Because many common estate planning issues are best handled using a trust based estate plan whose centerpiece is a revocable living trust, trust planning has become common place. Nevertheless, many people new to estate planning begin with commonly held misconceptions. Chief among those misconceptions are the beliefs that:
- The decision to use a revocable living trust is based upon how much money you have;
- Most estates will be subject to death taxes; and
- Probate is an expensive process to be avoided above all else.
Under the constant bombardment of marketing pitches from seemingly impeccable sources, these fears are fed by myths which this article will dispel. This article attempts to explain the important issues in estate planning in a logical rather than fear based environment. I hope you find this information helpful.
A useful definition of estate planning is I want to control my assets while I am alive and well, and pass what I own, to whom I want, when I want, how I want, all at the lowest possible overall cost. Every part of this definition is incorporated into each plan, but the first step is to know what you are up against. The following topics are arranged in the order in which they will occur in the course of your life and death:
- Planning While Alive and Well;
- Planning for Incapacity;
- Planning for After the First Death; and
- Planning for Wealth Transfer to Descendant.
- Values Legacy
This article is intended to illuminate the questions you need to answer; it does not attempt to answer the questions for you. It is intended to provide you with a useful framework for your discussion with your own estate planner.
TOPIC ONE – PLANNING WHILE ALIVE AND WELL
Most people want to retain control of their assets while they are alive and well and have a plan in place that will begin to operate efficiently in the event of incapacity or death. In most common situations, you will not want to make large gifts or create irrevocable trusts using assets that you want to control or consume during your life.
While irrevocable trusts may be a useful part of a large estate plan, they are most useful for assets such as life insurance that have little or no value to you while you are alive or for assets in excess of those you may want to consume during your lifetime.
Almost all plans will provide for what happens after you die. Lifetime documents, including a financial power of attorney, health care power of attorney, living will, and HIPAA designations, are used to provide you important lifetime protection.
The financial power of attorney can include many different provisions and you must choose the provisions that best meet your needs. The other documents are crucial for providing a safety net of care givers and expressing your intention should you face an end of life event.
The dilemma is that you must do the planning for incapacity or death while you are alive and well. You must provide clear instructions as to who is to control your assets when you are no longer able to do so and the circumstances that will trigger the succession pattern execution you have created.
You have a full toolbox to choose from to make this happen. The tool you choose will depend on several factors, including, but not necessarily limited to:
- Your interpersonal relationships expressed by the character and closeness of your family members;
- The abilities and trustworthiness of the people who could be responsible for you and your assets
- Your personal characteristics, including emotional and physical makeup and your outlook on life developed by your lifetime experiences and education;
- The source, nature and amount of your wealth; and
- Your goals, objectives, and aspirations for yourself and your family.
Once you have analyzed the foregoing factors, you are ready to choose the tools that will help you comfortably achieve your goals.
TOPIC TWO – PLANNING FOR INCAPACITY
This is perhaps the most important issue facing you. While it requires careful consideration, the actual documentation necessary can be quite simple.
Planning for incapacity requires inquiry into the following issues:
- What is your philosophy about end of life decisions?
- Who do you want to make health care decisions for you if you are unable to make them for yourself and to whom do you want medical information released? And
- Who do you want to control your assets and pay your bills if you are unable to do that for yourself, either temporarily or permanently?
Most people do not want their life prolonged after their medical team has made the determination that they will not recover from an incurable disease, fatal injury, irreversible coma, or permanent vegetative state. This is extremely important in this age of medical technology that can keep a patient with no discernible brain activity artificially functioning indefinitely. On the other hand, most people desire palliative care. This inquiry is not concerned with how to decide when that point occurs; the medical doctors will make that decision and inform your care givers, but rather what happens when that point has been reached. It is crucial that you have considered the possibility, explored your feelings, and made a clear and unambiguous written declaration to your loved ones and medical team. Only after you have made a careful and thorough examination of your feelings is it appropriate to sign a Living Will expressing your feelings to your loved ones and medical team.
