Estate Planning FAQs

What is the difference among a Personal Representative, Trustee, Agent, Guardian and Proxy?

The Personal Representative, also known as an Executor, settles your estate if a court-supervised probate is required. You can appoint your Personal Representative in your Will. 

The Trustee is the person or entity who manages assets owned by your trust and distributes the trust fund to the named beneficiaries according to the dispositive provisions of the trust. A husband and wife who create a trust often appoint themselves as the initial trustees and their children as their successor trustees. Instead of appointing their children as successor trustees, some clients opt to appoint an entity as their successor trustee, such as a trust company.  

An Agent is the person you appoint in your Power of Attorney document to make decisions on your behalf if you are incapacitated or otherwise cannot conduct your business. Through the Health Care Power of Attorney, our clients appoint an Agent to make decisions regarding medical and other personal care matters. Through the Durable Power of Attorney, our clients appoint an Agent to make decisions regarding legal, property, and financial matters.  If a third party requires court authorization, the Guardian is the person you nominate, or suggest, the court to appoint.  Most often, a client selects the same individual to be his or her Agent and Guardian. 

A Proxy is the individual you nominate under your Advance Directive to ensure your end-of-life decisions are fulfilled.  

What do I need to do if my spouse becomes incapacitated? 

If your spouse’s mental or physical condition is rapidly declining such that he or she is unable to make financial and medical decisions for himself or herself, you need to take steps to protect your spouse.  You may need to obtain letters from your spouse’s physicians to document the incapacity.  These letters accompanied by an affidavit will allow you to notify third parties that your spouse is no longer able to serve in a fiduciary role as agent or trustee.  Also, if your spouse has a power of attorney triggered upon his or her incapacity, you will need to present the physicians’ letters and the power of attorney to third parties in order to act as your spouse’s agent. If your spouse does not have a power of attorney document, it may be necessary for you to seek a court-appointed guardianship to care for your spouse. 

Our married clients commonly have estate plans in which each spouse is authorized to act for the other (as agent, trustee, and health care proxy) without having to document their spouse's incapacity.  Many single clients have similar delegations of fiduciary authority to other adults (children, parents, siblings, or trusted friends).  Planning for your incapacity, or for your assistance to loved ones who become incapacitated, is important and can be done in many creative ways to ensure a person's needs are met in the best way possible. 

What do I need to do when my spouse dies?

Every person's affairs are different as their life comes to an end.  Although a long list of detailed tasks could be compiled in advance, much of it would be unnecessarily confusing or inapplicable when the time comes for its use.  The best advice is two-fold.  First, consult with your attorney, accountant, doctor, and financial advisor to have good estate planning in place and keep it up to date with annual plan reviews.  Then, when a death occurs or seems imminent, convene a meeting of those advisors to confirm the planning in place and the appropriate actions to take after considering the circumstances at the time.  Each person has their own unique circumstances with a need for a unique plan, unique in both implementation and in execution.  Plan your work, then work your plan. 

Can I transfer real property to my trust if it is subject to a mortgage?  What if I need to refinance my home?

Federal law permits individuals to transfer their homestead property to a revocable trust for estate planning purposes without triggering the due-on-sale clause in a mortgage agreement.  This law only applies to your homestead property – it does not apply to rental properties or vacation homes. If you need to refinance your home, most likely the mortgage company will require you transfer the home out of your trust to yourself individually.  After you have refinanced, it is imperative for you to deed your home back into your trust to avoid probate and ensure your home passes according to the terms of your trust. You can transfer other real property subject to a mortgage to your revocable trust, but you will need to coordinate with the mortgage company to avoid triggering the due-on-sale clause.

What do I need to transfer to my trust?

In general, all assets requiring interaction with a third party in order to transfer the asset should be owned by your trust if you want the terms of the trust to govern the disposition of the asset upon your death or incapacity. You should consider transferring the following assets to your trust: real estate, automobiles, savings accounts, checking accounts, certificates of deposit, money market accounts, stocks, bonds, interests in general or limited partnerships, interests in limited liability companies, accounts receivable, notes receivable, mineral interests, royalty interests, boats, and other recreational vehicles.  Some of these assets may pass by beneficiary designation or joint ownership if they are not transferred to your trust. You should review your beneficiary designations to determine if your trust should be listed as the primary or contingent beneficiary. 

