ESTATE PLANNING ADVISOR SERIES
WHO'S WHO AND WHAT'S WHAT IN AN ESTATE PLAN
This Estate Planning Advisor is intended as a summary explanation of the participants, and the tools used, in the estate planning process. We discovered that some of our clients were not as familiar with the terminology, flow of decision making authority and end results of an estate plan as they would prefer. Therefore, we have prepared the following presentation to illustrate the essential elements of an estate plan and the components of the plan itself. We begin at the beginning.
The Basic Testamentary Estate Planning Documents
Once a decision has been made to engage in a formal estate plan, as opposed to letting the state default plan or the courts decide who receives your property at your death, the decision essentially boils down to the following choices:
Will-Based Estate Plans: A will-based estate plan uses a will to contain all of the instructions that the client wants to apply to their property at their death. In effect, a will is dormant until death occurs, then its terms spring into being and a court supervised procedure, called probate, begins and ensures that the decedents last wishes are carried out. The terms of a will progress through naming guardians for minor children, payment of last expenses, distribution of any specific bequests, the disposition of the decedents property, including changing the title of the property from the decedent to the beneficiaries, and the powers and responsibilities of the Personal Representative. More about the Personal Representative later.
Trust-Based Estate Plans: A trust based estate plan uses a revocable living trust to contain all of the instructions that the client wants to apply to their property at their death. Unlike a will, a living trust springs to life upon signing. It is an independent legal entity with rights and responsibilities of its own. The operations of the trust are carried out by Trustees, rather than Personal Representatives. More about Trustees later. Unlike a will, property is transferred from the Trustmaker to the living trust. The trust becomes the legal owner of the property for state and some federal law purposes. When a death occurs, the trust is already the owner, and does not need to go to the probate court for supervision. Typically, the Trustmaker is also the trustee. Upon the death of the Trustmaker the terms of the trust automatically transfer power and responsibility to the successor Trustee who is the person or persons the Trustmaker has chosen to the Trustee after the trustmakers death.
If you look at the operative provisions of a trust, you will see that they are often very similar to those included in a will. This is particularly true for the portions that deal with the payment of expenses, dispositions of specific bequests, disposition of the property, and the powers and responsibilities of the successor trustee or trustees. More about successor trustees later.
We refer to these documents as testamentary or dispositive documents; because both the will and the trust, at their very basic functions, are designed to make sure that the persons who the decedent wanted to receive his or her property does so upon the decedents death.
The Basic Decision Making Documents
For the remainder of the discussion, we are going to use the basic types of testamentary document planning to illustrate the different circumstances that occur, depending upon the choice of the client.
Will-Based Estate Plan: Because a will is simply dormant, until the death of the decedent, it is not considered a decision making document during the decedents life. It simply has no application to a living person. As such, a will-based estate plan will include a power of attorney for health care and a power of attorney for financial or property decisions. These documents enable decisions to be made by others when the client is physically or mentally unable to make decisions themselves. Increasingly, powers of attorney also become effective if a person disappears.
Financial Power of Attorney: A financial power of attorney is a document, typically signed at the same time as the will, that appoints a person termed an Agent. We will discuss the Agent later. The financial power of attorney is an extremely important document that should be given very careful consideration. A person sometimes wonders why his or her powers of attorney for property are so long and detailed. It helps to remember that the person has become unable to make decisions for him or herself, and the power of attorney is the set of instructions that enables someone else to make needed decisions, as such, the powers granted the Agent must be broad and thorough so as to enable the Agent to handle whatever comes along without court involvement. Powers of Attorney typically itemize numerous powers the Agent can utilize, but they seldom give direction as to how the powers should be exercised.
Health Care Power of Attorney: A health care power of attorney functions the same as the property power of attorney, except that the Agent is empowered to make health care decisions, including, sometimes, the decision to terminate life support systems, based on the instructions included in the document.
The health care and the financial powers of attorney are the only substituted judgment documents that do not involve court appointed guardians of the person and property that are available in a will-based estate plan.
Increasingly, financial institutions are becoming hesitant to act under an Agent's authority in a power of attorney for fear of some form of legal action. This is a significant disadvantage of a will-based estate plan because if the powers of attorney are not respected by financial institutions, legal action must be taken.
Trust-Based Estate Plans: Because a living trust springs to life upon signing, it will contain instructions that enable a successor trustee to make decisions for an incapacitated Trustmaker (also known as grantor). The trust itself is a substituted decision making document of its own. Financial institutions are more likely to understand the concept of a successor trustee than the concept of an Agent under a power of attorney. Of course, any competent estate plan, trust or will-based, will also have the health care power of attorney and the property power of attorney. However, the power of attorney used in the trust-based plan is frequently limited in scope to protect the Trustmaker. This is generally considered to be a considerable benefit of a trust-based estate plan, because if the financial institution will not accept a power of attorney, there is always the successor trustee in the living trust to fall back on. There are at least two substituted judgment documents for property:
The Living Trust: Decisions by the successor trustee.
The Powers of Attorney: Decisions by the Agent.
A well drafted trust will also include directions concerning the care the Trustmaker desires in the event of disability. This gives the Trustee the direction for desired care. Wills and property powers of attorneys do not contain such provisions.
Now that we have discussed the documents most frequently used in a basic estate plan, we now need to determine when and how will-based estate plans and trust-based estate plans gain control over the persons property.
