Planning for the Modest Estate

Jean and Paul Dugan have come to meet with me to discuss their estate planning needs. They are in their late 60’s, with an estate of $475,000 and several adult children. They know that they are not in the estate tax range, and are somewhat confused as to what their estate planning options may be.

Although estate tax planning is often the motivation for estate planning, an individual with a more modest estate can also benefit from a good estate plan. While tax planning issues may not be a concern, many other concerns are the same: how do I maintain the best quality of life for myself that I can during my lifetime, while protecting my family after I am gone?

Powers of attorney are an important part of the estate plan, because they can set the stage for the quality of care you will receive if you become incompetent or incapacitated. Do you want to remain in your home rather than going to a nursing home? Do you want a certain person or people making medical decisions for you? Do you want to choose someone to care for your financial affairs for you? These are the tasks carried out by powers of attorney- a delegation of certain responsibilities to persons you choose.

Being able to pass whatever you have accumulated in your life to your heirs is an important component of a good estate plan. Being able to decide who inherits what, and when they inherit it, can be done with a will or a trust. Specialized continuing trusts, such as a special needs trust or a testamentary minors trust, can be written into a will or a trust.

A will is a document in which you specify which heirs receive what assets, and when they receive them. Do you have a car that you would like to pass to your 22 year old granddaughter? Do you want to pass your late spouse’s coin collection to one particular child or grandchild? Do you want to make a cash gift to a family member or to your church or alma mater? These actions can all be accomplished with a will, although it is important to remember that probate is required whenever a will passes your assets.

If you want to avoid probate, a trust may be the estate planning option for you. The living trust allows you to re-title your assets so that you own them as trustee of your trust during your lifetime, and direct the passage of those assets at your death. In the trust document, you specify your successor trustees, who take over management of the trust when you are no longer able. A transition from trustee to successor trustee does not require probate, which can make settling an estate using a living trust a much simpler and less expensive process than when using a will.

Because the Dugans own two homes and a number of other investments, they may have a probate problem at the death of the survivor of the two of them. They probably should decide carefully between a will and a trust.

How do we decide whether someone needs a trust, or whether a will is enough? There are several considerations. First, we look at the financial consideration of the cost of a trust versus the cost of probating an estate with a will. My general rule of thumb is to look at all of the assets you have that would need to be probated. These are assets that are owned solely in your name, with no beneficiaries, no transfer on death designations, and no co-owners who have rights of survivorship. Total the value of your probate assets and multiply the total by .025. This figure will be an approximation of how much it will cost to probate your estate in Virginia. If this approximation of your probate cost is less than the cost of a trust, you do not really need a trust. If the approximate probate cost is greater than a trust, you can benefit from a living trust. In the case of the Dugans, their probate estate totals approximately $370,000 (the remainder of their estate is in assets with a beneficiary designation, so they will not have to be probated). Three and one-half percent of $370,000 is $9250, which is an estimate of the Dugan’s probate costs (these costs may be higher if the Dugans’ children use an attorney to help probate the estate). In this case, the estimate of the probate costs is far greater than the cost of a living trust.

The next issue to be considered in deciding between a will and a trust is the difficulty in completing probate for those who will be settling your estate. If the persons who will be settling your estate live locally and can manage the probate process, a will may be a viable option for you. If, however, your potential executors live in other states or do not have a lot of time to devote to probate, it may be kinder to them to use a trust. This is especially true if you own real property in another state. Real property is probated where it is located, so the beach house that the Dugans own in North Carolina will necessitate a second probate process in North Carolina if it is not owned by a trust. Ease of settling their estate is a concern for the Dugans, as their children live in other states.

The last issue to be considered in deciding between a will and a trust is whether privacy is a big concern for you. When an estate is settled with a will, many of the financial records of the decedent become a matter of public record, as the will and related records are recorded in the same manner that a deed is recorded. If this is not a concern to you, a will is still a viable option. If you are concerned about the privacy issue, possibly because you are concerned about a challenge to your will, maybe a trust would be the better alternative.

Whatever your needs and concerns are, using a trust or a will to plan for the modest estate is a good start. Valid powers of attorney appointing someone to care for us is a safeguard no one should be without. Take care of your modest estate, including an estate plan- it will benefit you and your family in the long run.