What should not or might not be transferred to my trust?

Retirement accounts, such as IRAs and 401(k)s, must be owned by individuals. A trust cannot own these types of assets. However, trusts can be the designated beneficiaries of such assets. Take caution though, because your trust should not be the designated beneficiary of your retirement accounts unless your trust contains certain "qualifying" provisions. 

Retirement accounts are unique assets because they receive special tax deferral treatment. To take advantage of this special tax treatment, contact your financial institution and make sure you have primary and contingent beneficiary designations in place for all of your retirement accounts. 

Some clients are uncomfortable with the thought of relying on beneficiary designations to transfer their retirement accounts to their beneficiaries. This discomfort is understandable because retirement accounts often comprise the bulk of many clients’ estates. If you prefer your retirement accounts pass to your beneficiaries according to the distribution provisions of your trust instead of providing complete control to your named beneficiaries, please contact us before designating your trust as the primary or contingent beneficiary of your retirement account. We will review your trust to make sure it includes the provisions required to “qualify” the trust for tax deferral. 

I’m concerned about my child’s marriage, substance abuse, financial management, etc.  How can I protect my child’s inheritance?

This is a concern shared by many clients. If your estate plan provides your children their inheritance outright, there is not much you can do to protect them from themselves or their creditors once their inheritance is distributed. At your death, if your trust distributes outright, your trustee must distribute your assets to your beneficiaries as your trust directs. Unless your trust specifically provides otherwise, your trustee will not have discretion to withhold assets from your beneficiaries, even if a beneficiary is a drug addict, in prison, filing for bankruptcy, or going through a divorce.

If this possibility concerns you, the best way to protect your child's inheritance is to set up a trust for their share. Your child's trust can authorize the trustee to use his or her discretion in deciding whether or not to distribute trust funds to your child. Because the trust fund can only be used at the discretion of the trustee and because the child, as beneficiary, cannot force a distribution, creditors cannot reach the child’s trust fund and the child's spouse cannot claim an interest in the trust fund as marital property. 

Our address changed.  Do we need to update our documents?

Your estate planning documents are not invalid because your address and phone number have changed. However, accurate contact information may become important when you provide these documents to third parties. For example, your Health Care Power of Attorney provides the name, address, and telephone number of your Agent, the person you have selected to make health care decisions on your behalf if you are incapacitated and unable to do so. In an emergency situation, your medical care providers should have accurate contact information on file so they will be able to contact your Health Care Agent as quickly and easily as possible. 

What is my trust’s tax ID number?

For individual revocable trusts, the tax ID number for the trust is the social security number of the settlor, or creator, of the trust.  For joint revocable trusts, the trust's tax ID number is usually the social security number of the primary reporting spouse. However, if the initial trustees of your revocable trust are no longer trustees, new identification numbers should be used to report trust income. You can file an SS-4 with the IRS to request a trust identification number. 

Food for Thought

by Lloyd and Karla McAlister

In this holiday season, much thought is given to food.  Here is some food for thought, for the good health of your personal estate planning ... and with no calories!

1.    Proper funding of a revocable trust.  Primarily the tool of the wealthy in the past, revocable trusts have become a common document in many personal estate plans today.  Revocable trusts can be crafted to accomplish many planning objectives.  However, avoiding the need for a court to appoint and oversee a guardian to manage ones financial affairs in the event of incapacity and avoiding the court supervised administration of ones estate after death, called probate, are by far the most frequent reasons for having a revocable trust in ones estate plan.  If you have a revocable trust for the purpose of avoiding the need for guardianship and/or probate, you should review every asset in which you have any interest to confirm each and every asset is properly integrated in your overall plan through ownership and/or pay on death provisions.  Although most assets can and should properly be owned by your revocable trust, there are very important exceptions.  So you should review your estate plan at least annually in order to confirm every asset is properly integrated in your plan to accomplish all your planning objectives, both non-tax objectives, such as probate avoidance, and tax objectives.  An annual review might be done at years end, with each newyear serving as a reminder for that review, or in conjunction with the preparation of ones annual income tax returns when you are handling your financial information for tax purposes anyway.

