ESTATE PLANNING ADVISOR[i]

Vol.3, No. 25 September, 2002

WHO’S WHO AND WHAT’S WHAT IN AN ESTATE PLAN

This Advisor is intended as a summary explanation of the participants, and the tools used, in the estate planning process. We discovered that some of our clients were not as familiar with the terminology, flow of decision making authority and end results of an estate plan as they would prefer. Therefore, we have prepared the following presentation to illustrate the essential elements of an estate plan and the components of the plan itself. We begin at the beginning.

The Basic Testamentary Estate Planning Documents

Once a decision has been made to engage in a formal estate plan, as opposed to letting the courts sort out who receives your property at your death, the decision essentially boils down to the following choices:

Will-Based Estate Plans: A will-based estate plan uses a document termed a will to contain all of the instructions that the client wants to apply to their property at their death. In effect, a will is dormant until death occurs, then its terms spring into being and a court supervised procedure, termed probate, begins and ensures that the decedent’s last wishes are carried out. The terms of a will progress through naming guardians for minor children, payment of last expenses, any specific bequests, the ultimate disposition of the decedent’s property, including changing the title of the property from the decedent to the ultimate beneficiaries, and the powers and responsibilities of the executor. More about the executor later.

Trust-Based Estate Plans: A trust based estate plan uses a document termed a revocable living trust, or simply a living trust or a revocable trust to contain all of the instructions that the client wants to apply to their property at their death. Unlike a will, a living trust springs to life upon execution. It is a real legal entity with rights and responsibilities of its own. The operations of the trust are carried out by trustees, rather than executors. More about trustees later. Unlike a will, property is funded, title is transferred from Mr. and Mrs. Smith to Mr. and Mrs. Smith, as trustees of the Smith Living Trust, dated January 1, 2002, during life. The trust becomes the legal owner of the property for state, and some federal law purposes. When a death occurs, the trust is already the owner, and does not need to go to the probate court for supervision. Typically, the decedent was the trustee, and the terms of the trust automatically transfer power and responsibility to the person or persons the decedent wished to exercise those powers after the decedent’s death.

If you look at the operative provisions of a trust, you will see that they are very similar to those included in a will. This is particularly true for the portions, called Articles or Sections, that deal with the payment of expenses, dispositions of specific bequests, ultimate disposition of the property and the powers and responsibilities of the successor trustee or trustees. More about successor trustees later.

We refer to these as the testamentary or dispositive documents, because both the will and the trust, at their very basic functions, are designed to make sure that the persons who the decedent wanted to receive his or her property does so upon the decedent’s death.

The Basic Decision Making Documents

For the remainder of the discussion, we are going to use the basic types of testamentary document planning to illustrate the different circumstances that occur, depending upon the choice of the client.

Will-Based Estate Plan: Because a will is simply dormant, until the death of the decedent, it is not considered a decision making document during the decedent’s life. It simply has no application to a living person. As such, a will-based estate plan will include a power of attorney for health care and a power of attorney for property decisions. These documents enable decisions to be made by others when the client, termed a principle in this instance, is physically or mentally unable to make decisions themselves. Increasingly, powers of attorney also become effective if the principle cannot be located for a period of time.

Property Power of Attorney: A property power of attorney is a document, typically signed at the same time as the will, that appoints a person termed an Attorney-in-Fact, of an Agent, depending upon local practice. We will discuss the Agent later. The property power of attorney is an extremely important document that should be given very careful consideration. Clients sometimes wonder why their powers of attorney for property are so long and detailed. It helps to remember that the client has become unable to make decisions for him or herself, and the power of attorney is the set of instructions that enables someone else to make needed decisions, as such, the powers granted the Agent must be broad and thorough so as to enable the Agent to handle whatever comes along without court involvement.

Health Care Power of Attorney: A health care power of attorney functions the same as the property power of attorney, except that the Agent is empowered to make health care decisions, including the decision to “pull the plug,” based on the instructions the principle included in the terms of the document.

The health care and property powers of attorney are the only substituted judgment documents, that do not involve court appointed conservators or guardians of the person and property, that are available in a will-based estate plan. Increasingly, financial institutions are becoming hesitant to act under an Agent’s authority in a power of attorney, for fear of some form of legal action. This is one disadvantage of a will-based estate plan, if the powers of attorney are not respected by financial institutions, legal action must be taken.

Trust-Based Estate Plans: Because a living trust springs to life upon signing, it will contain instructions that enable a successor trustee to make decisions for an incapacitated trustor, the person creating the living trust. As such, the trust itself is a substituted decision making document of its own. Financial institutions are more likely to understand the concept of a successor trustee than the concept of an Agent under a power of attorney. Of course, any competent estate plan, trust or will-based, will also have the health care power of attorney and the property power of attorney. This is generally considered to be a considerable benefit of a trust-based estate plan, because if the financial institution will not accept a power of attorney, there is always the successor trustee in the living trust to fall back on. This is not to say that there will not be court involvement at times, but there are at least two substituted judgment documents:

The Living Trust: Decisions by the successor trustee.

