Many clients contact an attorney seeking a will because they don’t understand the implications of merely having a will or haven’t been educated sufficiently regarding the benefits of a trust. Usually, the attorney sends clients an estate planning questionnaire in advance in order to get an idea of their individual situations. This allows the attorney to determine whether the client needs a will or a trust.
A basic last will and testament names an executor, who is often be the spouse of the person creating the will. (Adult children or other family members may be named as backp executors.) It will also include guardianship decisions and may provide an alternate guardian for minor children in the event that both parents pass away. Often, clients will choose to name a sibling and the sibling’s spouse as guardians. In that case, a plan for guardianship is needed in the event of a divorce.
A will should also include cremation or burial instructions. When dealing with younger individuals who have not done any preplanning, we will have a general provision indicating their preference for burial or cremation, and giving the executor power to make decisions regarding any additional final arrangements. If the client has contracted with a mortuary or a national organization such as Dignity, Trident, or the Neptune Society, then this should be included in the will.
The will addresses the distribution of assets to heirs. If children are named as secondary beneficiaries, , we will state how the assets should be distributed. In some cases, we will include a language for the creation of a trust (at the conclusion of the probate proceeding, a trust will be established for the benefit of the children). The problem with this type of estate plan is that it doesn’t avoid the probate process and it doesn’t reduce attorney’s fees, court costs, or professional fees. In addition, the financial and family affairs become public record, which can delay the distribution and use of the assets.
Many people do not realize that if they own property and merely have a will, a court process will be required before family members can sell the property. This is called a Muniment of Title (a fairly quick process of putting a beneficiary’s name on the title). However, title companies in Middle Tennessee prevent heirs from receiving funds or selling property for one year from the date of death (an unknown creditor could pop up and make a claim on the assets). Alternatively, a full-blown probate could start, which would allow for a house to be sold and the net proceeds to be available following a four-month waiting period.
Both the Muniment of Title and the Probate processes can be avoided by having a revocable living trust, rather than a will. A living trust is created while the creator of the trust is alive and involves retitling assets in the name of the trust. This avoids probate and issue’s with potential creditors, making it much easier to settle the estate. With an understanding of the difference between these processes it should be an easy decision which estate plan is right for you.
A living trust has a number of components: the name of the names of the people creating the trust, commonly referred to as the grantors, the name of the trustees, the people will manage trust property, and the beneficiaries of the trust. Use and enjoyment of the assets will remain the same. The only noticeable difference is the name of the trust will appear on bank statements and property tax bills. In most cases, the grantors will retain the ability to amend or revoke the trust, management investments and take property in and out of the trust as they see fit.
The trust should contain a section for family information, such as biological relationships between parents and children, especially if the trust has been created for a blended family. The client must name a successor trustee to manage the trust assets at incapacity or death. When one spouse dies, the surviving spouse may continue to serve as a trustee, or they may serve as a co-trustee with someone to assist them, like a close family member. A number of administrative provisions, like back-up trustee, and the process for removing or replacing a trustee must be documented.
The trust states whether or not all of the assets will be left to the surviving spouse, and detail triggering events that would make the trust irrevocable. This may be necessary if the grantors are concerned about re-marriage after the death of the first spouse, or the surviving spouse being susceptible to undue influence or fraud due to diminished capacities.
Some people choose to make specific gifts to distant relative, churches, charities or non-profit organizations. The remaining assets are called the trust residue, which is usually distributed in percentages. The trust residue is usually distributed to close family members, like children or grandchildren.
The life circumstances of the beneficiaries will need to be considered. Minor children will likely need the trust assets to provide for their health, education, maintenance and support. At a given age, they will have the right to become their own trustees and deal with their share of the trust assets as they see fit. For example, a beneficiary may be given a right to withdraw their entire share at age 25, or they be limited to one third age 25, the second third at age 30, the right to withdraw the final third at age 35.
If asset protection is a concern, then a discretionary trust can be created to give the trustees the ability to make distributions as they see fit for the benefit of the beneficiaries. If the children don’t have the ability, under the terms of the trust, to stand before the trustee and demand all of the money, then neither will their creditors.
The remaining trust components include the trustee powers, administrative provisions, and a definition of incapacity. Two physicians may be required to deem the parents incapacitated before allowing the successor trustee to begin managing the assets or using the assets for the grantors’ benefit.
