Who's Who and What's What in an Estate Plan

We have discovered that some of our clients are not as familiar with the terminology, flow of decision-making authority and end results of an estate plan as they would prefer. So, we have prepared this article to illustrate the essential elements of an estate plan and the components of the plan itself.

This article is intended only as a summary explanation of the participants and documents typically used in the estate planning process. It is by no means a comprehensive list or analysis of options available to you, depending upon your specific needs.

We begin with definitions.


Definitions

Will. A document that instructs what happens to your property after your death; sometimes known as a Last Will and Testament or, perhaps, a Pour-Over Will. A Will can nominate someone to be the guardian of your minor children following your death.

Testator. A person who makes a Will.

Executor. A person or entity who administers a Will (i.e., carries out its instructions).

Probate. Filing a Will after death with the court, which then supervises the Executor's administration.

 
Living Trust. A document that instructs what happens to your property while you're alive and after your death. A trust can be revocable (you retain the power to revoke it or change it) or irrevocable (you surrender the power to revoke it or change it). The most common living trust is called a revocable living trust (or "RLT" for short).
 
Trustmaker. A person who makes a trust.

Trustee. A person or entity who administers a trust (i.e., carries out its instructions).

 
Living Will. A document, more accurately called a Declaration of Desire for Natural Death, which expresses a person's wishes regarding the withholding or removal of artificial means of life support in certain extreme medical conditions.

Testamentary. A word referring to instructions, whether in a Will or a trust, about what happens to your property after your death.

Testamentary Trust. A trust created under a Will that instructs what happens to your property following your death.

Beneficiary. A person, entity or trust named to receive your property or income, whether under a Will, trust, life insurance policy or retirement plan.


Basic Testamentary Documents

Once you decide to proactively plan your estate, as opposed to letting a court sort out who gets what at your death, you have two plans...and only two... to choose from, either Will-based or trust-based.

Will-Based Estate Plan. A Will-based plan uses a single document, the Will, to contain all of the instructions about what you want to happen to your property at your death. A Will is of no effect until death occurs and it is submitted to the court for probate. Only then does it spring into being. The provisions of a Will typically cover payment of final expenses, specific bequests, the ultimate disposition of your property (which includes changing the title of property into the names of beneficiaries), naming guardians for minor children and setting forth the powers and responsibilities of the Executor. More about Executors later.

Trust-Based Estate Plan. A trust-based plan uses two documents in combination...a trust and a Will...to set forth all of the instructions about what you want to happen to your property both while you are living, especially in the event you become incapacitated or unable to manage your property yourself, as well as following your death.


The Living Trust. Unlike a Will, the living trust springs into being at the time the trust document is signed and the trust is funded. The administration of the trust is carried out by trustees, rather than Executors. More about trustees later. Through its trustees, the trust is a real, legal entity with rights and responsibilities all its own. Unlike probate administration, which is not funded until death, the trust is funded immediately by transferring cash and/or title to selected assets from "A. B. Smith" individually to "A. B. Smith, Trustee of the A. B. Smith Living Trust, dated Month Day, Year." On behalf of the trust, the trustee becomes the legal owner of the property for State and some federal law purposes. At the trustmaker's death, the trust is already the owner of the property, and no one needs to go to the probate court for supervision of any trust property. Usually, the decedent was the trustee, and the terms of the trust automatically transfer power and responsibility at death to a pre-named successor trustee. In addition to provisions covering lifetime matters (discussed below), the provisions of the trust typically cover payment of final expenses, specific bequests and the ultimate disposition of your property (which includes changing the title of property into the names of beneficiaries).

The Pour-Over Will. Less complex or detailed than a Will under a Will-based plan, your Will in a trust-based plan controls only what did not get put into the living trust during your lifetime and simply "pours it over", so to speak, into the trust at death without disclosing the details of your estate plan to the general public. In other words, assets in the trust, as well as your wishes about who gets what and when they get it, are kept private from the general public ... including the court (which can save a significant amount of probate costs). This Will would still be the proper way to name guardians for your minor children.

 
We refer to both the Will and the living trust as "testamentary" documents, because under each of them, you control the manner and timing of who gets what of your property at your death.


Basic Lifetime Decision-Making Documents

Now let's discuss how each of the two basic estate plans differ in the way that lifetime decisions are handled, depending upon the choice you make.