2.    Beneficiary designations, payable on death (POD) and transfer on death (TOD) accounts.  It is common for certain types of assets to pass from the owner to the person(s) of their choice at the owners death by a contractual designation, rather than by the owners Will or trust.  For example, life insurance and certain types of retirement benefits often pass to beneficiaries designated by the owner.  It is, therefore, critical for you to review any such arrangements in light of your overall estate plan to be certain those assets and benefits will pass in the event of your death to the person(s) or charities you intend.  Since a well drafted Will or trust can consider and provide for many contingent events, such as the unexpected death of the person(s) you intend to be the beneficiaries of your estate, it may be preferable to have such assets arranged so that the provisions of your Will or trust will control the disposition rather than relying upon beneficiary designations and payable/transfer on death arrangements.

3.    Deaths, including the unexpected death of a beneficiary.  In planning ones estate, thoughtful consideration is given to formulating a plan which is to be carried out in the event of your death.  However, all too often estate plans fail to consider the death of another person which can be critical to the success of your plan, your beneficiary.  What if the person(s) and/or charities you intend to benefit are deceased or incapacitated (or no longer in existence, as to charity) at the time of your death?  Or, what if they are alive at your death, but suffer death or incapacity (or legally dissolve, as to a charity) shortly after your death?  All too often a person will designate their spouse or adult child(ren) to receive some or all of their property, only to have one or more of those persons die or become incapacitated at points in time which were unexpected and cause unintended results such as a probate where probate was intended to be avoided, or estate taxes which could have been avoided, or property passing to persons who were not intended to benefit (such as unintended benefit or control passing to the spouse or even the ex-spouse of a child).  You should give careful thought to the possibility of your intended beneficiaries not being in existence, as you anticipate, at your death and, if that were the case, how you would prefer for your estate plan to operate in those alternative events.

4.    Family harmony and the family fiduciary.  Each of the five legal documents in a basic estate plan include the appointment of a fiduciary (Will - personal representative; trust - trustee; power of attorney - agent; advance directive - proxy).  The appointed fiduciary is delegated the legal authority to carry out the duties assigned to them, such as a trustee managing trust assets or a healthcare agent giving instructions to medical personnel.  Although family members, such as a spouse, parent or adult children, are logical candidates due to the intimacy of the relationship and their personal interest in the responsibilities to be undertaken, you should be mindful of the potential for family disharmony which can result from appointing family members.  It might make sense to involve a corporate fiduciary (a corporation whose business it is to handle such fiduciary matters, for a fee) or trusted friends who have the professional skills to handle such responsibilities with objectivity, either along with family members or alone.  In instances where family members are clearly the preference, which will undoubtedly continue to be the majority, careful consideration should be given to making those decisions and structuring such arrangements in the way which is believed will foster family harmony and not fuel the flames of conflict and disharmony.  Since there is no one way which is best, and people and circumstances change over time, you should review the fiduciaries named in your documents at least annually in order to determine whether any changes need to be made, either with the persons named or the guidelines for their performance of the delegated duties.

Estate Planning Toolkit

by Karla McAlister

Only about half of Americans have a Will according to a recent Forbes magazine article. Most people procrastinate because they do not want to actually think about what will happen when they die. It is important to plan and to make decisions or the state will make the decisions for you. State law directs how your assets are distributed if you die without a Will.  The distribution depends on whether you are married or single and whether you have children. The distribution, according to state law may not be anything you would have chosen but it is what your family must deal with if you have not planned.  It is especially important if you have minor children to make plans for the preservation of your assets to care for them. Provisions for a contingent trust for your children can be included in a Will or in a separate revocable trust document. 