Funding Your Living Trust

Many people are currently using the Revocable Grantor Trust, or Living Trust to complete their estate planning. While the living trust is a wonderful estate planning tool, signing the document is not enough. To realize the probate avoidance and other benefits of the living trust, the trust must be Funded.

Funding your trust means transferring your assets into your trust, so that they are owned by the trust prior to the death of the grantor (the person who is setting up the trust). Only assets owned by the trust will be distributed under its terms at the death of the grantor. Why? A trust is a legal, non-human entity which can own property. It has many similarities to a corporation, except that it is not intended to conduct a commercial business. When the CEO of a corporation dies, the corporation does not necessarily die; the establishment documents of the corporation usually provide for the replacement of the CEO, so that the business can continue to operate. A trust provides for the same type of continuity; when the trust is established, the grantors name their successor trustees, who will conduct the business of the trust if the primary trustees can no longer do so. The benefit of this continuity is the avoidance of the Probate process in Virginia. [Without a trust, when a person dies, any assets owned in that person’s sole name need to be transferred to the person who will inherit them under court supervision. This court supervision is called Probate. Request prior articles for more information].

In this article, we will be looking at the funding process as the Smiths, who just signed their trust, fund their trust. Mr. and Mrs. Smith are married to each other and have executed a joint living trust which names the two of them as primary co-trustees, and their children, Ann and Bob, as co-successor trustees. The Smiths are in a first marriage, and own all their assets jointly (please note that some of the funding strategies discussed in this article would be different if the Smiths were liable for estate tax). The name of their trust is the Smith Family Trust, dated 1/15/08. Mr. and Mrs. Smith own a home, two checking accounts, one savings account, one mutual fund account, one stock account, two individual retirement accounts, one life insurance policy on Mrs. Smith’s life, one life insurance policy on Mrs. Smiths life and two cars. They have asked me to help them to fund these assets to their trust.

To organize the assets owned by the Smiths, it is helpful to make a list of each asset, and arrange the assets in order of descending value. If the Smiths begin their funding with the most valuable assets and work their way down to the least valuable assets and they should die prior to having all assets funded, at least the more valuable ones would be funded, minimizing probate costs.

Generally the home is the most valuable asset owned by the grantors, and, as such, would be the first to be funded. A new deed is prepared that states that the home is now owned by Carl Smith and Debra Smith, trustees, or successor trustees, of the Smith Family Trust dated 1/15/08. Although this is a mouthful, this is a “magic phrase” that states that the acting trustee owns the home. During their lives, this is Mr. or Mrs. Smith; after death, it is Ann and Bob Smith. Because the successor trustees automatically own the home, no probate is required. We will use this ownership phrase to retitle each asset the Smiths own.

The first step in the funding process is to contact the account holder (such as a bank, credit union, stock broker or insurance company) of each account and ask them to send the form the account holder uses to transfer an asset to a Revocable Grantor Trust. While no account holder will allow transfer of an asset to a trust that is not yet signed, they will send the asset transfer forms prior to the signing, which can save time in completing the funding.

Use of a table to list the assets and track the funding process can be helpful for most clients. One sample entry from the table I use looks like this:

Asset Transfers to Trust

Asset	Request Form	Receive Form	Return Completed Form	Transfer Complete
1st Fidelity Savings	1/17/08	1/25/08	1/28/08

This table serves a dual purpose: being able to track the funding progress for all assets at once, and, when finished, the table provides a list of all assets owned by the trust (an updated copy kept with the trust makes sure that the successor trustees know where to find the trust’s assets).

The Smiths have made a list of their assets, and have received the transfer forms from the account holders. They have questions about transfers of their other assets:

Can checking and savings accounts be transferred to the trust? The answer is yes they can, and also, that they should be transferred to the trust. At the death of the second grantor, having the accounts in the trust makes it far easier for the successor trustees to be able to access the funds in the accounts; remember, the successor trustees automatically own assets owned by the trust at the time they become successor trustees. Accounts that have to be probated would not allow immediate access to the funds. Completion of the bank’s asset transfer form should be all that is required to effect transfer; the information printed on the checks is not affected (in other words, your checks do not have to name the trust); only the ownership documents need to be changed.