Will-Based Estate Plan. Because your Will is totally dormant until your death, it is not considered a decision-making document during your life. It simply has no application while you are alive. As such, a proper Will-based estate plan will include two different powers of attorney--one for financial decisions and one for health care decisions. These documents enable decisions to be made by others when you, called the "principal" in each instance, are mentally unable to make decisions yourself. Increasingly, powers of attorney are also being made to become effective if the principal is detained or cannot be located for a period of time. The health care and financial powers of attorney are the only documents available in a Will-based estate plan that permit others to make decisions for you without involving court-appointed guardians. All powers of attorney cease to be effective immediately upon the principal's death.

 
 Financial Power of Attorney. A financial power of attorney (or durable power of attorney) is a document that appoints a person called an attorney-in-fact to act as the agent for the principal. The financial power of attorney is an extremely important document that should be given very careful consideration. Clients sometimes wonder why their financial powers of attorney are so long and detailed. It helps to remember that the power of attorney is your set of instructions to enable someone else to make needed decisions when you have become unable to make decisions for yourself. As such, the powers granted to the agent must be broad and thorough, so as to enable the agent to handle whatever comes along without court involvement.

Increasingly, financial institutions are becoming hesitant to act under an agent's authority in a power of attorney for any one of several reasons: (1) fear of adverse legal action, (2) stale execution dates or (3) not being on their forms. A big disadvantage of a Will-based estate plan is that if the power of attorney is not respected by financial institutions, the only alternative is for legal action.

Health Care Power of Attorney. A health care power of attorney functions very much the same as the financial power of attorney, except that the agent here is empowered to make health care (not financial) decisions, including the decision to "pull the plug" based on the instructions you include in the document. Unlike a Living Will, which is a declaration by you of your extreme health care preferences, the health care power of attorney grants your agent discretion about your health care leading up to that time and, perhaps, during that time if you have so decided.

 
Trust-Based Estate Plan. Because a living trust springs to life upon signing and funding, it contains instructions that enable a successor trustee to make decisions for an incapacitated trustmaker. As such, the trust itself is a document that permits others to make decisions for you without involving court-appointed guardians; plus, it includes provisions for distribution of your property at death. Financial institutions are typically more comfortable working with trustees and successor trustees under a trust arrangement than they are with agents under a power of attorney. Of course, any competent estate plan, whether Will or trust-based, will also have the health care power of attorney and the financial power of attorney for at least two reasons: (1) health care decisions are more personal in nature than financial decisions and ought to be stated in a separate document for the convenient benefit of health care providers, and (2) since it is rare that 100% of a person's assets are actually transferred into trust, a financial power of attorney is necessary to handle property not in trust in the event of the principal's incapacity. So, under a trust-based plan, there are three, not just two, lifetime decision-making documents:
 
The Living Trust. Decisions are made by the initial and successor trustees regarding all assets that are inside the trust.

Two Powers of Attorney (financial and health care). Decisions are made by the designated agents regarding all assets that are outside the trust and regarding the principal's health care.


 
Gaining Control Over Property

Now that we've discussed the documents most frequently used in a basic estate plan, we need to determine when and how these documents, under both the Will and trust-based plans, gain control over your property.

Will-Based Estate Plan. As long as you remain in good health, you are the person who owns and controls your property. But when you become incapacitated (unable to make decisions for yourself), the agents named under your health care and financial powers of attorney must step in to make decisions for you. You may choose whether your power of attorney becomes effective immediately, even while you're able to handle your own affairs, or whether it becomes effective in the future only upon incapacity. Either way, title to property stays in your name during your lifetime under a Will-based plan. The attorney-in-fact simply has the power to handle property titled in your name as your designated agent.

Trust-Based Estate Plan. Because the trust is a decision-making entity through the initial and successor trustees, the trust must actually own the property before the trustee can make any decisions regarding it. The trustee of a living trust may not make any decisions regarding property it does not own. The process of transferring ownership of your property to the living trust is called "funding," which consists of sending instructions to banks, brokers and other "title holding entities" that the property is now to be held as "A. B. Smith, Trustees of the A. B. smith Living Trust, dated Month Day, Year," instead of "A. B. Smith" individually. In the case of real estate, funding occurs by preparing and recording new deeds. In the case of other property, funding occurs by preparing new assignments of title or by filling out new form documents. This is one of the administrative functions that some clients consider annoying, because although most financial or other title holding institutions are comfortable working with trusts that are already established, many are not intimately familiar with the mechanics of funding the trusts initially, including the fact that the trust continues to use the trustmaker's social security number until the trustmaker's death, when the trust becomes irrevocable and must get a separate number (a quick, simple thing). Confusion about initial and subsequent funding is becoming less and less problematic, however, as more and more people are using trust-based estate plans.


Decision Makers

We have previously discussed some of the decision makers in estate planning as part of our discussion of the documents used. Now, we'll provide a bit more detail as to each of the decision makers discussed...and introduce a new one.