 There are many different planning options and the proper option depends on your family situation, your assets and the complexity of your particular wishes.  Taking the time to work through and complete a planning questionnaire helps ensure accurate advice about the options for your situation. Sometimes the right answer is a revocable trust which avoids probateand provides detailed instruction for the trustee to manage your assets for your family. Other times the proper planning may be a transfer on death deed and placing payable on death beneficiaries on your bank accounts.  

Planning gives peace of mind:

• By specifying who gets what—especially items with emotional significance—you head off disputes.
• By choosing an executor and trustee if you use a trust to administer your estate, you put someone you trust in charge.
• By naming a guardian for your young children (under 18), you make it possible for the person you choose to raise your children if for some reason you and the other parent couldn’t. If you don’t make your preference known in your will (or in other legally effective document) a judge would have to choose a guardian without any knowledge of your wishes.

Your life insurance and retirement accounts, traditional IRA, Roth IRA, and 401K are distributed upon your death according to the beneficiary designation, not by the provisions of your Will or Trust. The law is complicated and it is important to discuss those beneficiary designations with an experienced advisor.
 

In addition to the basic estate planning tools of a Will and Trust, a Durable Power of Attorney, which names a person who can act in your behalf regarding your property, is a valuable document. This tool gives the agent the power to act on your behalf if you are incapacitated and need assistance or if you are unavailable to act.  If you have a Durable Power of Attorney you will probably avoid the need to have a Guardian appointed if you unable to handle your own affairs. This avoids the cost and time associated with guardianship proceedings. 
 

A Healthcare Power of Attorney allows the agent named to make healthcare decisions for you, if you cannot make them. It is useful if you are injured or incapacitated and unable to make healthcare decisions. An additional healthcare document is the Advance Directive for Healthcare that gives instructions to your physicians on end of life matters. It also names a proxy who can make decisions if you are not able to make them.  It is essential in all of these documents to name people you trust as the agents, proxies, trustees, and personal representatives. They have great power but it also gives you great flexibility and avoids court supervisions of your affairs. 

Dispelling the Myth that Estate Planning is for Old People

by Cody Jones

• “I/we don’t have enough assets to have a trust.”
• “I won’t need an estate plan until I’m older.”
• “I/we have too much debt for an estate plan.”
• “I just want to know who will take care of my kids if I die.”

I often hear these responses when the twenty- and thirty-somethings I meet discover I’m an estate planning attorney. Although we’re told to plan for the worst and hope for the best, that advice rarely translates into preparing for our incapacity or death.  Instead, our time is spent focusing on careers, finances, homes, families, and other adventures. As a thirty-something, I too am often guilty of forgetting my days are numbered, hoping I’ll have plenty of time to plan for the not-so-fun “adult” decisions of life.  In doing so, we disadvantage our loved ones by leaving them to pick up the pieces without any foresight from us. Plus, we sacrifice the advantages of planning ahead. 

1. Death is guaranteed, and incapacity is likely for all of us - no matter our age.  If you have experienced the loss or incapacity of someone you love, you know it is difficult.  We seldom think clearly in times of great tragedy. Planning ahead for such events can prevent additional stress in already stressful times. Such plans may include nominating someone you trust to care for you if you are incapacitated and documenting end-of-life decisions you would make if you were able.  Nominating an agent or proxy for your health care may also prevent the need for a costly court-supervised guardianship. 
   
    
2. Not planning ahead can create confusion.  Upon your death or incapacity, your loved ones will have heightened emotions, and each will react to grief in a different and personal way.  One of the most sensitive questions that may be asked is who will take care of your minor children or other dependents. This may be a difficult question for you to answer, but it is even more difficult for others to answer when you cannot.  Discussing the nomination of a guardian for your minor children or other dependents with your spouse and loved ones while you have the ability to express your reasoning and consider their input can help avoid controversy over an already difficult decision.  Nominating a guardian helps provide a smooth transition for your children or other dependents and their caregivers. 
   
