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In this section, we look at some basic documents and ways to hold assets that affect the implementation of your estate plan.
What Your Will Can Do For You
A Will is a testamentary instrument, which means that it has no effect until death. As long as you are mentally competent, you can change your Will at any time. In your Will, you can:
- designate who should receive various items of your estate;
- prescribe whether the property should be transferred outright or in trust, and if in trust, the terms of that trust;
- provide flexibility in the amount and manner of transferring property to your spouse;
- appoint guardians for your minor children to take care of them if you and your spouse die before your children reach the age of majority; and
- name the fiduciaries who will collect and manage your estate, pay debts and taxes, and distribute your property to your beneficiaries.
Your Will Does Not Control Non-Probate Assets
It is important to understand that your Will does not necessarily dispose of all of your property. Instead, it only disposes of your "probate assets," or, to oversimplify, assets in your name. To give a few examples, tangible property in your name, checking or savings account in your own name, real estate in your name, and a debt owed to you by someone else, all constitute probate assets.
By contrast, "non-probate assets" are assets that do not go through the probate process because the ownership arrangement dictates who will receive the property at death. Thus, non-probate assets are unaffected by the existence of a Will because the assets pass at death by operation of law regardless of whether a Will exists and irrespective of what it may provide. Non-probate property typically includes life insurance, pension or profit sharing plans, retirement accounts, lifetime trusts, and certain joint property. With such assets, the property passes according to the terms of the policy, plan, trust or to the surviving joint owner, and not in accordance with your Will. For example, if you have a life insurance policy that names your child as a beneficiary, the proceeds of the policy will pass directly to that child regardless of what your Will says.
Therefore, it may not be enough to execute a Will. To ensure that your non-probate assets are correctly disposed of, you must make sure that appropriate documents are correctly filled out, including designations of beneficiaries on your life insurance, retirement accounts, and so on.
Revocable Trusts
Increasingly, people are turning to the revocable trust as the basic document in their estate plan. As its name implies, a revocable trust can be revoked at any time by the grantor, so holding property in the trust is very much like owning it outright. Furthermore, the grantor typically acts as a trustee so that the grantor maintains complete control over the management of the property placed in the trust.
Generally, the grantor endeavors to put as much of his or her property in the revocable trust as possible. Therefore, when the grantor dies, the grantor's property in the trust is disposed of in accordance with the trust terms, and not in accordance with the grantor's Will. Any instruction that can be set forth in a Will can just as easily go in the revocable trust. However, if you opt for a revocable trust as your dispositive estate planning instrument, you will incur the administrative costs of creating the revocable trust and then transferring your assets to the revocable trust.
Why do people do this? One reason is to avoid the court proceedings, costs and inconveniences associated with the "probate" of a Will and the administration of probate property that passes under a Will. By contrast, the property held in a revocable trust after the grantor's death typically can be administered without any court oversight or associated costs. It is important to note that in certain states, the process of probating a Will and administering an estate is more difficult and expensive than in other states. For example, in some states, probating a Will is relatively simple and, therefore, avoiding probate may not be a primary reason for creating a revocable trust. However, in other states, probating a Will and administering probate property is more difficult and, therefore, residents of those states often choose revocable trusts as their primary estate planning document.
Regardless of where one resides, an important benefit of a revocable trust is the flexibility it can provide if the grantor should become disabled, incapacitated or incompetent. The trustees, who have been selected by the grantor, will typically have the ability to manage and administer the grantor's property held in the revocable trust with greater flexibility than is provided by other methods of managing an incompetent's property, such as guardianship, conservatorship, or under a durable power of attorney.
Although revocable trusts offer several benefits, including avoiding probate and providing flexibility, it may also be difficult and time-consuming to transfer everything that one owns to a revocable trust. As a result, grantors with revocable trusts should also execute a simple Will directing that any property owned by the grantor at death be transferred to the revocable trust.
In addition, a major misconception about revocable trusts is that they can save or avoid Estate Taxes. This is simply not true, as the assets of a revocable trust are treated for Estate Tax purposes just as if they were owned outright by the grantor.
Joint Ownership
If you own any assets as "joint owners'' with someone else, you need to consider whether that joint ownership conforms to your estate plan.
