Estate Planning for the Savvy Client
Page 4
Assume that the state where the Jones live has a small estate procedure for probate estates worth less than $30,000, and that the state’s intestacy law provides that if there is a spouse and children, the spouse and children split the estate 50/50. Assume also that the Jones have adult children.
Mr. Jones died with some accrued but unpaid vacation pay. Mr. Jones’ employer sends a check made out to Mr. Jones. Since Mr. Jones is dead, Mrs. Jones will not be able to cash or deposit the check (not even into a joint bank account). The amount of the check is less than $30,000. If Mr. Jones has a Will which names Mrs. Jones as beneficiary, then the proceeds of the check can be distributed to Mrs. Jones under the small estate proceeding. If Mr. Jones does not have a Will, however, Mrs. Jones will have to split the proceeds of the check 50/50 with the adult children under the intestacy laws.
After Mr. Jones’ death, a check arrives in the mail for a manufacturer’s rebate that Mr. Jones applied for before his death. Same result as above.
After Mr. Jones’ death, Mrs. Jones checks her state’s unclaimed property database and discovers that the state is holding funds from an old bank account that Mr. Jones had long since forgotten about. The account was in Mr. Jones’ sole name. Same result as above.
Remember
At a minimum your Will should clearly and unambiguously:
•spell out who receives your tangible personal property and how it is to be divided (to avoid disagreements),
•name residuary beneficiaries and alternate residuary beneficiaries (to avoid intestacy),
•name your executor and alternate executor,
•name a guardian and an alternate guardian (if you have young children), and
•include a trust to hold assets you leave to any young children.
CHAPTER 4
What Happens if You Become Incapacitated?
LET’S SWITCH GEARS NOW and discuss how estate planning can help, not just upon death, but also if age, illness or injury leaves you incapacitated during your life. Each state has its legal definition of incapacity, but in general an incapacitated person is someone who is impaired to the point of being incapable of making or communicating responsible decisions concerning themselves or their property.
What Happens Without Prior Planning?
Without prior planning, if you become incapacitated, a legal guardianship proceeding may be required-that is, a court proceeding in which the judge:
•determines whether or not you are, indeed, legally incapacitated, and
•appoints a guardian (sometimes called a conservator) to handle your affairs, if necessary.
The judge can appoint a guardian to make all your personal decisions, such as where you will live (a guardian of the person), and/or a guardian to handle all your assets (a guardian of the estate). There may also be other types of proceedings that allow for lesser degrees of guardianship if you are not totally incapacitated.
In any event, a guardianship or similar proceeding is likely to be complicated, lengthy, expensive, and public. Your prospective guardian will likely need to hire an attorney, and the court will probably appoint another attorney to represent you, the incapacitated person, as well. A guardianship may also be contentious if more than one person wants to be the guardian or if the allegedly incapacitated person does not agree that he or she is incapacitated.
“Putting Someone’s Name” on Your Accounts
You may be tempted to “put someone else’s name” on your bank accounts for convenience. For example, you may have considered “putting your daughter’s name” on your checking account so that if you become incapacitated, your daughter will be able to write checks. You might do this without giving it much thought. Unfortunately, that may lead to unintended and unwelcome consequences because, legally, it typically makes your daughter a joint owner of the account.
From the bank’s perspective, adding a joint owner sounds like a good idea. It’s much easier for a bank or other financial institution to deal with a joint owner than with an agent under a power of attorney (discussed below). Although powers of attorney generally have the force of law, and in many states financial institutions are required by law to accept validly executed powers of attorney, the bank may be wary of a power of attorney because it might not be valid, or may have been revoked without the bank’s knowledge.
From an estate planning perspective, however, making someone a joint owner could have extremely undesirable consequences for you in two ways. First, a joint owner of your bank account typically has the right to inherit all of the money in the account upon your death regardless of what your Will says. This consequence was illustrated in Quiz #1 in Chapter 2, The Number One Misconception About Wills.
In addition, “putting someone’s name” on your account may give that person important legal rights to the money in the account during your life. Because the person is now an owner of the account, there is always the possibility that the person could withdraw money from the account without your knowledge, or that the account could be taken by the person’s creditors.
Therefore, it’s usually best to use a power of attorney to name an agent to manage your accounts. We’ll discuss how to do this in the next section, Using a Power of Attorney for Finances. Be sure to see the Examples at the end of that section.
You can also use a revocable living trust, together with a power of attorney, to help manage your finances if you become incapacitated. See Using a Revocable Living Trust in Case of Incapacity in Chapter 6.