    
3. Planning ahead can make planning later easier. Just as a football team is better prepared for the big game if the coach has a game plan, you can be more prepared for managing your estate as it increases in value if you create the framework from the beginning. Part of this framework may include a revocable trust that outlines how your assets may be used upon your incapacity and controls the distribution of your assets upon your death.  You don’t need an abundance of assets to justify having a trust.  If you have assets without beneficiary designations, such as a vehicle and a house, preparing a trust may be prudent.  Even if you have debt associated with an asset, such as a mortgage, the equity you own is an asset of your estate.  If you die and the legal ownership of the asset is trapped in your name, your loved ones will likely need to go through a court-supervised probate to access the value of the asset. A probate is avoidable if you properly utilize a revocable trust. Creating a trust to own your assets as you acquire them throughout your life can be less time-consuming and less expensive than implementing the same planning with a lifetime’s accumulation of assets later in life.  With a trust already prepared, you can simply buy an asset in the name of your trust at the time of purchase and rest in the assurance the asset will be controlled by the trust upon your death or incapacity. 
   
    
4. A plan eases the impact of unexpected circumstances.  A revocable trust also provides a plan for unanticipated situations that joint ownership with rights of survivorship cannot address. Joint ownership only works well if at least one of the owners survives and has capacity.  If both you and your spouse die or become incapacitated simultaneously, a revocable trust contains provisions to address such circumstances.  Similarly, after your death if a beneficiary of your trust unexpectedly suffers from substance abuse or develops a disability, the trust can provide protections to avoid misuse or exhaustion of the trust funds which outright ownership cannot avoid.

Unexpected circumstances do not have an age limit.  Take time today to look at your family situation and personal assets. Who will care for your children if you pass away?  Who will care for you if you are incapacitated? What will happen to your assets upon your death or incapacity?  If you don’t have answers to these questions, or if you have adult children who cannot answer these questions for themselves, make an appointment so we can help you plan ahead and provide everyone certainty and peace of mind.

A Year-End Check-Up!

by Lloyd McAlister

Year’s end or the beginning of a new year, whichever you prefer, is an excellent time to get in the habit of checking your important personal paperwork – documents that are legally and financially important for you and your family.  So, consider taking an hour or so to do the following paper check-up:

1. Locate your documents!  Isn’t it amazing how many times we need some piece of paperwork and aren’t sure where to look for it? If you can’t relate to that problem, move on to #2!   If you’ve experienced that problem, though, you know it is a good idea to gather all your important records.  
    
2. Confirm the documentation you have! Your important records might include: military service and discharge papers; retirement plan papers; insurance policies; documents evidencing your ownership of all your assets, including vehicle titles, financial account statements, deeds for land and minerals, ownership records for assets received by gift or inheritance, trust papers for any interests you have in existing trusts, and so on.  And, last but by no means unimportant, your estate planning documents, including your last will and testament, your revocable trust, your durable power of attorney, your healthcare power of attorney (for general health and personal care decisions), your advance directive for healthcare (for end of life health decisions) and your consent for your attorney to communicate with your fiduciaries.  
    
3. Confirm you have the necessary signed, original documents!  In most of our business and personal matters it is acceptable to simply have a copy of documentation, rather than a signed and dated original document.  This is so either because we aren’t the party responsible for possession of an original or the original document is not necessary.  However, as you well know, it can be very important to have the original paperwork proving ownership of certain types of assets, either in order to transfer ownership to a new owner or in order to establish our own ownership.  Likewise, original estate planning documents, properly executed with your signature and, if required, the signatures of witnesses and/or a notary public, can be critical in carrying out plans and instructions in the event of your incapacity or death.  
    
4. Confirm your documents are current!  Have you ever felt time was passing quickly?  The speed of time passing seems especially real when we notice how “old” something has gotten without our notice.  For example, do you remember the date you did your estate planning documents (Will, trust, powers of attorney, advance directive for healthcare, etc.)?  Have things changed since then?  Do your documents still work the way you originally intended and, if so, is that still how you want things to happen?  Our clients regularly call upon us to meet with them and review their documents in order to assess whether any updating is needed or desirable.  Although this may seem inconvenient and does involve time and expense, the cost at present can be very small in comparison to the problems and costs which can be caused by having outdated documents which are no longer adequate or appropriate for the person’s situation.
    