How are stock and mutual funds transferred to the trust? In the area of stock type assets, a distinction needs to be made between ownership of a stock/ mutual fund account, and outright ownership of the actual share of stock. With an account (i.e., Merrill Lynch, Charles Schwaub, Prudential, Fidelity, Vanguard, etc.), one change to the ownership documents of the accounts changes title for all the stock or mutual funds in the account. If you actually hold your own stock certificates, they generally need to be returned to the issuing corporation with a medallion seal (or signature guarantee, usually available at larger banks), and the certificates are reissued in the name of the trust.

How do we transfer IRA’s to the trust? This is a very important question, because any tax deferred assets are handled differently that other assets. Tax deferred accounts are transferred to the trust by a change of beneficiary designation, NOT by a change of ownership. Tax deferred assets (IRA’s, Thrift Savings, Keoughs, 401k’s) are accounts that are structured so that income tax is paid at the time the funds are distributed from the account, NOT when the funds are contributed. A change of ownership is a taxable event, so we do not use a change of ownership to handle these accounts. Generally, these accounts have a beneficiary designation, which names the person(s) who inherits at the account holder’s death, and, if transfer to the trust is desired, the beneficiary designation can be changed to name the trust. Transfer of tax deferred assets to the second generation heirs can be accomplished in different ways. If the Smiths have grown children whom they want to inherit their IRA’s, they can simply name the spouse as the first beneficiary, and the children, jointly, as the second (or contingent) beneficiaries. If the spouse survives, he or she will inherit, if not, then the children will inherit. Current rules allow the heirs to roll the IRA fund over into IRA’s for themselves, reducing the overall income tax burden (Caveat: using beneficiary designations to avoid probate has many large pitfalls- please research this option very carefully before using it). If the Smiths had young children, a disabled child, or young grandchildren, they probably would name the trust (rather than the children) as the contingent beneficiary, so the children would inherit through the distribution scheme set up in the trust, which may have age-related or other restrictions on the way children will inherit. The decision as to whether to transfer tax-deferred assets into the trust, and how to accomplish it depends on many factors; you may want to consult a financial planner, accountant or estate planner for help determining how to best accomplish your goals.

What about life insurance? Life insurance is not generally tax deferred, but, with a revocable grantor trust, transfer is usually accomplished by a change of beneficiary also (Any life insurance policy with tax-deferred benefits should be treated as a tax-deferred asset to avoid income tax complications). In a situation like that of the Smiths (a couple with no estate tax liability), the general procedure is to name the spouse as the first beneficiary and the trust as the second beneficiary.

How do we retitle cars to the trust? When looking at the assets a family owns and wants to transfer to the trust, cars are generally very low on the priority list, for two reasons: cars are disposable assets, and the cost and inconvenience of retitling can be prohibitive. Most people do not currently own the car they will own at the time of their death. Since most cars depreciate quickly, even a car you bought two years ago may be worth only a small portion of the purchase price. The Department of Motor Vehicles charges a fee (approximately $35 at last look) to create a new title, and the fee and the waiting time may mean that retitling the car is just not worth it. The DMV has a simplified probate procedure if a car is the only item to be probated, so the risk you run by leaving a car out of the trust may be minimal. When you buy a new car it can be titled directly into the trust at the time of purchase.

Do we have to retitle personal property into the trust? Personal property (household goods, jewelry, electronics, furniture, etc.) is generally transferred to the trust by means of a document (signed at the time the trust is signed) called Transfer Document or something similar. This document transfers non-titled property to the trust. This approach works well, but if you have any personal property that is very valuable, you might want to sign an additional document (called an assignment) that specifically states that the valuable piece of personal property is thereby transferred to the trust.

Tip: at the time that you sign your trust, find the place in the trust where the trust name is stated (its usually on the first page). Using a small card (or a business card of the attorney who drafted the trust), write the name of the trust on the card. Keep the card in your wallet, so that the name of the trust is available when you want to buy a car, open a bank account or rollover a CD. Proactively funding the trust is much easier and more certain than funding after the asset is titled.

Financial Powers of Attorney and Their Use in Northern Virginia

Theoretically, executing a financial power of attorney allows you to choose a person you trust to act on your behalf to make business and financial decisions, virtually all the decisions you could make for yourself, for you in the event that you cannot make such decisions for yourself. The person to whom you delegate this power is called your Agent or Attorney-in-Fact, and he or she must act under the terms specified in the document when transacting business for you. There are several types of financial powers of attorney:

A general power of attorney comes into legal effect at the time that it is executed. It gives your agent the right to make financial decisions for you, from selling your possessions to paying your bills. Each power that you delegate to your attorney in fact is enumerated in the document. If there are any of these powers that you wish to delete, you may usually do so before you sign the final document.

