What is estate planning?
The primary goal of estate planning is to ensure the transfer of an individual´s property at death to the beneficiaries of his or her choice in the most efficient manner. This involves planning to (i) minimize taxes, probate fees and other administrative costs and (ii) preserve family harmony. An effective estate plan is accomplished through the preparation of certain documents, typically wills, revocable trusts, financial powers of attorney and advance medical directives.
Will my estate have to pay federal estate taxes? If so, how can I lawfully reduce my exposure?
Please go here for our answer to these questions.
What is a will?
A will is a legal document that provides for the settlement of an individual´s debts and obligations, and the orderly transfer of the remaining property to designated beneficiaries. A valid will avoids the application of Virginia´s intestacy laws which can result in the distribution of the estate to unintended beneficiaries. The will appoints an executor who is responsible for paying estate expenses and marshalling the estate´s assets. A well-drafted will can reduce estate administration costs by relieving the executor of the necessity of obtaining a costly surety bond, and may provide for the appointment of guardians for minor children.
The provisions of a will only affect the disposition of the individual´s probate estate. Many assets are transferred at death outside of the probate estate and without regard to the terms of the will. Assets owned jointly with rights of survivorship by two or more individuals will automatically be owned by the surviving individual(s) at the death of one owner. Bank accounts and certificates of deposit may be designated “P.O.D.” (payable on death) to a specified beneficiary. Similarly, investment accounts may include a “T.O.D.” (transfer on death) direction. Life insurance and annuity policies provide for named beneficiaries, as do all manner of retirement accounts (pension and profit-sharing accounts, 401(k)s and IRAs).
An effective estate plan coordinates the disposition of all of an individual´s property and financial resources. In most instances this requires more than just the preparation of a valid will.
What is a revocable trust?
A revocable trust is a document created by an individual (the “grantor”) for the purpose of managing the grantor´s assets. The trust appoints a trustee who holds title to the trust property and performs the day-to-day management of the trust. The grantor, alone or with the spouse, typically serves as trustee of the trust as long as he or she is competent to do so. The grantor can change any of the trust terms or revoke the trust during his or her lifetime.
At the grantor’s death or in the event of the grantor´s incapacity, the trust becomes irrevocable. If the grantor was serving alone as trustee, a successor trustee is appointed according to the terms of the trust document. The successor trustee then is responsible for distributing the trust assets, or retaining the assets in further trust, as directed by the document.
The assets that are held or received by the trust can remain in trust long after the grantor’s death. This allows the grantor to keep a trust in place for a spouse, children, grandchildren or even great-grandchildren.
The expenses to administer ongoing trusts for the benefit of the grantor´s family or other beneficiaries are lower than the expenses incurred for testamentary trusts created by a will. For example, trusts created under a revocable trust document are not subject to an annual review by the court nor required to file annual accountings with the Commissioner of Accounts. Appointment of additional or successor trustees are also handled privately without the need for a court order.
What are the advantages of a living trust?
When a grantor transfers assets to the revocable trust during lifetime, it is often referred to as a “living trust”. There are several benefits to a living trust.
First, if the grantor becomes unable to serve as trustee for health or other reasons, a successor trustee steps in to manage the trust for the grantor´s benefit. The trustee invests the assets prudently, and pays the grantor´s debts and living expenses. The living trust is generally safer than a general power of attorney for purposes of managing the grantor’s property in the event of his or her incapacity.
Second, assets held in the trust during the grantor´s lifetime, or paid to the trust at the grantor´s death by appropriate beneficiary designation, are not part of the grantor´s probate estate. This usually results in reducing the expenses of estate settlement. Virginia probate taxes, assessed by the state and locality (about $1.30 in tax per $1,000 in assets) only apply to probate assets. The executor´s commission and fees paid to the Commissioner of Accounts are similarly reduced.
Unlike a will, which when recorded at death becomes a public document, a revocable trust remains private. The value of the assets held in the trust at death, and the disposition of those assets, are only revealed to those who have an interest in the trust.
Who should I name as my executor and trustee?