Using a Power of Attorney for Finances
In order to avoid the expense, delay and other problems associated with guardianship, you will typically sign a power of attorney as part of the estate planning process. The power of attorney is a legal document in which you (called the principal) appoint one or more people to be your agent (sometimes called your attorney-in-fact). The purpose of signing a power of attorney is so that your agent has the legal authority to take certain actions for you without having to be your court-appointed guardian.
What Your Agent Can and Can’t Do
Your agent is empowered only to take actions for your benefit. Your agent must not use the power of attorney for his or her own benefit. For example, in dealing with your car, your agent typically could not legally:
sell it and keep the proceeds for himself,
give it to his daughter (or allow his daughter to drive it-no matter how badly she needs a car),
sell it to someone for a price below market value,
give it to charity, or
junk it without receiving market value for it.
Your agent could, however, sell your car (at market value) if the proceeds were needed to provide for you. The same goes for any of your other property.
Also, although the agent may be called an attorney-in-fact, this does not mean that the agent is an attorney or has the powers of an attorney!
The power of attorney document specifies the powers you give to your agent. The type of power of attorney you would typically sign as part of your estate planning is commonly known as a general power of attorney or a general durable power of attorney. This means you give your agent broad and sweeping powers-basically the power to take any actions with respect to your property that you yourself could take (limited, of course, by the agent’s duty to take actions only for your benefit). For example, the power to enter into business transactions, financial and banking transactions, real estate transactions, deal with tax matters, social security matters, pension plans and retirement accounts, and the like. That way, if you become incapacitated, your agent has the legal authority to take any action needed for your benefit, without the necessity of being appointed your legal guardian. If the powers are not broad enough, you run the risk that your agent will have to go to court to get additional authority.
There have been many cases of agents abusing their authority under a power of attorney. That’s why it’s vitally important that you have a high level of trust in the person you name as your agent, and t
hat your prospective agent understands what he or she can and cannot do as your agent.
Your power of attorney should also be clear as to whether or not your agent has the authority to pay himself or herself a fee for acting as your agent. You may or may not wish to compensate a family member for the time he or she devotes to acting as your agent. That is entirely up to you. If your agent is a professional (attorney, accountant, financial advisor and the like) typically he or she will be compensated for acting as your agent.
If someone (for example, another family member) thinks that your agent is abusing his or her authority, that person can alert the court, in which case the court may require your agent to account for his or her actions. If this happens, your agent would have to submit paperwork to the court (an accounting) that shows in detail what actions your agent has taken by authority of the power of attorney.
When the Power Begins
It is important to understand when the agent’s authority begins. You may think that your agent cannot act until you become incapacitated. But that is not the case. Typically, your general power of attorney is effective as soon as you sign it and give it to your agent. Once that happens, your agent can act whether you are incapacitated or not.
So, hypothetically speaking, if you execute a general power of attorney and give it to your agent today, your agent can theoretically go to your bank and wipe out your bank accounts immediately. Of course the agent is not legally permitted to steal from you, but a general power of attorney permits your agent to withdraw the money even though you are not incapacitated. You should trust your agent enough to be comfortable that he or she will not act under the power of attorney unless you become incapacitated (or you specifically ask him or her to act on your behalf-for example, if you’re traveling out of the country and need something to be signed).
If you’re not comfortable with the idea of your agent being able to act when you aren’t incapacitated, you may want to use a different type of power of attorney called a springing power of attorney. A springing power of attorney still gives your agent broad and sweeping powers to do anything you could do yourself, but the difference is that it does not “spring” into effect until a specified condition happens, typically that you become incapacitated, as certified by your doctor.
Each type of power of attorney has its pros and cons. A general power of attorney is much simpler for your agent to use, but requires a certain level of trust. A springing power of attorney is much more complicated to use. It may be difficult or impossible for your agent to get a physician’s certification (or whatever else is required by the condition) due to privacy laws (such as HIPAA). Third parties may also be less likely to accept a springing power of attorney because of concerns that the requirements have not been met. Which one you should use depends on your specific situation and personal comfort level.
When the Power Ends
You can change or revoke a power of attorney at any time, as long as you have the mental capacity to do so. As a legal matter this is usually done by signing a new power of attorney which states that you revoke all prior powers of attorney, or by signing a revocation of the power of attorney. As a practical matter, you should destroy all originals of the old power of attorney so that no one can attempt to use them. For this reason, it’s sometimes a good idea to keep the originals in your possession, rather than giving them to your agent (but let your agent know where to find them should the need arise).