If the power of attorney is durable, it continues in full force through illness or incapacity. Another approach is the springing power of attorney, which is written and executed in advance, but only takes legal effect upon a pronouncement of incapacity by a licensed physician. A Durable General Power of Attorney is the broadest type of financial power of attorney.

A springing power of attorney is written so that it does not take effect until you have been certified to be incapable of caring for your own affairs. The additional certification can make this power of attorney much more difficult to use than a durable general power of attorney.

Powers of Attorney are generally executed to protect a person during any time of illness or incapacity (they are only valid during the lifetime of the person delegating the power, and cannot be used to settle an estate), but just how easy are they to use?

A survey of financial institutions in the Northern Virginia area shows that different financial institutions may impose their own restrictions on the use of powers of attorney for their customers. When surveying the institutions, the following hypothetical question was posed: “If my parent has an account at your bank, and I am the agent under their durable general power of attorney and I need to do some banking for my parent, what do I need to provide to you to be able to use the power of attorney at your bank?”

The following is a list of restrictions, if any, imposed by ten local financial institutions are listed below. If you bank with any institution not included in the list, it is prudent to check with the institution to see if they have any restrictions or requirements on the use of powers of attorney.

1. Apple Federal Credit Union: (1-800-666-7996) This financial institution requires only the original copy of the power of attorney and one form of identification.

2. Bank Of America: (1-800-880-5454) This financial institution requires only the original copy of the power of attorney and one form of identification.

3. Burke & Herbert Bank: (703/ 549-6600) This financial institution requires only the original copy of the power of attorney and one form of identification.

4. Chevy Chase Bank: (301/ 598-7100) Here I was referred to someone in Virginia to answer my question. The representative stated that the bank’s procedure is to require the original power of attorney, and then the bank will create a new account that states that it is a power of attorney account.

5. F & M Bank: (703/ 359-9380) This financial institution requires only the original copy of the power of attorney and one form of identification.

6. First Virginia Bank: (703/ 241-3333) I spoke to a representative at the Annandale branch. She stated that the bank requires a copy of their own power of attorney form, which must be signed by the person delegating the power (in this example, my parent). If that person is incompetent, you must submit the original power of attorney to the bank’s legal department, who will review it and decide within 2-3 business days whether they will honor the document.

7. First Union Bank: (1-800-275-3862) This financial institution requires only the original copy of the power of attorney and two forms of photo identification.

8. Pentagon Federal Credit Union: (703/ 683-7787) To allow me to perform banking transactions on behalf of my parent, PFCU requires that my parent complete two forms: a statement of identity form and a POA/ agent affidavit. If my parent is incompetent and incapable of completing the forms, the manager of the individual branch has some discretion to review the original power of attorney and to waive the requirement for the additional forms.

9. Sun Trust: (1-800-273-7827) This financial institution requires only the original copy of the power of attorney and one form of identification.

10. Wachovia Bank: (1-800-WACHOVIA) Wachovia requires a signature card completed by the parent and the agent showing both signatures. If the parent is incompetent, they will review the power of attorney and, if it is sufficient, waive the requirement.

Sarah Parks is an estate planner with Custom Estate Planning in Annandale Virginia. If you have any questions or comments about this article, you may contact her at 703/ 333-6011.

Maintaining Your Independence and Quality of Life

Part One: Where to Live?

Often, as we age, we find that keeping the home in which we have raised our families is impractical. Especially as property tax assessments rise in Fairfax County, seniors are looking for more accessible, and affordable, housing. Often this means moving into a condominium, or maybe into a retirement complex. What issues arise here?

Relocation near one or more of your children: Maybe one of your children has suggested you to move to his or her area to be closer to the child, and to grandchildren. When considering this, keep in mind that relocation to an unfamiliar area can be very difficult for retirees. Ask yourself how well you know the area? Can you find your way to doctors (and do you want to switch doctors), to the bank, to a senior center, to the post office? What will your social activities be? If you are planning on building your social life around the local child and his/ her family, historically has this child had time for you? If you will be relying on the child for transportation, this question is even more important.

