Everyone who lived through September 11, 2001, shares a common experience. Although colored by our individual circumstances, we remember looking at the horrific images of destruction and misery and wondering why this tragedy occurred. Since that fateful day, Americans have flocked to churches, synagogues, mosques, and other places of worship seeking answers to questions regarding the meaning of life and the existence of suffering.
This national tragedy continues to affect all of us to varying degrees. We face similar issues in environmental calamities such as hurricanes, tornadoes, wildfires, and in personal struggles such as the COVID-19 pandemic and unexpected illnesses. In each instance, we prepare the best we can. We can prepare ourselves for these unforeseen circumstances by planning what should happen in the event a crisis strikes. Basic estate planning relieves stress at the time of crisis both for us and for those whom we love. The basic estate plan includes five documents: Property Power of Attorney, Health Care Power of Attorney, HIPAA Authorization, Will, and Revocable Trust.
Through a Property Power of Attorney, you designate an “Agent” who will make financial decisions for you when you are unable to do so. This Agent has the legal authority to act on your behalf and may be your spouse, a parent, or a trusted friend. Without this document, if you are missing or incapacitated, no one can act for you. Without it, if you were missing or incapacitated and your family needed to refinance your house to pay for bills, it could only be done by someone going to court and having you declared incompetent. Incapacity proceedings usually require the services of an attorney. That arduous process often leaves those involved emotionally drained.
A Health Care Power of Attorney designates an “Agent” to make health care decisions for you if you are unable to make them yourself. With this document in place, you can rest assured the person you trust will have the legal authority to make medical decisions for you. You also may wish to prepare a Living Will or similar document which expresses what you would want to be done regarding end-of-life decisions.
A HIPAA Authorization allows people whom you designate, such as your Agents or others, to access your protected health information. It’s through this access to your health information that the decision-makers you’ve chosen can make informed decisions.
A Will has several functions. First, and most importantly, under the laws of most states, it is the only way you can designate whom you wish to serve as guardian for your minor children. Without a Will the court will decide who will be guardian, regardless of your wishes. Unfortunately, no matter how caring the judge may be, that judge does not know and love your children as you do. Second, the Will distributes any assets that are held in your individual name at your death to your intended beneficiaries. Without a Will, the state determines how and to whom to distribute your assets under the laws of “intestate succession.” Unfortunately, this set list ignores your specific circumstances and assets often do not go to the desired person or in the desired manner. Third, the Will names someone as your Personal Representative or Executor to carry out the instructions set forth in your Will. Certain types of Wills, called pour-over Wills may “pour” your assets “over” into a Revocable Living Trust (“RLT”), to be distributed by its terms.
Even with a Will, any assets you own at death must go through “probate” to be distributed to those designated by you. Probate is the process of transferring title from the person who died to the person who has the right to receive the property. Depending upon the state and the situation, this process can be expensive, time-consuming, and emotionally draining for those left behind.
Setting up an RLT to hold legal title to your assets during your lifetime avoids probate. The RLT acts as a Will substitute upon your death and vests the successor Trustee with the legal authority to collect assets, pay your debts, expenses, and taxes, and dispose of the assets as set forth in the RLT. As a result, the assets avoid probate because the RLT owns the assets and the trust did not die. Even though the RLT holds legal title to the assets, you retain complete control of the assets during your lifetime and can make changes to the RLT. If you become incapacitated, the person you have chosen as your successor Trustee will manage the assets for you, much like the Agent under your Property Power of Attorney. The RLT provides great flexibility in allowing you to direct how and when the assets will be used after your death. For example, you can include provisions that ensure your children do not squander money but, rather, keep the money for higher education.
Finally, as part of your estate planning, you need to consider how other assets will pass upon your death. Periodically review the beneficiary designations on your 401k, IRA, or other qualified plan assets. Often, circumstances change, and you need to update your beneficiary designations to change with the times. This becomes increasingly important as retirement assets comprise a larger and larger portion of the typical person’s assets. Periodically, you should review the beneficiary designations for life insurance and any other assets which transfer automatically at death. Many financial accounts have such designations.
Unfortunately, we cannot eliminate the possibility of tragedy in our lives. However, we can reduce our anxiety at such times with a comprehensive estate plan that provides instructions to our loved ones regarding what should happen if tragedy occurs. This article reviewed the basic documents. Other considerations such as beneficiaries with special needs, creditor protection, income taxes, divorce protection, and estate taxes impact your plan. A qualified estate planning attorney who focuses in that practice area can help you structure your plan to achieve your goals.
Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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