “Medicaid Compliant Annuity” (or “MCA”) or “Miller Trust,” or other Medicaid exempt assets or income planning for Medicaid eligibility and qualification purposes.
Probate is the process by which upon the individual’s death a personal representative is authorized to take control of and administer the deceased individual’s estate. Probate need not be a difficult or expensive process, any more so than establishing and administering a Trust.
For example, in Indiana, the process used for probate is typically unsupervised by the court, and need not be time-consuming or expensive relative to the cost to establish and properly transfer assets to and administer a Trust during an individual’s lifetime and after the individual’s death. And unsupervised probate is not “public” in that there is no requirement to publicly disclose the nature of the assets or their values. Similar to the administration performed by the personal representative during probate, a Trust requires administration to effectuate the disposition of assets and comply with taxing authorities after an individual’s death.
Also, a Will under certain circumstances (for example, through a Power of Appointment) can also dispose of assets the individual does not own. A Will, however, cannot appoint a guardian for minor children, which request in a Will is a precatory request (an expression or a wish or intention) only subject to approval by a court, which requires a court proceeding.
A Will or Trust permits an individual to dispose of the individual’s property (estate) as desired. So, there is no reason to settle for anything less than a distribution scheme that exactly follows one’s own wishes.
There are five main components to a comprehensive estate plan. The first three components – the Will, the Trust, and TOD designations – govern how one’s property should be distributed after the individual passes.
The fourth component, the Power of Attorney instrument, grants an agent the legal authority to make decisions on behalf of the individual during the individual’s lifetime, including that authority can extend to situations when the individual is incapacitated and cannot make decisions for her or his own benefit.
The fifth component is a Living Will (also sometimes referred to as a “Life Prolonging Procedures”) Declaration, by which the individual expresses the individual’s desires and wishes for how medical care should be provided, including end-of-life decisions. Combined with a Health Care Power of Attorney the Living Will is often referred to as an “Advance Medical Directive” that gives authority to and guides the individual’s agent on how to make medical decisions for the individual.
This article will set out, in turn, the basics of each of these five components of a comprehensive estate plan. While practitioners may use slightly different terminology or emphasize one technique over another, the following described documents are the essence of the estate planning lawyer’s tool chest.
A Will is a written and properly executed legal document that establishes exactly how an individual, known as the “testator” (or “testatrix” in the feminine context), wishes her or his property to be distributed upon death. The law governing Wills varies widely from state to state. Most states require strict compliance with a multitude of formalities in order to create a valid Will.
There are three basic requirements that any document must satisfy in order to qualify as a valid Will. First, it must be in writing. Second, the document must be signed by the testator in front of at least two witnesses in order to authenticate the document. Third, the document must be signed by the two witnesses at the same time the testator signs who witnessed the testator sign to further authenticate the document as the testator’s Will and attest to the testator’s state of mind when she or he executed the Will.
There is more to an appropriate valid Will than the three basic requirements. But that discussion is beyond the scope of this article. It’s why it is critical to work with a lawyer who is well versed and experienced in estate planning.
When a person dies with a valid Will, the distribution scheme created in the Will displaces the state’s statutory distribution scheme that applies when a person dies intestate (without a Will).
Distributing property pursuant to a Will often requires the Will be filed with the probate court in order to preserve the Will (in Indiana a Will becomes invalid three years after the individual’s – the testator’s or testatrix’s – death) and appoint the personal representative named in the Will to oversee the administration and distribution of the estate according to the individual’s wishes expressed in the Will. Sometimes, such as with smaller estates, there are other methods available for distributing the assets according to the Will without probate.
The second, but not necessarily required, component of a comprehensive estate plan is a Trust. Trusts are often associated with the wealthy, but they don’t have to be. Trusts, like a Will, are vehicles for distributing assets to your beneficiaries. But Trusts can do more, including hold assets during the individual’s lifetime to permit someone else to step in and manage the assets if the individual becomes incapacitated during her or his lifetime (which can also be accomplished with a General, also known as a Financial, Durable Power of Attorney instrument), hold and manage assets after the individual’s death for the benefit of a minor beneficiary or to delay a beneficiary’s receipt of the assets and protect the assets from creditors (both forms of Testamentary Trusts).
