Cornerstone Documents For A Strong Estate Plan

Many people believe that their estate planning is finished when they have prepared and signed a Last Will.   There are several documents including, but not limited to, powers of attorney, revocable trusts, irrevocable trusts and medical directives that are likely necessary to establish the cornerstone of a successful estate plan.   A proper plan should consider avoidance of probate,  estate and inheritance tax savings, protection of assets, and assignment of someone to act as Agent in case of illness or disability.

All estate plans should include, at minimum a Last Will and Testament and a General Durable Power of Attorney.  A Revocable Living Trust can also be used to avoid probate and to manage your estate both during your life and after you are gone.  Irrevocable Trusts are incorporated into the plan for greater Medicaid and Nursing Home Asset Protection and/or Inheritance Tax and Federal Estate Tax protection.  In addition to these documents, medical directives, also known as Living Wills, allow you to appoint someone to make medical decisions on your behalf.

Will

A will is a legally executed document which explains how, when and to whom a person would like his or her property distributed after death.  Under Pennsylvania law, an individual may prepare a will in his or her own handwriting as long as it is dated at the top and signed at the bottom/end of the document.  However, such wills (holographic wills) risk ambiguity and incompleteness if they are not reviewed by an attorney.  Ambiguity or incompleteness can render a will ineffective or can give a will a different interpretation than the testator (person who “makes” a will) intended.  Holographic wills often result in protracted litigation in the probate court system which can cause delays and can by costly.  Attorneys generally will ensure that a will is clearly and effectively drafted, typed, and then executed in accordance with the corresponding State law where signing takes place.  Furthermore, holographic wills or older wills may not coordinate the other assets you own such as insurance policies, IRAs, pensions, and the taxes on such property.

A will also appoints an executor to carry out the mandates of the will.  A will is especially important if you have minor children because it allows you to creates trusts for minor children and to name trustees and a guardian.  However, many types of property or forms of ownership pass outside of the control of a will.  Jointly-owned property, property in trust, life insurance  and property with a named beneficiary, such as IRAs or 401(k) plans, all must be handled in a way that incorporates them with the will planning.  Specific attention must be paid to the beneficiary designations to insure that a successful plan is carried out.

Trust

A Trust involves a legal relationship in which the owner of certain property (known as the Grantor or Settlor) transfers such property to a person or institution (known as a Trustee) to hold and administer for the benefit of a person or institution (known as a beneficiary).  A Trust established under a Will comes into existence after the death of a testator and is known as a testamentary Trust.  A Trust effective during a person’s lifetime is referred to as a Living or Inter Vivos Trust.  If the Settlor (the creator of the Trust) retains the right to modify the Trust, it is revocable.  However, if the Settlor expressly forgoes the right to change the terms of the Trust and retains no interest in the property he or she transferred to the Trust, it is irrevocable.

Irrevocable trusts can perform many functions.  Accordingly, there are many different types of irrevocable trusts, including but not limited to: Medicaid Asset Protection Trusts, ILITS (Irrevocable Life Insurance Trusts); QPRTS (Qualified Personal Residence Trusts, BCT (Beneficiary Controlled Trusts), and GST Trusts (Generation Skipping Transfer Tax Trusts), and Grantor Retained Annuity Trusts (GRATS).  Even among these trusts there are many different permutations that are used to adapt to each client’s particular needs.

Power of Attorney

A person who gives Power of Attorney to another person (known as the Agent) authorizes that person to act as his or her legal agent.  A Power of Attorney may be limited to a certain time and task (e.g., representing an individual at a real estate closing) or it may be a complete and general Power of Attorney which authorizes another individual to act with complete legal authority.  A “durable” Power of Attorney retains its effectiveness even if the person who granted the Power of Attorney becomes incompetent.  A Power of Attorney ceases to have effect upon the Grantor’s death.

Absent a Power of Attorney, if an individual becomes incapacitated, no one may gain access to his or her assets or make other important medical, financial or legal decisions for his or her benefit without going through the expensive, traumatic, and cumbersome process of declaring the person incompetent, and establishing a court appointed Guardianship.

Medical Directives

A Medical Directive or Living Will states an individual’s preferences with regard to heroic measures and whether or not they should be taken to preserve his or her life if there is no chance of recovery from a tragic illness or injury. Under Pennsylvania law now explicitly recognizes such documents.  However, even in Pennsylvania, Living Wills have some limitations.  There is, however, a legal and moral persuasiveness under the state statute and a new United States Supreme Court case.  Living Wills can be an important part of an estate plan at any age as they remove some of the heavy emotional burden of life and death medical decisions from family members and they sometimes can eliminate the erosion of an individual’s estate through avoidance of interminable medical bills.

Medical powers-of-attorney are used to designate one or more people to step into the patients shoes to make medical decisions.

Beneficiary Designations

Many assets pass outside of a will,  i.e., a will does not control disposition of all estate taxable assets.  Retirement plans, 401k’s, IRAs, insurance policies, joint property with right of survivorship, in-trust-for accounts, and pay-on-death accounts all pass outside the control of a will.  To ensure that a will control’s disposition of assets and to obtain all tax advantages, it is frequently necessary to designate one’s estate or a trust under a will as beneficiary.  This type of beneficiary designation must be handled properly and with extreme care or assets could be exposed to creditors’ claims or unwanted income or estate tax consequences.  Legal counsel is highly recommended.

To read more about one of the most popular Medicaid Asset Protection Trusts read this article.

To read about naming a Trust as beneficiary of and IRA or 401k or other tax deferred asset click here.

To read more about the Power to Modify Beneficiaries click here.

 

Please contact Douglas L. Kaune at 610 933 8069 to review your estate planning and Elder Law goals or those of a parent or loved one.