Estate Planning Documents
When clients appear overwhelmed by the volume of documents necessary for a comprehensive estate plan, I add context by advising that “every document you ever sign during your life means that something went wrong for somebody else”. You may also think of a comprehensive estate plan like a homeowner’s insurance policy; they both cover many risks that may never occur, but you would never want to take on those risks without protection. There are however two differences between these two items (i) I will ensure that you completely understand your estate plan, and (ii) your estate plan covers one risk that is certain to occur.
“Everybody’s story is the same, only the facts are different. By carefully understanding your unique family dynamics, I will create a planning system that will address potential gaps in your current or nonexistent planning strategies. Your plan will benefit from the flexibility within a well-established structure, that may include the following documents.
A Will is a formally executed document that provides for the collection, management, and distribution of your property to your designated beneficiaries. Assets that are distributed under the terms of a Will are subject to the probate process. Assets such as life insurance, retirement accounts, and bank accounts may be distributed by their specific contract terms and are not controlled by the terms of a Will. Assets that are included in a trust (revocable or irrevocable) are managed and distributed according to the terms of the trust and not the Will or probate process.
The term “Pour Over Will” refers to a Will that is written as part of a plan with a Revocable Living Trust and provides that after probate, the assets will be distributed (poured over) to the trust for management and distribution.
Revocable Living Trust
This preferred planning strategy may be described by the following adjectives, each having a legal meaning
- Revocable Trust – You may revoke, amend, or modify your trust at any time during your life. This is different from an irrevocable trust.
- Living Trust – You are creating this trust during your life as opposed to a “testamentary” trust that is created in a Will after your death. A living trust also provides for you care while you are living in the event of incapacity, often avoiding the need of a guardianship. Your trust is a living document that can be reviewed and updated as your circumstances change.
- Grantor Trust – A grantor trust is the language of the IRS. Your trust is not a separate taxable entity during your lifetime. The Tax Identification number of your trust is your Social Security Number. All income is reported on your personal tax return.
Durable Power of Attorney
The purpose of the Durable Power of Attorney is to appoint another person (“agent”) to make decisions and transact business on your behalf This could be as a matter of convenience (when you are out of town) or otherwise unavailable due to incapacity. The Durable Power of Attorney, combined with a Trust may minimize the risk of a court supervised guardianship in the event you are incapacited or unable to take care of your own affairs for any period of time.
Medical Power of Attorney
A Medical Power of Attorney authorizes your agent to make medical decisions for you if you cannot express your wishes or make the decisions yourself. In addition, your Medical Power of Attorney authorizes your agent to obtain copies of your medical records.
Directive to Physicians (Living Will)
A Directive to Physicians is sometimes referred to as a “Living Will” and allows you to direct end of life decisions and the use of life sustaining procedures when you have a terminal or irreversible condition caused by illness, disease, or injury. This document backs up your Medical Power of Attorney.
The HIPAA Authorization grants authority to designated agents to obtain medical records, make billing inquiries, and discuss other medical information on your behalf. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) creates stiff penalties for medical providers that do not protect the privacy of individuals.
Declaration of Guardian for Minor Children
Biological parents are the natural guardians of the person of their minor children. However, at the time of the death of the second parent it will be necessary to appoint another person as the cupstodial guardian of the person for mnior children. This can be done in your Will or by a separate statutory document for this purpose only. Using the separate document can easily be changed without changing your Wills. The appointment of a guardian in your Will is ultimately effective when you die, but does not address the potential need of a guardian during any period of incapacity.
Declaration of Guardian in Event of Later Incapacity or Need of Guardian
To the extent a Trust may manage your assets and the Durable Power of Attorney authorizes your agent to act on your behalf during any period of incapcity, a guardian of your estate may not be necessary. However, neither of these documents apply to the guardianship of your person and your pre-selection of a guardian of your person can minimize or avoid family and legal disputes.
Appointment of Agent to Control Disposition of Remains
The Appointment of Agent to Control Disposition or Remainsis authorized by Section 711.002 of the Texas Health and Safety Code. This document will facilitate funeral plans with regard to the disposition of your remains, including cremation, and minimize family controversy. You may also want a separate memorial statement regarding details or guidance.
Irrevocable Life Insurance Trust (ILIT)
An Irrevocable Life Insurance Trust is commonly used to provide liquidity for an estate for the purpose of paying estate taxes. Because the Trust is “irrevocable” the life insurance proceeds are not included in the value of the grantor’s gross estate. Assets in an irrevocable trust may also be used to protect the assets from the grantor’s creditors. Special rules and procedures must be strictly followed to preserve the benefits of this trust and cannot be used to defraud creditors.
Special Needs Trust (SNT)
A Special Needs Trust (also known as Supplemental Needs Trust) may be an appropriate trust for parents who have a child with special needs by providing discretionary distributions to “supplement” the child’s needs instead of direct support for the child’s health, education, maintenance and support. This distinction is necessary to preserve the child’s eligibility for government benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSD), Medicare, and Medicaid. Without this special planning, assets held in a general support trust would be counted as a resource for the child which may disqualify the child from government benefits.
Trust For Unmarried Partners
Unmarried partners should include a Revocable Living Trust as part of their planning to ensure the desired distribution and management of assets in the event of incapacity or death of either partner. The provisions of a trust will overcome any legal barriers to statutory inheritance laws that otherwise apply to “legally” married partners. Additional powers should be granted to a partner/agent through a Durable Power of Attorney, Medical Power of Attorney, Directive to Physicians, HIPAA Authorization, Declaration of Guardian in Event of Later Incapacity or Need of Guardian, Agent for Disposition of Remains. This trust is critical when owning a homestead or other real estate.
A properly drafted Generation Skipping Trust permits a grantor to provide a distribution of assets directly to grandchildren (skipping children) while reducing potential estate taxes, generation skipping transfer taxes, and creditor protection for the skipped generation. This is a complex planning strategy that is often used for leveraging a transfer or wealth and appreciation, but can be an effective strategy for other family dynamics not driven by tax considerations.
A Pet Trust is a special trust that provides for the custodial care and support of a person’s pets, an expensive show dog, or other valuable animals such as a race horse after a person dies. The owner will name a custodian for the animal and provide funds for the animal’s support, including food, veterinary expenses, and shelter.
Business Succession Planning
Succession planning for small business owners (sole proprietorships, S-Corporations, partnerships, LLC’s, LLP’s, and professional corporations) must include a plan for their business or business interests in the event of death, disability, incapacity, or retirement. Assume two shareholders who are both active and integral contributors to a small business. Without a succession plan, the death of a shareholder may not only disrupt the future operation of the business, but could also force an undesirable ownership between the surviving active business owner and the uninterested spouse or children of the deceased business owner. A buy-sell agreement, funded by life insurance, will help provide for a smooth transition and settlement of the estate of the deceased shareholder.