It has been a couple of years since I have discussed estate planning basics. Today’s column will be a refresher course. You may think of estate planning as only death planning. However, estate planning also includes lifetime planning in the event of your mental incapacity.
A more comprehensive definition of estate planning we use is: I want to control my property while I’m alive and well, plan for me and my loved ones if I become mentally disabled, and when I’m gone, I want to give what I have to whom I want when I want and the way I want, and if I can, I want to save taxes, fees and costs.
During your lifetime, there are only two classes of persons who can make decisions for you when you cannot, those you appoint and those the probate court appoints. If you are like most people I have encountered, you would rather have the people you choose making decisions for you when you cannot, rather than the court. There are documents you can put in place to provide for your care in the event you became mentally disabled and also assure that your property is taken care of if you are unable to care for it, all the while staying out of court.
If you do not know what estate planning documents are used and what they are for, you are not alone. I am regularly asked about these documents such as: What are they? What do they do? When do they become effective? Do they expire? Today, we will address these and other questions.
The most common estate planning documents used and the ones we will discuss today are financial and healthcare powers of attorney, wills and trusts.
A durable financial power of attorney is a document by which you appoint one or more agents, sometimes called an attorney-in fact, and at least two back-ups, to make decisions over your property if you are not capable of making them on your own. What makes it “durable” is that it stays effective even after your mental disability. It never expires.
Your agent can receive your income, pay your bills and maintain your property. A durable financial power of attorney may give your agent full, broad, general powers to act on your behalf or limited powers such as to sell a parcel of real estate or transfer property to a trust.
Your durable financial power of attorney is only effective during your lifetime and expires with you. You can have your financial agent be able to act immediately upon the signing of your durable financial power or attorney or only be able to act upon your mental disability. You decide how that mental disability is determined. I and a number of my clients use a disability panel of loved ones to determine mental disability. When the majority of my disability panel determines I am no longer capable of managing my property and financial affairs, my agent can then step in to make decisions for me.
If you are mentally disabled and have no durable financial power of attorney, a conservator may have to be appointed by the probate court to make financial decisions on your behalf and to take control of your property, and supervised by the probate court for the rest of your life. Proper instructions in the power of attorney are key. On many occasions, it was necessary for us to file for conservatorships for individuals who had financial powers of attorney in place. Unfortunately, the proper instructions were not in the document because it was drafted by an attorney who did not specialize in estate planning and elder law.
A durable power of attorney for health care, also called a designation of patient advocate, is a document by which you appoint a health care agent, also called a patient advocate, to make medical and mental healthcare decisions for you if you are not capable of making them on your own.
I generally recommend that your durable power of attorney for health care contain, among others, five key provisions: 1) An appointment of a patient advocate and at least two back-ups; 2) Living will provisions, also called advanced medical directives, to document your wishes for your medical treatment regarding end-of-life care and the withholding or withdrawing life sustaining treatment (when to pull the plug); 3) Health Insurance Portability and Accountability Act (HIPAA) Provisions allowing your patient advocate access to your medical records and to sign releases of those records to others; 4) Mental healthcare treatment provisions to allow for mental healthcare treatment decisions for matter such as Alzheimer’s or dementia; and 5) If it is your desire, anatomical gift/organ donation provisions to allow your patient advocate to facilitate such a gift.
As is your financial power of attorney, your durable power of attorney for healthcare is only effective during your lifetime and expires with you. Your patient advocate can only act on your behalf if two medical professionals or a medical professional and a mental health professional determine that you are not capable of making those decisions.
If you are mentally disabled and have no durable power of attorney for health care, a guardian may have to be appointed by the probate court to make medical and mental healthcare decisions for you and be supervised by the probate court for the rest of your life.
A will is a document which has two basic instructions for after your death, who gets your stuff and who distributes it. In your will, you designate a personal representative (formerly executor), to distribute your property to the persons or organizations you designate. Whereas financial and healthcare powers of attorney are lifetime instruments, a will is a death instrument.
Your will generally only governs property owned in your sole name at the time of your death. Your will does not usually affect joint property, property held in trust or property with a transfer on death, payable on death or other beneficiary designations. Those instructions usually trump a will.
What many people do not realize is that a will must be probated through the probate court process. After your death, your loved ones cannot just take your will to the bank to withdraw funds out of your bank accounts. They must have proper court authorizations.
A revocable living trust is a document with instructions to manage and distribute your property both during your lifetime and after your death. It is kind of like a financial power of attorney and will rolled into one document, and then some. It is revocable in that you can revoke, amend or change it during your lifetime. It only becomes permanent upon your mental disability or death.
Many people set up trusts for probate avoidance and minimizing estate taxes. You may also want to include specific provisions for your beneficiaries in your trust, such as catastrophic illness directions, creditor protection, remarriage protection, divorce protection, values promotion, personal instructions and others. Your trust can set up special funds for your pets, the family cottage, the education of loved ones, special needs beneficiaries and many others. None of these provisions can effectively be accomplished with wills or financial powers of attorney.
A trust is generally not supervised by the probate court unless a party requests the supervision. You can be the trustee of your trust during your lifetime. You can have a co-trustee, such as your spouse, serve with you as trustee. To make your trust work and having the results that you intend, it must be funded. Funding is the proper titling of assets in the name of your trust or individual names and/or proper naming of your trust and /or individuals as beneficiaries and additional insureds.
Once you have an estate plan in place, it should be kept updated. Just like you should have an annual health check-up, you should have an annual estate plan check-up. Annually updating your plan keeps you current with changes in your personal and family situation, changes in your finances, tax and non-tax changes in the law and changes in your attorneys’ experience.
Failure to properly update your estate plan or fund your trust will cause unintended results, which may include probate during lifetime and after death, distributions not in accordance with your goals and objectives, additional taxes and additional administrative, legal, and other expenses.
If you are over the age of 18 and not legally incapacitated, at a minimum, you should have financial and healthcare powers of attorney and a will. You may also benefit from having a revocable living trust.
By: Matthew M. Wallace CPA, JD
Published edited November 17, 2013 in The Times Herald newspaper, Port Huron, Michigan as: How have your money smarts been?