Will-Based Estate Plans: As long as the person (testator) remains in good health, he or she is the person who owns and controls his property. Only when the testator becomes incapacitated (unable to make decisions due to physical or mental illness or a prolonged disappearance) does the Agent under the financial or health care powers of attorney step in to make substituted judgments for such person. Some powers of attorney become effective immediately and some are only effective upon incapacity - a so-called springing power of attorney.
At the death of the testator, the Personal Representative named in the will is provided with a court order to carry out the dictates of the will. The Personal Representative works for the Clerk of Court and reports back (accounts to) to the Clerk about every penny in the estate.
Trust-Based Estate Plans: Because the trustees have a decision power, the trust must actually own the property before the trustee can make any decisions regarding it. Just like the testator in the will-based plan, the trustee of a living trust may not make any decisions regarding property it does not own. This is one of the administrative functions that some consider annoying, because not all financial or other title holding institutions are sufficiently familiar with living trusts. However, this trend is ending as more and more persons begin using trust-based estate plans. The process of transferring ownership of a persons property to the living trust is termed funding, and consists of sending instructions to banks, departments of motor vehicles and other title holding entities that the property is now to be held in the name of the trust. A Trust that is not funded will not effectively serve its purpose.
Upon the death of the trustmaker, it is the death trustee named in the trust who is responsible for carrying out the statements in the trust as to the disposition of property owned by or controlled by the trust. The death trustee does not report to the Clerk of Court. The death trustee is usually empowered to carry out the instructions of the trust and to use whatever means are necessary to transfer the property.
We have discussed some of the decision makers in estate planning as part of our discussion of the documents used. In this portion, we provide a bit more detail as to each of the decision makers discussed, and introduce a new one.
Initial Trustee: In a trust-based estate plan, for married persons, the spouses are usually the initial trustees, with full decision making powers over the trust property until the incapacity or death of one of them. The surviving spouse will typically continue as the successor trustee. A will-based estate plan does not use a trustee until after death occurs and then a trustee is used only if trusts for a surviving spouse or children are created under the will.
Successor Trustee: In either a will or trust-based estate plan, provisions are uniformly made to provide for a succession of trustees when the initial trustee, or first trustee in a will-based plan, becomes incapacitated, resigns or dies. These successor trustees, disability trustees or death trustees, may be:
Family Members: If there are spouses or children that are capable of making the financial and legal decisions required of a trustee, they may be the only successor trustee, or two children may be successor co-trustees.
Professional Trustees: If the estate is large or complicated, or if family members lack the necessary skills, a bank or other professional trustee may be the successor trustee.
Combination: It may be that a family member oversees distributions and more family sensitive issues and a professional trustee oversees the financial aspects and tax filings.
Trust Protector: As legal, tax, family and economic circumstances are constantly changing, there has been an increasing use of what is called a trust protector. This is a very trusted friend of the family that is given powers to amend the terms of the trust that would cause estate tax problems if held by a beneficiary or a beneficiary that was a trustee of the trust. In effect, it is an innovation that has developed to provide increased flexibility.
This should be work for the attorney and staff. It takes an experienced estate planning attorney to understand the many circumstances when tax law, family matters, Medicaid issues and other matters can interact in an estate plan, and if not planned accordingly, can frustrate ones wishes. These are the participants:
Attorney: The attorney has the final responsibility for what goes out the door. The attorney continually enhances his or her skills and drafting techniques based on discussions with colleagues, continuing legal education programs and other information sources. It is important to understand that the attorneys job is not to create the plan, but listen to the clients and complete the plan they want. It is the client who is the final decision maker.
Paralegals/Legal Assistants: At times, paralegals or legal assistants are under appreciated for the large part they play in the physical creation of the documents themselves, funding living trusts, filing court papers, performing research and other tasks to support the attorney. While the attorney has the last word, every attorney will readily tell you that input from a paralegal or legal assistant is critical to meeting the complete needs of the client. Paralegals and legal assistants are truly partners in estate planning preparation and administration.
This, as it should be, is truly a team effort of experts in their individual disciplines that come together to apply their skills to design a plan to suggest to the client. Remember, the client should be the person in control not any of the advisors. This is a general description of the advisors who may be involved:
Certified Public Accountant: While usually viewed as the participant who prepares the accountings and income tax filings, CPAs can also very effective in performing tax research, providing the other participants with unique insight into the clients business and family.
Insurance Professional: Insurance companies are continually creating new products to satisfy the changing needs of clients. The truly professional insurance specialist keeps abreast of these changes and advises not only clients, but the CPAs, attorneys and financial planners of these changes so that the entire team is aware of new opportunities for their clients.
Financial Planner: While financial planners may also provide insurance services, they are of considerable help to successor trustees in managing the funds left by the testator in a will-based estate plan, or the trustmaker in a trust-based estate plan.
Attorney: The attorney may act as the team coordinator and is certainly the one that provides the needed legal language and structure for the plan that the team has prepared and that the client has approved. In reverse, the attorney can provide professional training and support to other professionals in terms of legal vehicles available for a large variety of planning circumstances. No other professional can draft the legal documents pertinent to a formal estate plan.
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Copyright, Nathaniel E. Clement, J.D., Counsellor at Law, 2007
1709 Legion Rd., Ste 214 Chapel Hill, NC 27517
Tele: 919-929-9298
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