Trusts are also used in Medicaid planning to try to protect assets from being counted for Medicaid qualification purposes (such as a “Medicaid Asset Protection Trust” or MAPT, or a “Miller Trust”).
While Trusts established and funded (assets transferred to the Trust) during the individual’s lifetime may avoid the necessity of probate upon the individual’s death, establishing a Trust typically costs more in fees and expenses than drafting a Will. Funding the Trust during the individual’s lifetime is like transferring the assets to the individual’s beneficiary after her or his death according to the terms of a Will. And Trusts still require administration of the assets after the individual’s death to transfer the assets to the individual’s beneficiary or to manage the assets until the Trust terms dictate the transfer of the assets to the beneficiary.
So, Trusts may require assets to be transferred twice, once when the Trust is established and then again when the assets are distributed from the Trust to the beneficiary. And sometimes a Trust must be filed with the court (a process called “docketing” the Trust) to have it enforced by the court with which it is docketed.
Administering a Trust requires filing tax returns just like an estate. And a “Trustee” – the person who has authority over the Trust to administer it according to its terms – is entitled to receive a fee just like the personal representative of an estate that has been admitted by the court to probate. And because a Trust can be more complex and its existence may extend for a longer period than a Will, the Trustee may more likely demand a fee.
Whether a Trust saves fees and expenses by avoiding probate is unlikely or not as significant as publicized by some pundits or “trust shops” who are trying to sell trust packages. Creating and funding a Trust during an individual’s lifetime is a bit like probating the individual’s estate before the individual passes away.
A Trust, at its core, is a separate legal entity that holds property for the benefit of another person. Nearly any type of property can be placed in a Trust. When an individual creates a Trust during the individual’s lifetime (often called an “inter vivos trust”), the individual transfers legal ownership of the property to the Trust (the assets held by the Trust, or the “Trust Property”). The individual can then either retain the right to use the property during the course of the individual’s lifetime or limit the use to another person.
For example, an individual could own a home and place the home in the individual’s Trust. The Trust then becomes the legal owner of the home, but the individual retains the right to live in it during the individual’s lifetime. The Trust could then further provide that, upon the individual’s death, a designated beneficiary would have the right to receive or use the home, or require that the home be sold and the proceeds invested to generate an income.
It is important to note that under Indiana law that provides for an unsupervised probate estate, a court order is not required to distribute the property pursuant to the terms of the Will, which is just like a Trust that permits without a court order the beneficiary to receive the home or the proceeds from the sale of the home after the individual creating the Trust passes away.
Often Wills and Trusts work in conjunction with each other. For example, Wills can contain “pour-over provisions” to transfer assets to a pour-over Trust described in the Will that is created and funded at the individual’s death (a “testamentary trust”). The Trust could have the same beneficiary as the Will, but limit the beneficiary’s right to receive the assets in the Trust for a period of time, or provide the beneficiary with a limited lifetime interest in the income only from the Trust, with the assets being distributed to another beneficiary upon the income beneficiary’s death, or just about any other variety of scenarios.
But take note, a pour-over Trust is not needed with a Will to complete or protect the transfer of assets under a Will that are not specifically identified in the Will or that the testator may have forgotten that the testator owns. For such purposes, most Wills contain a “residuary clause.” It would be rare to draft a Will that does not include, a “residuary” clause.
A “residuary clause” according to its terms transfers any assets not expressly mentioned in the Will to the designated beneficiary. This ensures that the individual’s entire estate is disposed of according to the individual’s exact wishes as set out in the terms of the Will or in an included testamentary trust.
Transfer on Death (TOD) Designations
Transfer on Death (“TOD”) designations can be used to transfer assets without a Will or Trust. A TOD designation permits certain property to be transferred without having to administer a Will or Trust.
To transfer an asset that is subject to a TOD designation, often all that is required is for the beneficiary to present a death certificate and prepare, sign and file some paperwork with the agency or financial institution that controls or registers title to the property, like a bank, a mutual fund, a stock investment account, or the county bureau of motor vehicles or recorder’s office.