The Powers of Attorney: Decisions by the Agent.

Passing Control Over the Client’s Property

Now that we have discussed the documents most frequently used in a basic estate plan, we now need to determine when and how these documents, will-based estate plans and trust-based estate plans gain control over the client’s property

Will-Based Estate Plans: As long as the client/testator remains in good health, the client is the person who owns and controls his or her property. Only when the client becomes incapacitated (unable to make decisions due to physical or mental illness or a prolonged disappearance) does the Agent under the health and property powers of attorney step in to make substituted judgments for the client. Some powers of attorney become effective immediately and some are only effective upon incapacity a so-called springing power of attorney.

Trust-Based Estate Plans: Because the trust is a decision making entity, through the trustee or successor trustees, the trust must actually own the property before the trustee can make any decisions regarding it. Just like the testator in the will-based plan, the trustee of a living trust may not make any decisions regarding property it does not own. This is one of the administrative functions that some consider annoying, because not all financial or other title holding institutions are sufficiently familiar with living trusts. However, this trend is ending as more and more clients begin using trust-based estate plans. The process of transferring ownership of the client’s property to the living trust is termed funding, and consists of sending instructions to banks, departments of motor vehicles and other “title holding entities” that the property is now to be held as John and Jane Smith, trustees of the John and Jane Smith Living Trust, dated January 1, 2002, instead of John and Jane Smith.

The Decision Making Persons

We have discussed some of the decision makers in estate planning as part of our discussion of the documents used. In this portion, we provide a bit more detail as to each of the decision makers discussed, and introduce a new one.

Initial Trustee: In a trust-based estate plan, the spouses are usually the initial trustees with full decision making powers over the trust property until the incapacity or death of one of them. While there is no “initial trustee,” as such, in a will-based estate plan, when the administration of the testator’s estate is settled, and if trusts for spouses and children are created under the will, the first trustee takes over at that time. Typically, that will be the surviving spouse of the testator.

Successor Trustee: In either a will or trust-based estate plan, provisions are uniformly made to provide for a succession of trustees when the initial trustee, or first trustee in a will-based plan, becomes incapacitated, resigns or dies. These successor trustees may be:

Family Members: If there are spouses or children that are capable of making the financial and legal decisions required of a trustee, they may be the only successor trustee, or two children may be successor co-trustees.

Professional Trustees: If the estate is large or complicated, or if family members lack the necessary skills, a bank or other professional trustee may be the successor trustee.

Combination: It may be that a family member oversees distributions and more “family sensitive” issues and a professional trustee oversees the financial aspects and tax filings.

Trust Protector: As legal, tax, family and economic circumstances are constantly changing, there has been an increasing use of what is termed a trust protector. This is a very trusted friend of the family that is given powers to amend that would cause estate tax problems if held by a beneficiary or a beneficiary that was a trustee of the trust. In effect, it is an innovation that as developed to provide increased flexibility.

Who Prepares the Documents and Funds any Trusts

This is truly the purview of the attorney and his staff. It takes an experienced estate planning attorney to understand the many circumstances when tax law, family matters, Medicaid issues and other matters can interact in an estate plan, and if not planned accordingly, can frustrate the wishes of the client. These are the participants:

Attorney: The attorney has the final responsibility for what goes out the door. He or she is continually upgrading their skills and drafting techniques based on discussions with colleagues, continuing legal education programs and other information sources. It is important to understand that the attorney’s job is not to create the plan, but listen to the clients and complete the plan they want. It is the client who is the final decision maker.

Paralegals/Legal Assistants: At times, paralegals or legal assistants are under appreciated for the large part they play in the physical creation of the documents themselves, funding living trusts, filing court papers, performing research and other tasks to support the attorney. While the attorney has the last word, every attorney will readily tell you that there have been times when a paralegal or legal assistant has asked “did you really mean to write that,” only to find out that the attorney did not mean to “write that.” Paralegals and legal assistants are truly “partners” in estate planning preparation and administration.

Who Designs the Estate Plan

This, as it should be, is truly a team effort of experts in their individual disciplines that come together to apply their skills to design a plan to suggest to the client. Remember, the client is the final decision maker. While the functions of the individual professionals will cross over, the following is a general description:

Certified Public Accountant: While usually viewed as the participant who prepares the accountings and income tax filings, CPAs are also very effective in performing tax research, providing the other participants with unique insight into the client’s business and family dynamics. The CPA is probably most familiar with the client because of the annual income tax preparation and planning that is done by the CPA.

Insurance Professional: Insurance companies are continually creating new products to satisfy the changing needs of clients. The truly professional insurance specialist keeps abreast of these changes and advises, not only clients, but the CPAs, attorneys and financial planners of these changes so that the entire team is aware of new opportunities for their clients.

Financial Planners: While financial planners may also provide insurance services, they are of considerable help to successor trustees in managing the funds left by the testator, in a will-based estate plan, or the trustor, in a trust-based estate plan.

Attorney: The attorney may act as the team coordinator and is certainly the one that puts into the needed legal language and structure the plan that the team has prepared and that the client has approved.