The Living Will myth to dispel is that it is not a tool to be used by a caregiver to demand that medical treatment be withheld when there are viable treatment options that could lead to a medical recovery.
The second issue in this area is who should make medical decisions for you if you are unable to do so for yourself. There are a variety of situations where this decision could have an impact: an accident, a medical procedure requiring anesthesia, addictive behavior, dementia, or Alzheimer’s.
Arizona has enacted a statutory priority that will operate if you haven’t made a health care power of attorney. A spouse, an adult child, a parent, other relatives, and one who has assumed responsibility for the decisions can all be in the chain of command for health care decision making. Your Health Care Power of Attorney can change the statutory order or provide a priority among individuals in the same statutory priority. This is a particularly acute problem in domestic partner relationships because your domestic partner will have no priorities or rights except those provided by you in a properly created and executed writing. A Health Care Power of Attorney can also establish guidelines for the decision maker if you have a known preference.
For persons at risk for dementia, Alzheimer’s, or addictive behavior, a Mental Health Power of Attorney is an important document. The Mental Health Power of Attorney expressly authorizes your Agent to admit you to an appropriate facility that may include locking the doors or restraining the patient if your medical condition requires drastic solutions. Without the authorization you will still be admitted and restrained, but you will be released in 48 hours unless your caregiver has obtained an emergency court order to keep you admitted. This can be an expensive and time consuming procedure detracting from the Agent’s efforts to provide for you medically and emotionally.
The final question to address in incapacity issues is who will handle your financial affairs if you are unable to do so for yourself. Choosing the right people and their alternates is as important as choosing what powers you want to delegate and whether the powers are to be delegated using a financial power of attorney or a revocable living trust or a combination of the two. Important issues include whether the grant of authority is to be presently effective or only upon your incapacity, how incapacity is to be defined, and who will you choose to make the decisions for you. Considering these questions before meeting with an estate planning attorney will insure that you get the most value out of your meeting.
TOPIC THREE – PLANNING FOR AFTER THE FIRST DEATH
The intermediate step in any estate plan is what happens after the first death. If you have an estate taxable estate, even though no estate taxes are paid following the first death, your plan must provide prior to the first death what happens, or you will lose the right to use the first decedent’s Applicable Exclusion Amount (AEA). That amount is currently $2,000,000.00 and changes from time to time, but what has remained constant is the AB trust method of preserving the use of the AEA at the second death. The method requires that your will or trust directs that the first decedent’s assets up to the AEA be placed into a separate trust and remain identifiable until the second death. The terms and conditions under which that trust is administered may vary, but the constant is that the trust must contain certain magic words recognized by the Internal Revenue Service which nominally restricts access to the principal of the trust.
The plan can also provide more restrictions which allow a surviving spouse to use the assets if needed, but preserve the assets for the benefit of the descendants of the first decedent, if different than the surviving spouse’s descendants. There are many variations on the restrictions that can be utilized to give the surviving spouse and descendants the comfort and flexibility to the desired degree.
This intermediate planning is of course also crucial in same sex or domestic partnerships if the first decedent desires his or her money to be available to his or her partner, but eventually return to his or her own family.
TOPIC FOUR – PLANNING FOR WEALTH TRANSFER TO DESCENDANTS
The target of most estate planning is creating a method of passing your wealth to your descendants and others. Traditional planning is concerned with to whom do you give your assets. Modern planning also considers creative answers to how and when as well as the traditional questions.
“To whom” means you must identify who you want to receive what assets. Many testators want to benefit one or more charities and for them a decision must be made whether to leave an outright bequest or establish an ongoing fund from which one or more charities may benefit over time. Establishing a fund with a community foundation has gained popularity as a way to involve your children in the decision making process and may be more about teaching your descendants the value of becoming involved in philanthropy or community than about the actual charity. It also can satisfy the desire to continue giving to worthwhile organizations to fund general or specific programming rather than a one time gift.
