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There are many legal strategies involved in estate planning, including wills, revocable living trusts, irrevocable trusts, durable powers of attorney, and health care documents. Each of these documents is important, but the most crucial aspect of an estate plan is the alignment of the assets so they are distributed according to your wishes at the time of your death. Many people equate estate planning with documents. Properly drafted documents are important, but people are often surprised that wills do not avoid, but guarantee probate! The way assets are titled and how beneficiaries are named is often more important than the documents themselves. The documents must also be kept up to date for the plan to work and the family to be taken care of at the time of death or incapacity.
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Your Last Will and Testament
Your last will and testament is just one part of a comprehensive estate plan. A will is the only place you can name a guardian for your minor children (under age 18). You can also name who will receive your property at your death and provide other instructions regarding how you would like your assets to be handled. If a person dies without a will they are said to have died “intestate” and state laws will determine how and to whom the person’s assets will be distributed. Unfortunately, many people confuse avoiding intestacy (the state’s default plan) with avoiding probate (court intervention that often leads to delays, added expense, and a lack of privacy). Wills guarantee probate and court intervention.
A will can have instructions sometimes referred to as a “testamentary trust.” They may contain tax-saving language, delay the distribution of assets to young children or other beneficiaries, but not only guarantee probate but actually prolong the probate process.
Here are a few things you should know about wills and testamentary trusts:
- A will is the only place to nominate a guardian for minor children. This is one of the most important aspects of a will and cannot be overlooked. All parents of minor children should document their choice of guardians so you do not set up a family battle or unintentionally send your children to a guardian you would not choose.
- A will does not become effective and therefore has no legal authority until after death. So a will does not help manage a person’s affairs when they are incapacitated, whether by illness or injury. Although you can nominate your executor (the person who can administer your probate assets in a public forum), they are ultimately appointed by the court. Until the court gets around to appointing your executor, your assets are in limbo and no one has the right to access and distribute your assets, pay expenses, and otherwise handle your financial affairs.
- A will does not help an estate avoid probate. A will is a legal document submitted to the probate court for approval, so it actually necessitates probate and forces your family to seek court intervention. Essentially, the court and those who do not know your family may make decisions for you.
- A will directs assets left in your name or that were not otherwise designated to pass to a specific person or entity after your death. This results in the court taking over the process, forcing your family to list all assets publically as they try to determine who should inherit. At that point, anyone has the ability to go to the probate court and see what you or your family own.
- Assets left in your name alone precludes anyone from having the legal authority over that asset after your death. Banks and financial institutions will freeze your accounts, shut down access to them, and prevent your family from accessing your assets until the court approves your will and appoints your executor.
- Having a will-based plan is rarely appropriate for clients who want to make things easy, private, and simple as they take care of their families.
- A testamentary trust is a trust created under a will and is not effective until not only the will but the trust, is approved by the court and the trustees of the trust are approved by the court. This causes a second layer of probate intervention and monitoring: not only will the executors be required to report and give an accounting to the probate court, but the trustees of the testamentary trust must also file a separate accounting.
Trusts: Revocable Living Trusts, Irrevocable Trusts, and Special Needs Trusts
Although there are many types of trusts created and effective during life, they all have the same basic purpose: to allow you to pass your assets in a manner you choose based on specific instructions, privately and without court intervention. All trusts are considered contracts and provide very specific instructions to make sure your family is taken care of in the manner you wish. These instructions can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal entity with at least three parties involved: the trust-maker, the trustee (trust manager), and the trust beneficiary. In a revocable or living trust, often all three parties are represented by one person or a married couple.
A living trust often becomes the base estate planning document used to accomplish our clients’ wishes. The key to successful living trust planning, however, is that assets are aligned with the trust instructions. The trust can only control those assets “retitled” or “funded” with the name of the trust appearing on your accounts, real estate, and other assets. Insurance policies and some other assets must have the trust designated as a beneficiary to avoid probate and take advantage of the many protections and tax-savings a trust can provide.
Many of our clients also like to take advantage of instructions that allow any asset earmarked for a beneficiary to be protected from divorces, bankruptcy, and lawsuits. With the divorce rate as high as it is, some clients hope that protecting assets from divorce will be as valuable to their beneficiaries as savings on taxes. Fortunately, these trusts can be drafted to provide both tax and creditor protection while still allowing a beneficiary use and control of the assets.
Another valuable result of trust planning is that assets are immediately available following disability or death. If assets are owned in your name alone, banks and financial institutions are likely to freeze your accounts, rendering them inaccessible to pay for expenses. If instead the assets are aligned with a trust, the trustees have immediate access and the institutions are contractually bound to allow the trustees access to all accounts, allowing them to carry on your affairs without delay, court intervention, or added costs.
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Powers of Attorney
A power of attorney is a legal document giving another person (your “attorney-in-fact”) the legal right (powers) to do certain things for you. What those powers are, depends on the terms of the document. A power of attorney may be very broad or very limited and specific. All powers of attorney terminate upon the death of the maker, and some may terminate when the maker (principal) becomes incapacitated (unable to make or communicate decisions). A “Durable Power of Attorney,” however, is effective even in the event of incapacity and is what we typically recommend to our clients.
Unfortunately, not all banks and financial institutions accept powers of attorney. Some institutions accept only powers of attorney using their own company-specific forms or those forms approved by their legal department. As a result, a little-known fact in legal circles is that banks and financial institutions have routinely denied the use of powers of attorney or have made the process so cumbersome that many people do not even attempt to submit their powers of attorney.
We have seen how frustrating it can be for loved ones when an institution denies a power of attorney in the midst of an immediate need for access to funds to pay for healthcare or medical expenses in the event of incapacitation. Planning in advance and coordinating with the specific financial institutions is essential to make sure the power of attorney will be recognized when it really matters.
Health Care Documents (or Advance Directives)
A Massachusetts Health Care Proxy (sometimes called in other states an “advance medical directive”) is a document that specifies the type of medical and personal care you would want should you lose the ability to make and communicate your own decisions. Anyone over the age of 18 may execute a Massachusetts Health Care Proxy, and this document is legally binding in Massachusetts. Your advance directive can specify who will make and communicate decisions for you, and it can set out the circumstances under which you would not like your life to be prolonged if, for example, you were in a coma with no reasonable chance of recovery.
Another important document that goes hand-in-hand with your advance directive is a HIPAA release—an authorization to your medical providers to allow specified individuals to access your medical information. Without this authorization, your doctor may refuse access to your medical records and may not communicate with your designated decision-maker.