Initial Trustee. In a trust-based estate plan, the trustmaker is usually the initial trustee and retains full decision-making powers over the trust property until the trustmaker's incapacity or death.

In a Will-based estate plan, the testator's estate is administered and settled by the Executor. If one or more trusts for the spouse, children or others are created under the Will (i.e., "testamentary trusts"), the Executor transfers the property to the first trustee, who takes over the property at that time. Typically, but not always, that would be the surviving spouse of the testator.

Successor Trustee. In either a Will or trust-based estate plan, provisions should be made to provide for a succession of trustees when the first trustee becomes incapacitated, resigns or dies. These successor trustees may be:

 
Family Members. If there is a spouse or child who is capable of making the financial and legal decisions required of a trustee, they may be the sole successor trustee, or two or more may be successor co-trustees.

Professional Trustees. If the estate is large or complicated, or if family members lack the necessary skills, a bank, trust company or other professional trustee may be the successor trustee. Such a person or entity may also be named when "independence" (i.e., a true "arms length" decision) is required regarding certain transactions.

Combination. It may be that a family member oversees distributions and more family sensitive issues, while a professional trustee oversees the more objective financial aspects, including tax filings, and acts uniquely in the event of what might otherwise be "conflict of interest" situations involving family member trustees.

 
Trust Protector. Because legal, tax, family and economic circumstances are constantly changing, there has been an increasing use of what is termed a trust protector, or trust advisor. This is a very trusted friend of the family, often a licensed professional, like a CPA, attorney or financial planner, who is given powers to amend the trust and do certain extraordinary things as needed, when to do so would otherwise be a conflict of interest or cause estate tax problems if done by a beneficiary, especially a beneficiary who is also a trustee of the trust. In effect, it is an innovation that has developed to provide for managing your property with as near the flexibility as you would have were you able.


Designing The Estate Plan

Designing your estate plan is truly a team effort among experts chosen directly by you or chosen for you with your approval. They collaborate and apply their individual disciplines and skills to design a plan to suggest to you for your approval. Remember, you are the final decision maker. While the functions of the different professionals will cross over, the following is a general description of what they do:

Certified Public Accountants. CPAs are usually viewed as the participant who prepares the accountings and income tax filings. However, CPAs are also very effective in performing tax research, as well as providing the other participants with unique insight into the client's business and family economic dynamics. The CPA is probably most familiar with the client because of annual income tax return preparation and related planning.

Insurance Professionals. Insurance companies are continually creating new products to satisfy the changing needs of clients. The truly professional insurance specialist keeps abreast of these changes and advises not only clients, but also the CPAs, attorneys and financial planners of these changes, so that the entire team is aware of new opportunities that might suit the client's needs.

Financial Planners. Some financial planners may provide insurance services. Whether they do or not, they are of considerable value to you in helping to arrange your assets to best achieve your financial goals; plus, they are extremely valuable to those who take control over your assets at whatever time.

Attorneys. The attorney must have a total awareness and vision of your affairs in order to create documents that will fulfill your expressed intentions. So, it is usually, but not always, the attorney who acts as the team coordinator. The attorney is certainly the one who puts the needed legal language and structure into the plan that the team has designed and the client has approved.


Preparing The Documents And Funding Any Trusts

Proper drafting of documents is truly the work of the attorney. It takes an experienced estate planning attorney to understand the many different ways that your intentions, family concerns, tax laws and other matters interplay within an estate plan. If not properly planned, documented and funded, your wishes can be frustrated. Here are the participants in that critical process:

Attorney. The attorney has the final responsibility for what goes out the door of his or her firm. Attorneys should continually be upgrading their knowledge, skills and drafting techniques through discussions with colleagues, continuing legal education programs and other resources. It is important to understand that the attorney's job is not to create the plan, but to listen to the client and complete the plan the client wants. You are the final decision maker.

Legal Assistants. At times, legal assistants are under-appreciated for the large part they play in physically creating the documents themselves, funding living trusts, filing court papers, and performing research and other tasks to support the attorney. Legal assistants are valuable partners in estate planning preparation and administration.

Client, Attorney and legal staff. As previously mentioned, a trust must be funded in order to be of any effect. Ideally, it is fully funded during the trustmaker's life, so that only insignificant "residual" assets are left to "pour over" into the trust by the Will at death. Based upon a combination of economics, expertise and practicality, the client, attorney and legal staff will decide together on a case-by-case basis who will handle the funding.


Conclusion

We hope that this article has been helpful to you. If you have any questions or need assistance in any way, please contact us to see how we can be of service.