Even if you utilize a trust in your estate plan, it is essential to have a “pour over will” that directs assets at your death to your trust through probate.
If the goal of estate planning is to avoid probate, it seems counter intuitive that one would sign a will, but the pour over will is an essential part of some estate plans, reports the Times Herald-Record’s article “Pour-over will a safety net for a living trust.”
If a person dies with assets in their name alone and without some contractual beneficiary which avoids probate (e.g. life insurance) those assets go through probate. The pour over will names the trust as the beneficiary of probate assets, so the trust controls who receives the inheritance. The pour over will works as a backup plan to the trust, and it also revokes past wills and codicils.
Living trusts became more widely used after a 1991 AARP study concluded that families should be using trusts rather than wills. Trusts were suddenly not just for the wealthy. Middle class people started using trusts rather than wills, to save time and money and avoid estate battles among family members. Trusts also served to keep financial and personal affairs private. Wills that are probated are public documents that anyone can review. See here for more details. https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/
The one downfall to a trust is that it must be properly funded to work right. As I said earlier, you probate assets in your name that do not pass by contractual obligation. So, the trust must either own assets itself (“funding it”), have assets pass to it (e.g. the life insurance pays to the trust) or you must have some other mechanism for an asset to get to the trust or beneficiaries, such as a “joint tenants with rights of survivorship” account. The pour over will is the safety net that makes sure if you missed something or obtained an asset you didn’t expect, there is still a way to get that asset to the trust and ultimately to your beneficiaries after death.
Speak with an experienced estate planning attorney to talk about how probate may impact your heirs and see if they believe the use of a trust and a pour over will would make the most sense for your family, and how best to fund the trust to accomplish your goals.
Every adult needs an estate plan, don’t wait until you have an “estate.”
Every adult, whether we have a lot of property or not, should have an estate plan. A client once told me they didn’t need a Will because they didn’t have an “estate.” They thought it meant substantial wealth, but estate planning is much more than that.
As we go through the many milestones of life, it’s important to plan for what’s coming, and also plan for the unexpected, even beyond the finances. An estate planning attorney works with individuals, families and businesses to plan for what lies ahead, says the Cincinnati Business Courier in the article “Estate planning considerations for every stage of life.” For younger families, having an estate plan is like having life insurance: it is hoped that the insurance is never needed, but having it in place is comforting.
For others, in different stages of life, an estate plan is needed to ensure a smooth transition for a business owner heading to retirement, protecting a spouse or children from creditors or minimizing tax liability for a family.
This is by no means an exhaustive list, but here are some milestones in life when you need an estate plan:
Becoming an adult. It is true, for most 18-year-olds, estate planning is the last thing on their minds. However, at 18 most states consider them legal adults, and their parents no longer control many things in their lives. If parents want or need to be involved with medical or financial matters, certain estate planning documents are needed. All new adults need a general power of attorney and health care directives to allow someone else to step in, if something occurs. Michael Galligan from our office gave a great presentation this summer on this topic. See here for the video. https://youtu.be/lZUaMVRRTms
That can be as minimal as a parent talking with a doctor during an office appointment or making medical decisions during a crisis. A HIPAA release should also be prepared. A simple will should be considered, especially if assets are to pass directly to siblings or a significant person in their life, to whom they are not married.
Getting married. Marriage unites individuals and their assets. In community property states like Texas, it creates the new wrinkle of community property. For newly married couples, estate planning documents should be updated for each spouse, so their estate plans may be coordinated and the new spouse can become a joint owner, primary beneficiary and fiduciary. In addition to the wills, power of attorney, healthcare directive and beneficiary designations also need to be updated to name the new spouse or a trust. This is also a time to start keeping a list of assets, in case someone needs to access accounts.
If this is not the first marriage, there is an even greater need for an estate plan because there may be children from the prior marriage to plan for. Remember, your assets don’t go to a surviving spouse just because you are married, so you definitely need an estate plan.
When children join the family. Whether born or adopted, the entrance of children into the family makes an estate plan especially important. Choosing guardians who will raise the children in the absence of their parents is the hardest thing to think about, but it is critical for the children’s well-being. A revocable trust may be a means of allowing the seamless transfer and ongoing administration of the family’s assets to benefit the children and other family members.