A power of attorney is no longer effective after you die. At that point, it is your executor who will take over handling your property. Agents sometimes think that they can continue to write checks or otherwise deal with property after the death of the principal, but in general they have no legal authority to do this.
If the Power Is Refused
What if the bank or other financial institution refuses to accept your agent’s power of attorney? A bank could also claim that the bank’s own form of power of attorney is the only one it will accept. Regardless of a bank’s policies, powers of attorney generally have the force of law, and in many states financial institutions are required by law to accept validly executed powers of attorney.
If you’re concerned that your financial institution will refuse to accept your power of attorney when the time comes, then you should have the financial institution establish in its records, in advance, that your agent is the attorney-in-fact on the account. Check with your financial institution to find out how to do this.
Examples
Jane, a widow, is concerned about who will do her banking, pay her bills, and so on if she becomes incapacitated. She would like her daughter, Debby, to be able to handle these matters for her without Debby having to go to court and be appointed as guardian. Jane goes to her bank and “puts Debby’s name” on her accounts. The bank has Debby sign a signature card so that she is the joint owner of the accounts with her mother. Years pass and then:
Debby is involved in a messy divorce. When she has to disclose her assets, her husband’s lawyer points out that she is the owner of joint bank accounts. The bank accounts may become part of the marital assets to be divided up between Debby and her husband.
Debby develops a drug, drinking, or gambling problem. She becomes desperate for cash and realizes that she is the joint owner of bank accounts – Hurrah! She goes into the bank and withdraws the money.
Debby is in a car accident. There is a lawsuit and a judgment against her for more than her insurance will cover. All her assets, including the joint bank accounts, are subject to this judgment.
Jane’s better choice would have been to execute a power of attorney naming her daughter as agent and presenting it to the bank to establish Debby as the agent (not the joint owner) on the accounts.
A power of attorney not only avoids the unpleasantness of the three scenarios above, but it could also allow Debby, as agent, to deal with many other matters for her mother, such as handling other assets, filing tax returns, and more.
Note that the same types of problems can also arise if you “put your house in someone else’s name,” which from a legal point of view may be akin to giving your house away. It may also create tax problems that are beyond the scope of this book. Before you do anything like that, consult your estate planning attorney.
Making Your Healthcare Wishes Known
It is a good idea to include advance directives as part of the estate planning process. Advance directives are legally binding documents that deal with health care matters. They are known by many different names in different states, but they typically address the following:
Your wishes regarding life support systems, such as artificially administered nutrition and hydration, mechanical respiration, and cardiopulmonary resuscitation (CPR), if you are terminally ill or permanently unconscious, and not capable of communicating your wishes. Depending on your state, you might address these matters in a stand-alone document called a Living Will or as part of a Health Care Power of Attorney or other advance directive document.
The appointment of an agent to make health care decisions for you if you are not capable of making them yourself. You might do this in a Health Care Power of Attorney or as part of another type of advance directive document.
Your wishes regarding organ donation. In many states, you can use your Living Will, Health Care Power of Attorney or other advance directive document to specify whether or not you wish to donate organs and, if you do, which organs. Or you may specify that you want your agent to make the decision.
Be sure that you understand the specific language and consequences of the documents used in your state. In addition to your attorney, you may also want to consult your physician if you have any questions about specific medical treatments or how your health care documents will work in specific situations.
Remember
Generally speaking:
If you sign a general power of attorney, it can be used by the person you name (your agent) even if you are not incapacitated.
Your age
nt under a power of attorney is authorized to act only in your best interest.
Your agent’s power under a power of attorney ends upon your death.
“Putting someone’s name” on your bank account can not only give that person important legal rights to the money in the account during your life, but can also give that person the right to inherit all the money in the account upon your death, regardless of what your Will says.
CHAPTER 5
Do You Need
a Trust?
TRUSTS ARE IMPORTANT AND useful tools in estate planning, but that doesn’t mean they’re for everyone. You can’t know whether or not you need a trust without knowing what you’re trying to accomplish by having a trust and whether the type of trust you’re considering will do the job. In this chapter I’ll introduce some basic types of trusts, along with their common uses.
What Exactly Is a Trust?
Broadly speaking, a trust is an arrangement by which a person or institution, the trustee, legally owns the property of one person, the grantor, for the benefit of another person, the beneficiary. Here is a common, and simple, example: