Every now and again, it’s helpful to go back to the basics. This blog will go back to the basics of estate planning to talk about how and why everyone should have an estate plan. Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.
No matter how BIG or small your net worth is, estate planning is a process that addresses how and to whom you leave your assets when you die and names decisionmakers who will wind-up your affairs at death and make financial, medical or personal decisions for you if you cannot yourself.
An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:
Your car
Your home
Financial accounts
Investments; and
Personal property.
Part of estate planning is deciding which people or organizations are to get your possessions or assets after you’ve died. This includes determining how to give it to them, and that plan addresses concerns such as marital status of the beneficiary, how they are with money, addiction problems, taxes and so on.
It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.
One of the biggest reasons people don’t have an estate plan is they assume they have no “estate” to be concerned with. It might be true they don’t have much money, but everyone should consider naming individuals to act for them if they become incapacitated, ill or otherwise need help making decisions.
It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.
You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.
All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan covering these three basic areas.
Guardianship is often unnecessary or limited thanks to guardianship alternatives which include appropriate estate planning.
Guardianship is the court process by which a Judge appoints a person to make decisions on behalf of someone who cannot make them for themselves. Guardianship is a very involved process which removes or reduces the legal autonomy of the individual and appoints a decision maker for that person. Guardianship can be invasive, time-consuming and costly. Although guardianship is sometimes necessary and beneficiary to the individual, many clients seek to avoid guardianship and, in fact, Texas (and virtually every state’s) law directs you to use less restricting guardianship alternatives where available. The best options require preplanning however, so if you want to avoid the need for guardianship, you should consider some of the following guardianship alternatives. See the article entitled “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First” from Kiplinger for more.
Durable Financial Powers of Attorney
Guardianship often is necessary when an elderly individual loses legal capacity due to dementia, Alzheimer’s or other conditions leading to cognitive decline. In that case, the person cannot make their own financial decisions anymore, so a guardian would need to be appointed to manage their assets.
However, if an individual has a durable financial power of attorney (POA) in place, then this may not be necessary. The POA names an individual to take financial action for you if you can’t yourself. It is usually much better than guardianship as you are the person choosing who will act and you can set the rules as you want. It is also substantially cheaper than guardianship litigation. It is also one of the most important estate planning documents for this reason.
Trusts are more than just will substitutes. In this context, the trustee of the trust can control the assets owned by the trust. So, if the person who created the trust becomes incapacitated, the successor trustee (again a person you choose) can take over and start controlling the assets. This is often a major reason for clients who create revocable trusts later in life or who have concerns about long-term care or management of their assets.
Medical Powers of Attorney
This echoes the issues of the financial POA, namely that you can appoint a person to make medical decisions for you. Now, the law does provide default decision makers for medical decisions makers, so this isn’t typically the reason for a guardian. However, it too is a critical document for several reasons. Among them, you may not want the default to be your decision-maker, it provides clarity of responsibility and lets the decision-maker know in advance what’s expected of them, and finally, avoids delay in a medical crisis when the documents have to figure out your family history to determine who a default decision-maker is.
Naming Fiduciaries for Minors
Another common guardianship scenario is leaving property to minors. Although there are multiple state-based alternatives which might be helpful, such as creating UTMA/UGMA accounts (Uniform Trusts for Minors Act/Uniform Gifts to Minors Act), paying to a court registry or possibly to a parent of that child depending on the circumstance. However, if these alternatives don’t work, you may need a guardian for the minor.
In any case where leaving property is intentional, such as in a will or trust, an easy solution is to establish a trust for the minor within your own documents. This accomplishes several goals, but here, allows for an adult to hold the property for the child. They can then spend the assets on their behalf, such as on education, daily living and so on,
Now, the above are mostly proactive steps, so these are what you can do now to avoid guardianship later. However, if you or a loved one find yourself without sufficiently covering these concerns and contemplating guardianship, there are still some alternatives that might help or help reduce the scope of the guardianship.
Limited Guardianship
This a blog unto itself so this will be brief, but guardianship can be limited in nature. Essentially, the powers of the guardian are limited so that the least autonomy is taking from the individual as possible. This could mean that only assets are under the control of the guardian, or perhaps only to control some personal decisions such as medical decisions.
Joint Ownership
Some families take the step of making a family member a joint owner on a bank or other assets. Now, I didn’t include this as a proactive measure because joint ownership has a litany of difficulties. It includes the risk of creditor issues, potential concerns over gift making, disruption of the estate, plan, tax implications and lends to family disputes. However, should you find yourself with the need for guardianship, this can be a less restrictive guardianship alternative.
Social Security Representative Payees
Social Security pays to an account with a designated rep payee for beneficiaries who can’t act for themselves. So, on this particular account, the rep payee, which is typically a close family member, but could be someone else, is already authorized to control that particular asset. So, this doesn’t typically completely avoid the need for a guardianship, but does mean that one account receiving income can be accessed and utilized for an individual without the intervention of a guardian.
Community Property Administration by a Spouse
This is distinctly a Texas solution, but we have community and separate property. Community property is owned by the marriage, as opposed to the individual. So, depending on the assets of the individual, her marital status and suitability of the spouse to do this, community administration might be a helpful guardianship alternative.
