What is Estate Planning?
Many people believe that if they have a will, their estate planning is complete, but there is much more to a complete estate plan. A good plan should be designed to make estate administration efficient, consider taxes (estate, inheritance and income), protect assets if you need long term care, and appoint someone to act for you if you become incapable of managing your affairs.
All estate plans should include, at minimum, three important estate planning instruments: a power of attorney for healthcare (with end of life provisions), a power of attorney for finances and a will. While there are more tools out there, these are the basics.
But planning is about much more than documents, it is about making a plan to recognize your wishes and carry them out in the most efficient, humane and cost effective way.
Financial Power of Attorney:
Why is this first? Isn’t a will the most important document in an estate plan? For most people, the answer is no.
A financial power of attorney allows a person you appoint as your Agent to act in your place for healthcare and financial purposes when and if you ever become incapacitated. Without a power of attorney, no one can represent you unless a court appoints a legal guardian. This court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship, your representative may have to seek court permission to take planning steps that he or she could implement immediately under a durable power of attorney. And, the Court will frequently prohibit doing estate planning and asset protection planning that can easily be performed by the Agent appointed under a well drafted power of attorney.
Healthcare Power of Attorney:
A durable power of attorney for health care designates someone you choose to make health care decisions for you if you are unable to do so yourself. A living will instructs your health care decision-maker under what conditions to withdraw life support if you are terminally ill or in a vegetative state.
Although Pennsylvania does allow a close family member to make medical decisions under Act 169, this law can create conflict.
A will is a legally binding statement directing who will receive your property at your death, how it will be distributed and who will make sure the provisions are carried out. If you do not have a will, the state will determine how your property is distributed. A will appoints a legal representative (called an executor or a personal representative) to carry out your wishes. A will is especially important if you have minor children because it allows you to name a guardian for the children. However, a will covers only probate property. Many types of property or forms of ownership pass outside of probate. Jointly owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and aren’t covered under a will.
Although not necessarily a part of your estate planning, at the same time you create an estate plan, you should make sure your retirement plan, life insurance and other beneficiary designations are up to date and coordinate them with your other estate planning. If you don’t name a beneficiary, the distribution of benefits may be controlled by state or federal law or according to your particular retirement plan.
Some plans automatically distribute money to a spouse or children. Although others may leave it to the retirement plan holder’s estate, this could have negative tax consequences. The only way to control where the money goes is to name a beneficiary. Also, you want to make sure your beneficiary designations are consistent with your will. If an asset has a beneficiary designation available it can pass outside of your probate estate (what the will controls). So if you want all of your estate to be split equally between your children, but you named one child as the sole beneficiary of your $1.0 million life insurance policy then your estate plan will not be carried out as you intended.
A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” Trusts have one set of beneficiaries during those beneficiaries’ lives and another set often their children who begin to benefit only after the first group has died.
There are several different reasons for setting up a trust. A common reason is to avoid probate. If you establish a revocable living trust that terminates when you die, any property in the trust passes immediately to the beneficiaries. This can theoretically save time and money for the beneficiaries. For Pennsylvania residents probate is more efficient than in other states and therefore a revocable trust provides less benefits. Also, since the adoption of the Uniform Trust Act by Pennsylvania, the formalities required by a will are also required by the trustee of a trust further reducing any theoretical efficiencies of a trust for avoiding probate.
Certain trusts can result in tax advantages both for the donor and the beneficiary, (although a revocable trust provides no tax advantages over a properly drafted will). These could be “credit shelter” or “life insurance” trusts. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid. Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust need know of trust assets and distribution. Provided they are well drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes incapacitated.
More than any document, the value of planning is the consideration of different eventualities and thinking about how you want those eventualities addressed. While documents can be a piece of the plan, the advice from an experienced planner and the consideration of different outcomes are the key to an effective estate plan.
For more information, please visit us at www.RobertSlutsky.com.