The primary owner that holds title to the property can designate a beneficiary (the “TOD beneficiary”) to take title to the property upon the primary owner’s death. When the primary owner passes away, the TOD beneficiary becomes the legal owner of the property upon providing proof of the primary owner’s death and the TOD beneficiary’s identity. This is a way to transfer assets without the time and expense of administering a Will (i.e., going through probate) or administering a Trust, and is especially suitable for individuals with small estates and very simple distribution desires.
But be aware, there can be unforeseen consequences using TOD techniques, such as if the primary owner later creates a Will to distribute the property to a beneficiary other than the TOD beneficiary. The TOD designation will control the distribution regardless of what is expressed in the Will.
Other Components of a Comprehensive Estate Plan
The three vehicles set out above – Will, Trust, and TOD beneficiary designation – are the main means to transfer ownership of assets upon death. But a comprehensive estate plan also includes a General or Financial Power of Attorney, Living Will, and Health Care Power of Attorney, by which an individual can express the individual’s wishes for how to manage and can secure assistance during the individual’s lifetime with managing her or his personal affairs, matters and property.
Power of Attorney
The Power of Attorney is a document that legally authorizes an “agent” – a designated individual – to make decisions on behalf of the “principal” who creates and executes the Power of Attorney. A “General” or “Financial” Power of Attorney permits the agent to make financial decisions for the principal. A Health Care Power of Attorney permits the agent to make health care decisions for the principal. A Power of Attorney can have a time limit or can be “durable” so that the principal’s incapacity does not affect the agent’s authority.
The Power of Attorney is especially appropriate and useful if the principal becomes incapacitated and is unable to personally direct her or his affairs. The Power of Attorney allows the agent to step into the principal’s shoes to make decisions for the principal, such as managing the principal’s financial affairs or deciding on courses of medical treatment to pursue. The Power of Attorney can grant narrow or broad decision-making authority and power to the agent.
The Living Will or sometimes referred to as the “Life Prolonging Procedures” Declaration is the principal’s expression of her or his desires in respect to how medical care shall be provided to the principal, including end-of-life care scenarios. The Living Will combined with a Health Care Power of Attorney is sometimes referred to as an “Advance Medical Directive”.
An “Advance Medical Directive” typically provides hospitals and medical care providers with instructions on issues such as the principal wishes in respect to whether to be resuscitated, placed on a ventilator, or otherwise the lengths the principal wishes medical providers to take to keep the principal alive in the event of an end-of-life care scenario.
Taking the time to develop a comprehensive estate plan is something that everyone should do regardless of their net worth or the assets they own. A comprehensive estate plan ensures both that your property is disposed of according to your exact wishes and that someone you trust is the one making decisions for you if you cannot act for yourself. Having a comprehensive estate plan ultimately provides valuable peace of mind with respect to a variety of deeply personal decisions, allowing you to enjoy life to its fullest with the knowledge that you’ll leave behind the legacy you desire.
Working with a lawyer who is knowledgeable and experienced in estate planning techniques is critical to establishing the plan. And your estate planning lawyer will know when and how to coordinate with other professionals, such as financial, insurance, and tax advisers, on how best to achieve your desired estate planning outcome.
There are many misleading and misinformed online “advice” articles and columns, forms, and sites, including published by other professionals in other fields who are not lawyers and who have no knowledge of your personal situation. It has never been truer that “you get what you pay for” than in the estate planning venue. If properly expressing your personal decisions and desires and having them enforced and followed is important to you and your peace in mind, trying to save dollars using a “DIY” process or form is the best way to not achieve your desired outcome.
Establishing a relationship with an estate planning lawyer that can guide you and your family through the process of creating a comprehensive estate plan using appropriate documents and techniques, and who knows you and your family and will be readily available to advise and guide you and your family through difficult times, is worth every penny.
Please call to discuss your personal situation.
Disclaimer: The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state, region, and local. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, may rely upon or should act or refrain from acting on the basis of any content included above without seeking and formally retaining appropriate legal or other professional advice on the particular facts and circumstances at issue. Providing this information does not create a lawyer-client relationship.