Guardianship Appointment
Although this isn’t a guardianship alternative, I’d be remiss if I didn’t mention it. You have the power to name the person who you would want to be a guardian for you if guardianship is necessary. We routinely prepare these for clients so that should guardianship be necessary, you’ve told the court who should do it. They are very seldom necessary due to the estate planning we put in place, but it serves a belt and suspenders approach to ensure you have as much control over a guardianship process as possible.
Other Alternatives
There are other guardianship alternatives beyond what I included here, but key factor is that preplanning is the best guardianship alternative. Talk with an experienced estate planning attorney to protect yourself or loved ones from having to pursue guardianship.
Waiting too long to update an estate plan may lead to bad plans and hurt families. Here are some milestones when you should consider changes.
Many people say that they’ve been meaning to update their estate plan for years but never got around to doing it. Our office is located near the hospital system, so we get a lot of calls for last minute changes, which is difficult, and sometimes not possible. Worst of all, we occasionally have to probate out of date wills or administer old trusts that left complicated, unnecessary tax planning, unsuitable executors or trustees, or in some cases, beneficiaries the client meant to change, but never did.
As a way to avoid those scenarios, this blog will talk about when you need to review your estate plan. This isn’t exhaustive and the best approach is to review the plan every few years, but these major life events often indicate a need to change your plan. The list as follows comes from Kiplinger’s article entitled “12 Different Times When You Should Update Your Will” and gives us a dozen times you should think about changing your estate plan, as well as a few more of my own:
You’re expecting your first child. The birth or adoption of a first child is typically when many people draft their first estate plan. In Texas the designation of a guardian for the child happens outside a will, but it is still important to provide a trust and trustee for that child in your estate plan as well.
You may divorce. Update your estate plan before you file for divorce, because once you file for divorce, your estate plan and assets may not be able to change until the divorce is finalized. Doing this before you file for divorce ensures that your spouse won’t get all of your money if you die before the divorce is final.
You just divorced. After your divorce, your ex no longer has any rights to your estate (unless it’s part of the terms of the divorce). However, even if you don’t change your estate plan, most states have laws that invalidate any distributive provisions to your ex-spouse in that old will. Nonetheless, update your estate plan as soon as you can, so your new beneficiaries are clearly identified and that any obligations created in the divorce are fulfilled.
Your child gets married. Your current estate plan may speak to issues that applied when your child was a minor, so it may not address your child’s possible divorce. You may be able to ease the lack of a prenuptial agreement by creating a trust for your child in your estate plan to keep those assets out of the marriage.
A beneficiary has issues. Estate plans frequently leave money directly to a beneficiary. However, if that person has an addiction or credit issues, update your estate plan to include a trust that allows a trustee to only distribute funds under specific circumstances. It is often a good idea to create such a trust anyway in case issues arise in the future.
Your executor or a beneficiary die or are incapacitated. If your estate plan named individuals to manage your estate or receive any remaining funds, but they’re no longer alive or suffering bad health, you should update your entire estate plan (especially powers of attorney).
Your child turns 18. Your current estate plan may designate your spouse or a parent as your executor, trustee or other fiduciary, but years later, these people may be gone or not suitable. Consider naming a younger family member to handle your estate affairs.
A new tax or probate law is enacted. Congress may pass a bill that wrecks your estate plan. Review your plan with an experienced estate planning attorney every few years to see if there have been any new laws relevant to your estate planning. It is also a good idea to keep reading blogs like this one as we try to address significant changes that might affect you.
You receive a financial windfall or loss. If you finally get a big lottery win or inherit money from a distant relative, update your estate plan so you can address the right tax planning. You also may want to change when and the amount of money you leave to certain individuals or charities. Similarly, a significant financial loss may mean you can jettison unnecessary tax planning and can simplify your plan. I find many people change their minds on beneficiaries if they think they will leave less money as well.
You can’t find your original estate plan. This happens more than people realize. If you cannot find your original Will or other estate planning documents, you should consider executing a new one. First, if you can’t find it that typically indicates it’s so old it needs updating anyway, but in the case of wills you should probate the original. It is sometimes possible to probate a copy, but that isn’t a given and you should avoid that scenario.
You purchase property in another country or move overseas. Some countries have treaties with the U.S. that permit reciprocity of wills, but how well that works is another matter. Transferring property in one country may be delayed, if the will must be probated in the other country first. Ask your estate planning attorney about how to address property in multiple counties.
You relocate to a new state. Estate plans don’t always need to change when you relocate, but there are nuances to each state’s estate and tax laws, so you should consult with a local attorney after you move. For example, Texas is a community property state that changes how property is owned going forward for married couples and has no estate tax. A new resident coming from a common law property state with a state estate tax like New York might benefit from a new plan.
Your feelings change for someone in your estate plan. If there’s animosity between people named in your estate plan, you may want to disinherit someone or change your estate plan. You might ask your estate planning attorney about a No Contest Clause that will disinherit the aggressive family member, if he or she attempts to question your intentions in the estate plan.
You get married (or remarried). One milestone I like to point out that a surprising number of people don’t consider, is updating your estate plan after you get married or in the event you remarry. Many people assume that their spouse becomes an automatic beneficiary of their estate plan, which isn’t true, although all states give some rights to the new spouse. It is far better, especially in a second marriage where step children are involved, to update your estate plan to exactly what you want for you and your loved ones.
Your own bad health. One milestone I’m particularly sensitive to is your own bad health, especially cognitive health such as dementia or Alzheimer’s. Many clients prepare plans when they are young that aren’t considering long term care, Medicaid or other planning, so that should be complete before incapacity prevents it.
