We have covered a multitude of topics in this column. Every few years I like to cover estate planning basics to give you a refresher on essential estate planning documents. If you think that estate planning as just death planning, you would only be partly right.
Estate planning does include the set of instructions you make for the distribution of your stuff after you are bereft of life. However estate planning also includes the set of instructions to allow someone to make decisions about you and your stuff during your lifetime when you are unable. A key part of estate planning is lifetime planning.
A more holistic and comprehensive definition of estate planning that 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, all at the lowest predictable overall cost to me and those I love.
During your lifetime, there are only two groups of people 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 that you can put in place to minimize the chance that your loved ones would have to go to court to make decisions about you when you cannot.
If you do not know what estate planning documents are used in this or other situations, you are not alone. I am regularly asked about different 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.
When it comes to using estate planning documents, there are basically three categories 1) those that are only good during your lifetime, 2) those that are only good after your death, and 3) those that are good both during your lifetime and after your death. Today, we will discuss the most common estate planning documents in each of those categories.
The estate planning documents that are only good during your lifetime are durable powers of attorney. What makes them “durable” is that they stay effective even after your mental disability. They do not expire until you do .There are two general types of powers of attorney, one for financial matters and the other for health care matters. These two types of powers of attorney should not be combined in a single document since they each have different legal requirements.
A durable financial power of attorney is a document in which you appoint one or more agents, sometimes called attorneys-in-fact, and at least two back-ups, to make decisions over your finances and other property. Your agent can receive your income, pay your bills and maintain your property. Your financial power of attorney may give your agent full, broad, general powers to act on your behalf or limited powers, such as to only be able to sell a parcel of real estate or transfer property to a trust.
You can have your financial agent be able to act immediately upon the signing of your financial power or attorney or only be able to act upon your mental disability. You can 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. You choose whether a majority or unanimous decision of your disability panel members determines that you are no longer capable of effectively managing your property and financial affairs, at which time, your agent can then step in to make decisions for you.
If you are mentally disabled and have no durable financial power of attorney in place, 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. In many instances, it was necessary for us to file in court 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 health care decisions for you. Generally, your patient advocate can only act on your behalf if two health care professionals determine that you are not capable of making those decisions.
I generally recommend that your health care power of attorney contain, among others, five key provisions: 1) an appointment of a patient advocate and at least two back-ups; 2) mental health care treatment provisions to allow for decisions for matters such as Alzheimer’s or dementia; 3) anatomical gift/organ donation provisions if you want your patient advocate to facilitate such a gift; 4) 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; and 5) 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 of life sustaining treatment (when to pull the plug).
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 health care decisions for you and be supervised by the probate court for the rest of your life.
The estate planning document that is only good after your death is your will. Your will has two basic instructions, who gets your stuff and who makes it happen. The person whom you appoint in your will to make it happen is your personal representative (formerly executor),who distributes your property to the persons or organizations you designate.
Your will generally only governs property owned in your sole name at the time of your death. If you have property that is owned jointly with others, or has a transfer or payable on death beneficiary designation, that property bypasses all of the instructions in your will.
What you may not realize is that to be effective, a will must go 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 first.
The only estate planning document that we are discussing today that is good both during your lifetime and after your death is your revocable living trust. 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. Your trust is a document with instructions to manage and distribute your property for you during your lifetime and for your loved ones after your death. It is kind of like a financial power of attorney and will rolled into one document, and then some.
There are many trust protections and benefits that are not available with a will and include privacy, probate avoidance, and protections for minors, young adults, surviving spouse remarriage, beneficiary divorce, beneficiary indebtedness, lazy beneficiaries, mentally disabled beneficiaries, addicted beneficiaries, the family cottage, family pets and higher education funding.
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, to serve with you as trustee. To make your trust work and having the results that you intend, it must be fully-funded.
Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. Your trust is a vehicle, a financial vehicle. It’s like that new car sitting in your driveway. It sure looks great, but it isn’t going anywhere unless you put fuel in it. The fuel for your trust is your assets. To properly fuel your trust, it must be funded with those assets.
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 and your finances, tax and non-tax changes in the law and changes in your attorneys’ experience.
The proper updating and funding of your trust is critical in making your estate plan work and having the results you intend. Failure to properly update your estate plan or keep your trust properly funded may cause unintended results. These may include probate during your lifetime or 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 health care powers of attorney and a will. You may also benefit from having a revocable living trust.
By: Matthew M. Wallace, CPA, JD
Published edited March 6th, 2016 in The Times Herald newspaper, Port Huron, Michigan as: The Basics of Estate Planning