Joint ownership has many forms. Many involve a so-called “right of survivorship,” meaning that when the first owner dies, the surviving owner automatically receives the deceased owner's interest in the property. One example is a savings or checking account registered jointly in each of the joint owners' names. When the first joint owner dies, the surviving owner receives the entire account.
As you can see, jointly owned property with a right of survivorship is not part of the "probate" estate of the first joint owner to die. At that time, the property passes automatically to the surviving owner regardless of any provision to the contrary in the deceased owner's Will.
Joint ownership is normally established in the document that gives you title to the particular property. Thus, the deed to real estate owned jointly by two people will set forth both of the names as owners. A checking account that is held in both names will be similarly titled.
Joint ownership can have advantages. For example, it is easy to enter into and, when there is a right of survivorship, allows for the passing of property at death without any other legal document or proceeding. In addition, under certain circumstances, joint ownership can result in valuation discounts for Gift and Estate Tax purposes. However, joint ownership has disadvantages as well. Placing property into joint ownership limits legal control over the property, because more than one person has control over how the property will be used, invested, or managed. Where there is a right of survivorship, a joint owner also cannot change the disposition of the property by Will if he or she is the first to die. Another disadvantage is that property passing to the surviving owner may not receive the "step-up" in basis that an appreciated asset transferred at death usually receives. In addition, in order for each individual to take full advantage of the applicable exclusion amount, it may be useful for one to own property in his or her own name, rather than jointly. Accordingly, you should carefully consider whether joint ownership is the most advantageous means for holding your assets.
But note: A very different set of legal rules governs the joint ownership of copyrighted works. Whenever two or more co-writers collaborate on a copyrightable work—for example, when one writes music and the other lyrics—all co-writers own equal, undivided interests in the copyright to the work unless they contract to alter those interests. A copyright could also be jointly owned if a writer has transferred part of his or her ownership interest to another party. With any jointly owned copyright, there is no right of survivorship. This means that when one co-owner dies, the deceased's share of the copyright does not pass to the other co-owners. Instead, the deceased co-owner's share passes to his or her beneficiaries under the Copyright Act, the deceased co-owner's Will, or the applicable state law of intestacy, depending on the circumstances. Finally, you should be aware that any joint owner of a copyright can grant non-exclusive rights in it (e.g., a license to reproduce or publicly perform the copyrighted work) without the other joint owners' consent, although the grantor must pay them their shares of the revenue earned.
Other Documents: Health Care Proxy, Living Will, and Power of Attorney
The Health Care Proxy, Living Will and Power of Attorney can serve an important place in your overall "life planning."
A Health Care Proxy is a document that allows you to appoint a person to act as your health care agent to make health care decisions on your behalf in the event you are unable to make them for yourself. The Health Care Proxy is like a power of attorney for medical decisions. It states that if you are incapacitated and unable to make medical decisions on your own, the person you designate as your agent may decide your health care treatment. A duly appointed health care agent generally has the authority to make the same health care decisions you could make if you were able. Note, however, that, in some states, unless the agent knows your wishes about artificial nutrition and hydration, the agent will not have the authority to make any decisions about those issues on your behalf. If you would like your agent to have the authority to make such decisions for you, you should include proper instructions in your Health Care Proxy (and/or Living Will).
A Living Will is a document that stands as an expression of your wishes not to be kept alive by artificial means in the event you are in an irreversible coma or death is imminent. The Living Will cannot direct your doctors to remove you from life support; instead, it only states what treatment you would or would not want in such a situation. Ultimately, the decision of your health care agent will prevail. However, the Living Will can serve an important role in communicating your wishes to your health care agent.
A Power of Attorney is a document that allows you to appoint a person to act as your agent to handle your affairs during your lifetime. It enables you to give another person the power to handle any part or all of your affairs, including the power to mortgage, sell, or otherwise dispose of any real or personal property without advance notice to you or approval by you. You can, of course, limit your agent to act on your behalf only in certain matters. A Power of Attorney is an effective way to ensure your business affairs will be attended to if you become disabled or incompetent. Without such an instrument, no person can legally take these necessary actions on your behalf.