Relocation to retirement community: Often the big questions here are what can I afford, and can I live comfortably in whatever space I can afford? Some retirement communities have apartments, some have cottages or small homes; some are rentals, with some you “buy” your unit and the purchase price is returned to your heirs upon your death, and with others, you buy a unit on the open market as you would any other real property. Some complexes are just housing complexes, others have different levels of care for their residents. Issues that arise here are:

a. Decide how much space you need- do you see yourself having overnight guests? Need a separate room for an office? How much of a kitchen do you need?

b. How large a community do you want? Do you want to be one person/ couple in an apartment that is one of many, or do you want to be able to get to know all of your neighbors?

c. If you choose to own, look at the community’s policy concerning reselling of property and how much of your sales price is returned to you. How much of any appreciation on your unit? Are there restrictions on real estate agents who can show/ sell the unit? How long after you vacate is your purchase price returned to you? Are there any fees subtracted? Does the monthly fee have to be paid while the unit is up for sale? Can the unit be sublet, or passed on to other family members?

d. With an owned unit, how much will the monthly fee cost? What does that include? Some plans include one meal per day. Will you be paying for goods/ services you know you won’t be using? What charges are extra? In many cases, housekeeping, parking spaces, transportation and other services increase the monthly fee. Who pays for utilities? Does you unit have a separate heating/ air conditioning control (so you can adjust the temperature to your preferences)? What is the policy on pets?

e. If you intend to cook in your own kitchen, test the appliances to be sure how well they work. Make sure storage and counter space are adequate, and be sure your dishes fit in the cabinets.

f. With a rental, what services are you actually buying? Meals, housekeeping, parking place, utilities, emergency services?

g. Does the community have differing levels of care, or do you have to move if you become unable to perform your activities of daily living?

h. In a community that offers independent living, assisted living, rehabilitation or custodial care, what are the prices for the different levels of care? Can outside care providers be brought into independent living facilities so you don’t have to move? What will the community do if the units in the level of care you need are full? Are patients who have spouses living in the retirement community given priority so the spouse can visit? Visit the nursing facility/ assisted living/ custodial care area of any communities you are visiting and ask residents what they think of the facilities, food and care they are receiving.

i. With any community you are considering, if you are paying for 1 or more meal(s) per day, eat in the dining room on a non-special event evening and see the everyday quality of the food and service. Ask who plans and who prepares the meals, and what educational credentials this person has. Is there any ability to provide for special diets or needs (such as diabetic diet, no-salt diet, or a vegetarian diet)? Look for salad bars or buffets that allow you to create or choose your own food. Ask about dining room hours for various meals and be certain you are satisfied with the schedule. What happens if you cannot come to the dining room to eat (i.e., you are ill or wheelchair bound)?

j. Look at the transportation services provided by any retirement community and be certain the services provided are within your budget and satisfactory for your needs. Consider access to groceries, banking and medical care. If trips to the grocery store mean being dropped off at 9 AM and the first pickup is at 1 PM, what will you do with the extra time and any perishable foods? If there is medical care onsite, visit the medical facilities and observe the way the residents are treated. As with hiring any other professional, ask to interview the on-site staff members and ask about their credentials. If you are interested in holistic medicine or in alternative medical care, ask about the availability of appropriate medical personnel.

k. If you become wheelchair bound, what services exist for transporting you to meals, medical appointments, community and social activities, religious services?

l. The Guide To Retirement Living (call for a free copy- 800-394-9990) compares retirement housing options in the Metro DC area.

Downsizing from a house to an apartment: When you have chosen a smaller home, how do you adjust your household to fit into the smaller space? How do you know what you will need in your smaller home? If you plan to cook, what kitchen equipment will you need? What storage does your new home have for everyday items, out-of-season clothing or holiday decorations? Will you have room for photo albums, artwork or musical instruments?

Are your children available to help with the downsizing process? Can one or more children store items that you may need? Do your children want any of the items you need to give away? If you aren’t sure what you will need or can comfortably store, consider a small self-storage area for 4-6 months after your move. That way, you have time to see what you really will need in your new home, and access to items you find you need (rather than having to replace them).

Companies exist to help you downsize, but choose them carefully. Often they are liquidators, and will run a “yard sale” to sell your items, pricing many of them very low to get the sale finished. Ask how they initially price items- what methods or guides they use to arrive at a price that is fair to you. If you have some potentially valuable items (china, silver, crystal, collectibles, tools) do they have ways of selling these items that help you to realize more of their value that just selling them in a yard sale format? Some companies have connections to antique dealers or online brokers who can sell the item(s) over a longer period of time. How does the company advertise the items, especially the unique ones, for sale? Compare the commissions between companies, and ask what happens to any items not sold? You may be responsible for donating them. Before hiring any downsizing company, ask for names of past customers and contact them to hear about their experiences.