The first consideration in choosing an executor and trustee is determining whether the position should be filled by a family member or other individual, or by a professional fiduciary. Clients often prefer family members as the primary choice for these positions. In planning for married couples, we usually suggest that one spouse serve as executor and trustee for the other. If a family member has the abilities and experience to serve in these roles, this selection can be less expensive than naming a professional. The downside to naming a family member or other individual is that the person may be unable to serve when the times comes or, once serving, may need to step down. This is frequently the case when long term trusts for children are planned. While we always recommend naming a successor executor and trustee in the documents, the same problem can arise if the named successor is also an individual.
When a client concludes that there is no family member or close friend who has the skill set required to serve as Executor or Trustee, the client might consider a Professional Executor or a Professional Trustee, i.e., an individual, law firm, bank, or trust company that regularly serves in these roles for a predetermined compensation. Professional fiduciaries are generally knowledgeable and experienced in administering estates and trusts, and especially mindful of the requirements for investing prudently. However, naming a professional fiduciary may be more expensive in some cases than naming a family member who retains professional assistance. Professional fiduciaries usually charge commissions as executors and trustees based on their published fee schedules. Commissions are generally based on the size of the estate or trust.
If the estate or trust is complicated to administer or if estate taxes are likely to be owed, a professional fiduciary, serving alone or with a family representative, may be the best choice. In other cases an appropriate solution is to name an individual as the initial executor and trustee, with a professional fiduciary as the successor. All the available alternatives, with their advantages and disadvantages, are considered in greater detail in the estate planning process.
For further discussion, please read our recent post on Avoiding Family Conflict
What is a durable general power of attorney?
A power of attorney is a document created by the “principal” naming an “agent” to act for him or her with respect to management of the principal’s property and financial affairs. A “general” power of attorney is written very broadly to permit the agent to do almost anything that the principal could do himself or herself. A “durable” power of attorney remains effective in the event of the principal´s disability or incapacity. A power of attorney can be revoked by the principal at any time, and ceases to be effective at the principal’s death.
What is an advance medical directive?
Virginia law expressly validates advance medical directives and provides a suggested form for implementation. The advance medical directive typically accomplishes the following: (i) it provides a statement of the signatory’s wishes in the event the signatory has a terminal condition and is unable to speak for himself or herself (sometimes known as a “living will”), (ii) it appoints the signatory’s agents who can make health care decisions on the signatory’s behalf in the event of the signatory’s incapacity, (iii) it provides authorization under HIPAA for the release of the signatory’s medical information to selected persons by hospitals, doctors, and insurance providers, and (iv) it authorizes anatomical gifts of a signatory’s body or body parts upon death, for those who wish to make such gifts.
I have minor children. Are there any special issues that I need to consider?
Clients with minor children have special estate planning issues to address. First, the clients should name a guardian or guardians for the custody of their children until they reach majority (age 18). The guardians are typically nominated in the will. The actual appointment of the guardian(s) is made by court order, but the nomination of the guardian(s) by the parent or parents is routinely honored. The guardian makes the day-to-day decisions that the parents would otherwise make if alive, for example, where the children will live, the schools they will attend, etc.
Second, the estate plan should create appropriate trusts for the benefit of the children. Trusts ensure that the children´s inheritance will be properly managed and applied until the children have the financial experience and maturity to manage the assets themselves. If the client has more than one dependent child, we usually recommend a two-stage approach. In the first stage, all the family´s assets are retained in a single trust which provides for the support, health and education of all the children. The use of a single trust provides the flexibility to address differing needs at different ages, not necessarily in equal amounts, as the parents would do if living. In the second stage, each child´s inheritance is held in a separate trust. The trust is designed to gradually give the child more benefit from and responsibility for the trust assets over time. This approach minimizes the risks that a single financial mistake by the child will result in the loss of his or her inheritance.
Occasionally, clients may have a child with a mental or physical disability. Often the clients would like to provide some financial benefit for the child, but want the child to remain eligible for certain state and federal support. This requires the use of a certain type of trust, often called a Special Needs Trust, that contributes to the child´s quality of life while keeping the child eligible for government assistance.
I have recently moved to Virginia. Do I need to revise my estate documents?
Probably. Although federal tax laws remain the same, there are substantial differences in probate laws from one state to the next. Unanticipated expenses and unintended consequences often result when estate planning documents created for one jurisdiction are used in another.