Part of business planning. Estate planning should be part of every business owner’s plan. If the unexpected occurs, the business and the owner’s family will also be better off, regardless of whether they are involved in the business. At the very least, business interests should be directed to transfer out of probate, allowing for an efficient transition of the business to the right people without the burden of probate estate administration. You also want to address these issues. https://galligan-law.com/the-importance-of-business-succession-planning/
If a divorce occurs. Divorce is a sad reality for more than half of today’s married couples. The post-divorce period is the time to review the estate plan to remove the ex-spouse, change any beneficiary designations, and plan for new fiduciaries. It’s important to review all accounts to ensure that any controlling-on-death accounts are updated. A careful review by an estate planning attorney is worth the time to make sure no assets are overlooked.
Upon retirement. Just before or after retirement is an important time to review an estate plan. Children may be grown and take on roles of fiduciaries or be in a position to help with medical or financial affairs. This is the time to plan for wealth transfer, minimizing estate taxes and planning for incapacity.
In sum, it is important to realize everyone needs to plan. Don’t wait because you think you don’t need one.
A power of attorney names a person to make decisions for you under rules that you establish, and ensures someone can handle your affairs if you cannot.
Without a durable power of attorney, helping a family member or loved one who cannot act on their own becomes far more difficult and stressful. Powers of attorney, also known as POAs, typically give the agent specific powers to conduct the principal’s (person creating the power of attorney) financial business, explains the Aiken Standard in the article “The durable power of attorney.”
For financial powers of attorney, there are different types, including non-durable, springing and durable. A non-durable POA is time limited. It either expires at the end of a set amount of time or upon the death or incapacity of the principal. Non-durable powers of attorney are typically used for specific circumstances, such as real estate closings or for transferring car titles.
The durable power of attorney is in effect from the moment it is executed. It is not revoked if the person becomes incapacitated (hence the term “durable”), nor by the passage of time. The person can alter or terminate a durable POA at any time before he or she lacks capacity, however, and it does end when the person dies.
Springing powers of attorney become effective at a future date. They “spring” into power, according to the terms of the document. That may be the occurrence of a particular event, like the person becoming incapacitated or disabled. They can be problematic, as there will be a need to prove that the person has become incapacitated and/or disabled.
The advantage of the durable power of attorney is that it remains in effect even after the person has become impaired. You can choose to let your agent act right away or make it springing as described above. It is often prudent to make them effective immediately so that if time is of the essence (i.e., there is an emergency that requires quick action), there is no need to prove incapacity or that a condition has occurred.
In addition to a financial POAs, there’s also a healthcare power of attorney, which is a separate document that gives the named person the authority to make medical decisions when the principal is not able to do so. There are also several other documents which plan for incapacity, such as living wills and HIPAA releases, which should be considered as well.
In Texas, powers of attorney rules are strict, so how they are drafted is very specific. They provide for many powers or restrictions to the agent which the principal should consider when preparing a power of attorney, such as whether his or her agent should be compensated, whether the agent can make gifts and naming successor agents if the first cannot serve.
Power of attorney documents should be created and executed, along with a complete estate plan, long before an individual begins having problems in aspects of their lives. These documents are essential as part of planning for incapacity. See my past article for more detailed information. https://galligan-law.com/estate-planning-when-faced-with-a-serious-illness/
When they are signed, it is necessary for the person to have mental capacity. They have to be able to be “of sound mind.” If they have been diagnosed with dementia or Alzheimer’s, it is necessary that all these documents be prepared as soon as possible.
Without a durable power of attorney, family and friends won’t be able to make important financial decisions, pay bills, make healthcare decisions and engage in any kind of Medicaid planning. If a person does not create a power of attorney and then suffers a health problem which makes them unable to handle their own affairs, anyone who wanted to take on any of these responsibilities would have to go to court and be appointed the person’s guardian. It’s much easier to tackle these tasks in advance, so that the family can act on their loved one’s behalf in a timely and effective manner.
