New Year’s Resolution Checklist
Make a New Year’s resolution to review your finances to assure your estate plan is in good shape.
1. Beneficiary Designations.
Make sure the beneficiary designations of IRAs, 401-Ks, and life insurance policies are up-to-date and coordinated with the estate plan. Often, when a spouse dies, the beneficiary designations for the surviving spouse are not updated and there is no contingent beneficiary – leaving the assets payable to the estate of the surviving spouse. This could cause the payment of the death benefit of these accounts to be made to an unintended beneficiary or to a minor, special needs beneficiary, or other vulnerable individual without appropriate protections. It could also cause a costly and time consuming probate proceeding.
The death beneficiary of assets such as IRAs, 401-Ks, and life insurance are not normally controlled by the terms contained in a Will or a trust. The beneficiary is usually named in the contract itself. Where there is a conflict between the contractual designation and the beneficiaries named under a Will or trust, generally the contract prevails. As an example, if the eldest son is named as beneficiary of a life insurance policy and the Will of the insured instructs the executor to divide all the assets of his estate equally among all children, the life insurance death benefit would be paid solely to the son. This may or may not be what the decedent intended. The provision in the Will does not legally obligate the son to split the life insurance death benefit with his siblings.
2. Incapacity Planning.
A durable power of attorney for finances and revocable living trust can prove to be invaluable tools in the event an individual is found to lack the capacity to manage his or her financial affairs due to dementia, Alzheimer’s disease or similar conditions. These estate planning documents allow a trusted individual (known as the agent or trustee) to pay the bills and handle the finances of the incapacitated individual. Without such documents, a costly legal proceeding (known as a guardianship or conservatorship, depending upon the state) would be required. If a guardianship or conservatorship is needed, the person appointed by the court (known as a guardian or conservator) may need to be bonded and will be required to file an accounting with the court annually. The guardian or conservator may be required to get court permission before taking certain actions. Some advisors advocate for a guardianship or conservatorship proceeding because of the existence of court oversight. However, a similar result can be achieved without the ongoing legal fees and court interference by requiring the agent under a power of attorney and a trustee to deliver periodic reports and supply copies of bank records to a second trusted individual. If the designated individual finds improprieties in the manner the finances are being handled, he or she can remove the agent or trustee and enlist the assistance of the court at that time, if necessary, to recover the funds.
3. Making Health Care Wishes Known.
We have all heard about persons being kept alive through use of a feeding tube or breathing machine. The United States Supreme Court case involving Terri Schiavo is just one of countless examples. While the use of this life prolonging medical equipment can be very beneficial, many individuals do not desire to be maintained indefinitely when the possibility of recovery is non-existent. The presence of an advance health care directive, health care power of attorney, or health care proxy allows a designated agent to make health care decisions for a person who is not capable of making these decisions for himself or herself. But these documents do much more than that. They designate an agent to determine whether or not to have a medical procedure performed; where the incapacitated person will reside (in an assisted living facility or nursing home as compared to at home with in-home care providers); with what church and recreational activities that incapacitated person will be involved; and whether to be buried or cremated. An advance health care directive, health care power of attorney or health care proxy is a very important component of a comprehensive estate plan.
The Health Insurance Portability and Accountability Act (HIPAA) provides that protected health insurance information is not disseminated by medical and health care personnel. While the protection of this information is vital, it can often interfere with an agent or trustee obtaining information needed for the efficient administration of an incapacitated person’s health care and finances. For this reason, it is vital also to have a HIPAA Preauthorization Form, which designates the individuals who can obtain protected health care information in the event of incapacity. The individuals who are typically pre-authorized to have access to this information are the designated agents, trustees, and close family members.
4. Use of a Revocable Living Trust.
A probate is a legal proceeding through which the assets of the decedent are inventoried, creditor claims are received and either paid off or rejected, taxes and other government claims are paid, and the residual of the estate is paid to beneficiaries. When a person dies intestate (without a Will), the beneficiaries of his or her estate are determined under state law. A probate proceeding is open to the public, can take a year or more to conclude, and can cost thousands of dollars in legal fees, executor fees, court costs, and administration expenses.
A common misperception is that the creation of a Will avoids probate. In fact, a Will mandates a probate administration, because one of the functions of a probate is to determine whether the Will is valid. A common way to avoid probate is to create a revocable living trust. The assets owned by a revocable living trust are distributed without the need for a probate proceeding and as directed by the terms of the trust. During the lifetime and competency of the creator(s) of the trust, he, she, or they have complete control over the assets of the trust and can change the terms of the trust, if desired. After death, the assets CAN be distributed outright to the intended beneficiaries. They can also be further held in trust for the beneficiaries designated under the trust. Holding assets in trust allows for the management of assets intended to benefit a minor beneficiary, a person with special needs, or an individual who is incapable of managing his or her financial affairs due to immaturity or problems with taxes, excessive debt, gambling, alcohol, and/or drugs. The trust for the beneficiary can last indefinitely or cease to exist when certain conditions are met (attaining a designated age, being drug-free for a designated period, or demonstrating the ability to manage the trust assets are three of many possibilities).
5. Funding of the Trust.
The New Year is the perfect time to review the ownership of all assets. Assets owned individually (rather than by a trust) will not avoid probate (as explained above). Oftentimes, individuals create a trust but don’t transfer ownership of assets to the trust. A trust that is unfunded (contains no assets) can be analogized to a treasure chest that contains no booty. You have the treasure chest, but it serves no function other than maybe serving as a conversation piece. Once a living trust is created, the ownership of the creator’s assets must be transferred to the trust. This is accomplished by contacting the bank or brokerage company to effectuate a change of ownership of financial assets, or in the case of real estate, recording a deed transferring title to the trust. If the death benefit from an IRA, life insurance, or other assets with a beneficiary designation is to be controlled by the terms of the trust, a change of beneficiary forms designating the trust as beneficiary will need to be executed. As assets are bought, sold, or transferred during the life of the creator, any new assets should be titled in the name of the trust. Failure to provide for ownership of assets by the trust may cause these assets to be subject to probate upon death.
Our law firm focuses on estate planning and the administration of trust and estates for clients of all levels of wealth. We offer comprehensive estate planning services, including incapacity planning and assistance with lifetime funding of trusts. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information regarding cutting-edge estate and financial planning strategies for persons of levels of wealth. You can get more information about a complimentary review of your existing estate plan and our planning and administration services by calling our office at (408) 356-9200 or (831) 476-2400.
