No matter what your age or how much wealth you’ve accumulated, you need an estate plan to protect yourself, your loved ones and your assets – both now while you’re still active as well as your inactive years and after your death. Having an effective estate plan is one of the most important things you can do for your family. An effective estate plan includes: (1) the documents; (2) your comprehensive net worth (asset portfolio) and (3) consistent, periodic review.
I. DOCUMENTS.
A. Will
A will permits a person to state who will receive their property at death. Even if you want your property to pass according to the laws of intestacy, which are the laws in Virginia that dictate who will receive your property if you die without a will, a will has several advantages.
In a will you can appoint the personal representative of your estate. The personal representative, called an executor when he or she is appointed in a will, is the person responsible for collecting and distributing a decedent’s assets. Without a will, the law permits the court to appoint any beneficiary of the decedent’s assets as the personal representative, called an administrator when the decedent died without a will.
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An individual can also waive surety on the bond in a will. When a personal representative is appointed, the court will require surety on the bond. Typically this means that a surety company will provide insurance against the personal representative mishandling assets of the estate. Like any insurance, this costs money. This requirement can be waived in a will, saving the personal representative and the estate hundreds of dollars.
In addition, if you have minor children, you can direct who shall be the guardian of your children if you pass away. This can help assure that your children will be raised by those you want to raise them, and help avoid conflict among family members if multiple people feel they are best suited to raise your children.
To be effective, a will must be filed in probate court. Probate is a judicial process for managing your assets if you become incapacitated and for transferring your assets in an orderly fashion when you die. The court oversees payment of liabilities and the distribution of assets. Generally, your personal representative will need to employ an attorney.
Because a will does not take effect until you die, it cannot provide for management of your assets if you become incapacitated. Other estate planning documents, discussed below, become effective if you should become incapacitated.
B. Durable Power of Attorney
A valid Durable Power of Attorney will allow your loved ones to use your finances to take care of you in the event that you become incapacitated. One can become incapacitated at any time, and your loved ones may be left with the burden of personally paying your monthly expenses, and paying any new medical expenses and other costs that may arise in the event that you become incapacitated. A valid Power of Attorney will allow your attorney-in-fact to write checks on your behalf, buy and sell property on your behalf, and generally maintain your finances so that you may be taken care of appropriately.
A traditional power of attorney terminates upon your disability or death. However, a durable power of attorney will continue during incapacity to provide a financial-management safety net. A durable power of attorney terminates upon your death.
C. Advance Medical Directive
An Advance Medical Directive announces to the world your medical wishes in the event that you are unable to state them. In addition, it appoints an individual to make medical decisions on your behalf. Lost in the wake of Bush v. Schiavo was the fact that the fights among family members and the undesirable public attention could have been avoided if an Advance Medical Directive had been in place. The Advance Medical Directive includes a living will and a healthcare power of attorney.
A living will expresses your intentions regarding the use of life-sustaining measures in the event of a terminal illness. It expresses what you want but does not give anyone the authority to speak for you. The healthcare Power of Attorney designates a person with the authority to speak for you. Both the living will and the healthcare Power of Attorney are incorporated in the Advance Medical Directive.
D. Revocable Trust
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There are many different types of trusts with different purposes, each accomplishing a variety of goals. A revocable living trust is one type of trust often used in an estate plan. By transferring assets into a revocable trust, you can provide for continued management of your financial affairs during your lifetime (when you’re incapacitated, for example) at your death and even for generations to come. Your revocable living trust lets trust assets avoid probate and reduces the chance that personal information will become part of public records.
Every revocable trust has three important components. The grantor (or settlor) – generally you – creates the trust and transfers assets to it. The beneficiary(ies) – often you and your family – receive the income and/or principal according to your trust’s terms. The third component, a trustee – who could be you, a family member or a corporate trustee – manages the trust assets.
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You can change a revocable trust’s provisions at any time during your life. If you act as your own trustee, you continue to manage your investments and financial affairs. In this case, your account might be titled “(Your name), Trustee of the (Your Name) Revocable Living Trust Dated (Date).” Because this legal entity exists beyond your death, property titled in the trust does not need to pass through probate.
There are several advantages and disadvantages to a trust as opposed to a will. The advantages include:
(1) Flexibility
If you leave your assets in a trust, you direct a trustee to hold the assets for the benefit of your named beneficiaries. Thus, if you have young children, special needs children, or adult children that you do not want to hold your assets outright, you can direct that a trustee hold the assets and use them on your beneficiaries as needed. Often a trustee will only use the assets for the health, maintenance, support, and education of the beneficiary. This will help ensure that the assets are used when your beneficiary needs them, and that they are not wasted by the beneficiary.
Of course, a trust can be created in the will document itself. Trusts created in a will are usually established for the benefit of minor children, and all assets are usually paid to the beneficiary when he or she reaches age 21.
(2) Professional Management
When you place your assets in trust, you can appoint a financial manager, such as a bank, to manage your assets. Many individuals want to know that their property will be managed by someone with the knowledge and education to oversee the growth of their assets.
(3) Privacy
A will, once probated, is recorded in the Circuit Court of the County or City in which the decedent last resided. Any person that wants to see the contents of the will may obtain a copy at the courthouse. By contrast, generally only the beneficiaries of a trust are entitled to view the contents of the trust. Of course, one has to question whether he or she has anything to hide in the will, and even if he or she does, whether any individuals will be sufficiently motivated to go view the will at the courthouse.
(4) Avoid Estate Administration
Administration of the Estate can be a burden on a personal representative. It requires a significant amount of time to collect all the assets of the estate and distribute them properly. There may also be significant costs associated with administration of the estate as well. These include probate taxes and court costs involved in probating the will. It may also include legal fees if the administrator seeks legal advice to ensure that the administrator is not personally liable to any beneficiaries or creditors of the estate.
II. YOUR NET WORTH/ASSET PORTFOLIO
An important step in the planning process is to create a comprehensive net worth statement showing all of your assets, including taxable accounts, tax-deferred accounts (IRAs, annuities, retirement plans) and life insurance investments. Your attorney and your financial advisor need to know your assets, their values and how each asset is owned in order to properly advise you of all of your options.
III. CONSISTENT, PERIODIC REVIEW
Once you have executed the appropriate documents for your planning needs, you should review them periodically to ensure they remain up-to-date given any significant changes (births, deaths, divorces, etc.) in your situation or even if you believe there have been no significant changes. What you don’t know can cost you and your loved ones and harm the value of your assets. Having these documents in place is important, but there’s more to the estate planning process. For example, you’ll need to coordinate primary and contingent beneficiary designations on your IRA, employer-sponsored retirement plan (such as a 401(k) or 403(b) plan), annuity contracts and life insurance policies with your estate plan. And you may have estate-tax issues to deal with as well.
G. Raye Jones, the author of this post, is a Wills, Trusts, and Estates attorney with MartinWren, P.C., who represents clients in estate planning and advanced tax planning. For more information about any of the estate planning instruments, please contact Raye at (434) 817-3100 or by email at [email protected].
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