The successor trustees are normally entitled to a trustee fee for the time and effort spent administering the trust. A common fee is 1.5% of the value of trust assets, which is paid each year.
When dealing with trust-based estate plans, a companion pour-over will should be used. With a pour-over will, anything that was in the grantor’s name when he or she passed away pours into trust, such as financial accounts with named beneficiaries or a refunded check received after the grantor’s death.
Having a general (broad in scope) durable power of attorney is very important. When drafted correctly, this document is usually about 20 pages long and addresses every area of a person’s financial life. It is durable because it is valid beyond incapacity. A limited power of attorney terminates when someone becomes incapacitated. The durable power of attorney goes beyond incapacity and only terminates if it has been revoked or if the person who created the power of attorney has died. It will include the power to buy, sell, invest, deal with securities, prepare and file tax returns, deal with insurance, provide support for dependents, and cover employee benefits, retirement benefits, and governmental benefits.
Many times, clients find themselves with potential liabilities and an asset protection issue (due to diminished capacity or having to be placed in a nursing home). To deal with such situations, the power of attorney must include the ability to create, modify, or revoke a more advanced trust, like a Medicaid Asset Protection. In addition, there will be a provision that disallows the person acting under power of attorney from modifying the overall estate plan.
A financial power of attorney can be structured in one of two ways. First, it can be an immediate power of attorney, meaning as soon as the power of attorney has been signed, it is valid and gives the individual acting under the power of attorney the ability to begin making financial decisions. Alternatively, it could be created as a “springing power of attorney.” Under this option, the individuals named cannot act until the person creating the trust has been determined to be incapacitated. Like a trust, the determination of incapacity occurs with the opinion of two licensed physicians, or a court of law, declare, in writing, that the individual is no longer able to manage their financial affairs due to age, illness, or the use of prescription drugs.
Every good estate plan—especially a trust-based estate plan—deals comprehensively with how assets should be managed if the grantor becomes incapacitated. Incapacity issues are addressed in the financial power of attorney. This permits the chose successor to manage assets both inside and outside of the trust. The final component of incapacity planning is the advance healthcare directive. Many attorneys draft their own healthcare powers of attorney, but the Tennessee legislature has created the Tennessee Advance Healthcare Directive. This replaces the old living will, healthcare power of attorney, and HIPAA authorization.
When creating an advance healthcare directive, an individual first names the person who will be entitled to make healthcare decisions and receive medical information on their behalf. In most cases, that person will be their spouse. If the spouse is unable, then a close friend or one of their children could be named as an alternate. The advance healthcare directive gives the client an opportunity to indicate whether the power to receive their medical information and make medical decisions is effective immediately or effective only once they become incapacitated. They will also have an opportunity to decide whether or not they want to be an organ donor.
The Tennessee Advance Healthcare Directive also considers various healthcare situations, such as total and permanent confusion, end-stage illness, or total dependence.
An individual would be able to indicate whether all or any of those situations are unacceptable to them, and whether or not he or she wants their life prolonged under such circumstances. The advance healthcare directive provides for four different healthcare options: CPR, tube feeding, respirators, and treatment of new conditions. With respect to each healthcare situation, the individual can indicate which (if any) healthcare option to be pursued. Incapacity planning saves money and simplifies things because it avoids conservatorship proceeding in court.
Beneficiary designations should be considered part of any trust-based estate plan. A person may want to name his or her spouse as a beneficiary but may be concerned about the spouse’s ability to name their own children as beneficiaries once they pass away, or the consequences of a divorce.
An assignment to personal property, is a good way to transfer tangible personal property to the trust and empower the trustee to manage those items in the event of incapacitation or death. This is done in lieu of retitling tangible personal property in the name of the trust, and can be done with any tangible item, such as furniture, furnishings, hobby-related items, photo albums, and television sets.
One of the final items in an estate plan is an asset transfer document. Since a trust is of no benefit unless assets are transferred to the trust, such as executing a trust transfer deed. Doing so will allow family members to avoid probate and will simplify everything once that person passes away. Tennessee is one of the best states in the country for trust planning. The “T” stands for “Trust” – there is so much that we can do here! In addition to real property, we will put financial accounts in the name of the trust so benefit as well. If someone owns a business, a stock power allows the transfer of ownership of the stock to the trustee of the trust, and if they have a corporate minute book, stock certificates should be re-issued to the trust.