My planning check-up:

• What documents do I have?  
• And which are signed originals?
• Will    
• Trust    
• Durable Power of Attorney    
• Healthcare Power of Attorney    
• Advance Directive for Healthcare
• Where are my documents located?
• Are my documents current?

A Word About Words

by Lloyd McAlister

Mrs. Jones’ attorney: “Mrs. Jones, your father’s life insurance is taxable and at an estate tax rate of forty percent.”

Mrs. Jones: “But I didn’t think my father’s insurance was in his estate!”

Mrs. Jones’ attorney: “The life insurance your father owned is not part of his ‘probate estate’ but it is a part of his ‘gross estate’ for estate tax purposes.”

Legal terminology can be confusing, causing people to misunderstand important legal and financial consequences.  Few legal terms create more confusion than the word “estate” and the variety of uses for the word which have different legal and tax implications.

When a person dies, we often speak of their “estate,” usually referring to the property and legal rights the deceased person owned at the time of their death.  However, sometimes we mean something narrower in meaning, with a more specific application.  For example, we might be talking about the “estate tax” due as a result of the person’s death, in which case we might use the word estate to refer to their “taxable estate.”  However, technically, to arrive at one’s “taxable estate” we must start with their “gross estate” and deduct allowable deductions.  Now, what at first might have seemed somewhat simple becomes more confusing.  

When referring to one’s estate, we might also be talking about their “probate estate.”  Again, what might seem simple can become quite confusing because we referred to “taxable estate” and “gross estate” above, yet what comprises one’s “probate estate” might be quite different than those other terms used to refer to tax matters.  If a person dies owning property titled in their name without valid transfer on death successor owner arrangements, the disposition of that property after the owner’s death is technically subject to the administration of such property by the “probate court.”  The probate court determines:  what property fits in that category (and, consequently, is subject to the jurisdiction of the probate court), whether there was a valid last will and testament of the deceased person which disposes of such property and, if no valid will exists which completely disposes of the property, the disposition of the deceased person’s property according to state law (called the laws of “descent and distribution”).

Although all the property in a deceased person’s probate estate might also be in their gross estate, it will not necessarily all be in their taxable estate due to the “allowable deductions” which are subtracted from the gross estate to arrive at the taxable estate, deductions such as the marital deduction for property passing to a surviving spouse or the charitable deduction for property passing to a charity.  Similarly, it is entirely possible some or even all the deceased person’s property is in that person’s “gross estate” (again, using the term in its technical sense to refer to the gross estate for federal estate tax purposes) yet little or none of it is in their “probate estate” because the ownership of the property was such that there was no need for a probate court to determine the lawful, successor owners.  The very common use of revocable trusts (also referred to alternatively as living trusts, inter vivos trusts, loving trusts, etc.) is an excellent example; a person might establish the ownership of some or even all their property in the name of the trustee of their revocable trust in order to avoid the court-supervised administration of their estate, a legal process called “probate.” By virtue of the legal fact that the client, now deceased, did not hold the title in their individual name but rather held title in their name (or someone else’s name) as a trustee of their trust, there is nothing to probate (nothing for the probate court to administer); the successor trustee named in the deceased person’s trust merely needs to accept or confirm their appointment as trustee.  Since the property in one’s revocable trust is subject to the “estate tax” it is included in their “gross estate” and, possibly, their “taxable estate” even though such property is not in their “probate estate.”  In fact, the deceased person may have planned their “estate” so that there will not be a “probate estate” and, consequently, no need for a court-supervised probate proceeding.

So, if you speak of someone’s “estate,” be careful to be clear about the type of “estate” to which you are referring.  Otherwise, you may believe others understand what you said, yet you may not realize that what they think you said is not what you meant!