“To Whom” also means identifying whether there are any family members or others you want to assist financially. In some circumstances, it is appropriate to include a plan provision that a certain portion of your assets are held and used for caring for an elderly parent or disabled child or sibling, with those reserved assets eventually passing to your descendants or ultimate beneficiaries upon the death of the assisted person.
“How” and “When” are relatively new concepts in estate planning. Wealth passing to the next generation has become a significant amount and the uncertainty of how your descendants will react to receiving the money has created a new layer of planning. Using trusts and independent trustees to protect assets and dole out money in a responsible manner is popular. To effectively utilize a trust and trustee means writing specific guidelines so that your descendants can enjoy the fruits of your success, but not waste the assets. This is often the most thought provoking and time consuming part of modern estate planning. Protecting descendants from creditors, predators, and their own spendthriftiness is not an easy matter nor is it a function solely of age or time. You can create a well conceived plan that will be satisfying to you and your descendants and leave a lasting legacy rather than descendants embittered by an archaic rule from the grave type of plan based on a rigid dated formulaic approach.
TOPIC FIVE – VALUES LEGACY
Now that you’ve created a solid plan for how you are to be cared for to the end of your life and how to pass your wealth to your descendants, it is time to take care of what you most value. You can help instill a sense of community by establishing a fund for future giving, but you should also write a family letter or ethical will. This important document addressed to your loved ones should be an extension of the values and ideas you care about, but may not have always expressed to them. It is an opportunity to leave a written legacy describing the important lessons of your life to your descendants. It will be particularly welcome by the more remote generations you may not have known as well or as long as you would have liked. In this age where extended families are disappearing, it is an opportunity to inculcate your loved ones with those values you hold most dear. There is no form or legal requirement. Use your imagination, include pictures and stories of your life, to create a lasting account of your life. Explain the significance of family heirlooms and describe your own life changing events. The ethical will may last long after the money is gone!
A FINAL WORD: EXPLODING THE MYTHS OF A UNIVERSAL ESTATE TAX AND THE HORRORS OF PROBATE
You may be confused and concerned by the bombardment of advertising and marketing you receive telling you that you must have a trust to avoid estate taxes and avoid the horrors of probate. Even though I strongly believe in the use of trusts, I use them in my practice only as an appropriate tool. If your estate is under $2,000,000, you probably won’t be subject to estate taxes. If your estate is under $1,000,000, it is inconceivable at this time to believe that you will ever be subject to estate or death taxes if you live in Arizona. Politicians and trust mill hucksters alike use disinformation to make you afraid, but be strong – knowledge is power and unless you have an estate in excess of the Applicable Exclusion Amount (now $1,000,000) and a spouse, an inexpensive trust won’t help you. If you are single with wealth valued beyond the Applicable Exclusion Amount, an inexpensive trust won’t protect you from estate taxes and you will need a different approach to minimize estate taxes.
Probate is very expensive and time consuming in many states, particularly in New England, the Midwest, and California. In Arizona it is usually quick (most Arizona probate cases are substantially complete in two to three months and completed, but for a final tax return, within six months) and inexpensive (most probate cases can be completed for less than $5,000 in legal and accounting fees). Probate handles some situations better than alternative methods, particularly if there are more than two heirs sharing assets.
With the advent of ‘beneficiary deeds,” the availability of POD/TOD accounts, the prevalence of retirement accounts that use beneficiary designations to pass assets, and small estate affidavits (for estate valued at less than $50,000 of accounts and automobiles and not more than $75,000 of equity in real property determined using the assessed valuations less liens), you have multiple choices about how to organize modest estates without using a will or trust. Most estates use a combination of technique and the benefit of consulting with a knowledgeable attorney is that you can find out which of these methods or combination of methods is most desirable for you.
Estate planning is complicated and should be a personalized experience for everyone. Learn as much as you can and then meet with a qualified, knowledgeable, and experienced estate planner that answers your questions, explains your choices, and helps you design an outstanding estate plan.