A comprehensive estate plan should take into consideration the many estate planning instruments available to practitioners. Each person’s situation is unique, due to family dynamics, net worth, self-employed business succession goals, health care concerns, etc. A brief overview of common estate planning documents follows.
WILLS
In a will, the testator – the person whose will it is – determines who should receive his or her property. The testator may place limitations on the use of the property, including how it should be disposed of. If he or she has minor children, the testator may appoint a guardian to care for the children, and a trustee to manage the assets of the children.
If one’s net worth may exceed the state or federal exemption level, we usually consider providing for the option of a trust to be created at the time of the first death in order to maximize the possibility of estate tax avoidance. One should consider leaving assets in trust up to the amount equal to the state exemption level. This will be included in the decedent’s estate, but because it does not exceed the limit there will be no estate taxes. The surviving spouse receives the income from said trust, and the balance left in the trust at the death of the surviving spouse will not be included in his or her estate and will pass directly to the couple’s children.
SUBSTITUTES FOR WILLS
Particularly for parents with young children, we feel a will is necessary so that one may appoint a guardian. For many people, much of their property may be transferred at death without utilizing a will. For example:
Joint Tenancy with Right of Survivorship. If one registers a bank account or a brokerage account containing various investments in the form of joint tenancy with right of survivorship, the assets in said account pass to the surviving joint tenant at the first death.
Beneficiary Designations. Not only does life insurance pass to the named beneficiary (so long as there is no violation of the surviving spouse’s community property rights), so too may retirement accounts be left outright to a named beneficiary rather than having their disposition controlled by one’s will.
Transfer on Death Deeds. Recently, the Washington legislature authorized deeds which can be recorded during one’s lifetime but only become effective at death. See RCW 64.80. Before death, the owner of the property (i.e., the grantor) may revoke the deed. The fact that a transfer-on-death deed is recorded does not vest any rights in the grantee.
Trusts. Property may be transferred in trust to a named trustee, who may be the grantor of the trust. The trust may include instructions for the transfer of the property upon the death of the grantor. These arrangements are sometimes referred to as living trusts. We often utilize trusts for older clients, particularly clients who own real estate in another state. If one transfers all of one’s property into a revocable trust, and diligently manages to take title to all future acquisitions in the name of the trust, the use of the trust may avoid the administrative expense involved in probating a will. This may well be a benefit for an older client who would not have to incur the expense in both time and money in managing such a trust for many years.
In general, we don’t feel that revocable living trusts are an appropriate estate planning tool for younger married couples. The cost of preparing a trust is two to three times that of preparing a will and the cost in both time and money in maintaining the trust continues on an annual basis. And what is often not understood by clients who have heard about living trusts is that a properly drafted will has the same estate tax avoidance features as the trust. In other words, one does not avoid estate taxes by using a living trust instead of a will. The purpose of a living trust may be to avoid the expense of a probate – which expense has to be compared to the expense of both time and money in creating and managing the trust. See related article, “Do You Really Need a Living Trust?”
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Care must be taken that arrangements set forth in substitutes for wills are not in conflict with one’s will. For example, if one executes a will that provides all property at death shall pass the surviving spouse, yet names a child as the joint tenant on a bank account or beneficiary of a insurance policy, there would be a conflict between that designation and the wording in the will. And normally, these specific designations set forth in the substitute for the will would control.
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There are other documents one might consider at the time they are reviewing their estate plan.
Durable Power of Attorney
If a person becomes incompetent, a petition for guardianship may be filed with the county court and after a fairly expensive and lengthy process, a guardian may be appointed to manage the disabled person’s affairs. A durable power of attorney prepared at a time before the principal becomes disabled avoids the need for a guardianship.
With a durable power of attorney one appoints a trusted person to manage his or her affairs, including the option to make health care decisions, should he or she become disabled. Usually, a durable power of attorney is effective at the time it is signed, but it is not used unless the principal in fact becomes disabled.
Health Care Directive
By means of a health care directive people inform their family and physician whether they desire to be kept alive through artificial means should they have a terminal condition and be on life support systems.