If any of the items you wish to dispose of could be of use to someone else, and you would be happier knowing where they are going, consider donation. You can donate a piano, for instance, to a church or school. If the recipient is a 501(c)(3) charitable organization, your donation can be tax deductible.

Part Two: Protecting your Interests- Before and After Death

We are all concerned with becoming mentally incompetent and having to give up control over our affairs. The best way to protect yourself in this event is to make sure you have an incompetency plan in place. With the use of a funded Revocable Living Trust or a Durable General Power of Attorney, you can name someone you trust to take care of your financial and business responsibilities for your benefit. With an Advance Health Care Directive, you can make some advance medical decisions, and choose a medical agent to make medical decisions for you. Here are some issues that arise:

Protecting your financial interests: Selecting your agent(s) or successor trustee(s) is the most important part of setting up a financial incompetency plan. When you choose your agent, look for someone who understands your values and respects them enough to carry out your wishes. Choosing co-agents can often be safer for you. If you choose one agent, he or she is often influenced by his or her spouse, and may make decisions that are not in your best interests because of spousal pressure. Naming co-agents who must agree on any decisions minimizes the spousal pressure, as the agent receiving the pressure can say to the spouse “That isn’t going to work- my sister has to agree with my decisions, and she knows Mom would not have wanted it that way.” When choosing co-agents, however, make sure you choose two (or three) who get along. You don’t want to be in limbo waiting for them to come to agreement.

It is generally not safe for you to have a child’s name on your assets as co-owner. You are actually giving the child a portion of the asset by adding them as a co-owner. If the child has any financial problems, a judgment against them for an auto or other accident or is involved in a divorce, your assets become reachable by the child’s creditors. Sometimes, people want to have a child’s name on a particular bank account that is designated for emergencies or for funeral expenses. If you add a child’s name to a small bank account for these purposes, make it clear in a writing delivered to all of your children or heirs that the child’s name is on the account for your benefit, NOT so the child will inherit the account. Certain types of co-ownership have “rights of survivorship,” which will entitle the named child to inherit the account.

If you intend to stay in your own home as long as possible, make sure your agent knows your intentions, and that your intentions are clearly spelled out in your power of attorney and/ or your trust. This allows your agent to deplete your estate, if necessary, to care for you if that is your wish.

If you are in a marriage where you and your spouse have different children and you have planned so that each spouse’s children inherits that spouse’s estate, DO NOT name each other as agent under a Durable General Power of Attorney without realizing that you are giving the spouse unrestricted access to your assets. Fraud with the use of Durable Powers of Attorney has been a problem, and may financial institutions and brokerage companies now require additional forms that must be filled out by the account owner before someone else can access the account using a power of attorney. Check with your financial institutions to determine if any additional paperwork is necessary; this is much easier to complete while you are still competent.

For your own protection, do not give your children (or other agents) copies of your financial documents until it is absolutely necessary. Because they are powerful documents, I do not make copies (certified or otherwise) of Durable Powers of Attorney; these copies given to children are often responsible for fraud. The reason I do not recommend giving children copies of you trust or will is that many people feel that, once they have shown the children the documents, they cannot change them. Remind your children, if necessary, that your estate is YOURS, and you can leave it all to your cat if you choose.

The question of whether or not to use a financial planner often comes up with seniors. I work with several excellent (and honest) financial planners, but there are also disreputable ones. If you want to use a financial planner, interview several, or, if possible, ask friends or relatives for recommendations. When interviewing, ask in what areas the financial planner may be able to help or answer questions. Also, gauge how easy the financial planner is to reach, and how easy to talk to. Do you understand what he/ she is saying, or are you constantly asking for clarification? Also, be aware of how the financial planner is paid. Generally financial planners operate in one of two ways: first, you can pay for a financial plan, and then choose to purchase (or not) any of the financial products or services the financial planner offers. Secondly, the financial plan is purchased as part of a larger purchase of financial products. If you just want a financial plan, be certain the financial planner you have chosen will prepare the plan for a straight fee.

Protecting your medical interests: From a strictly self-interested perspective, an Advance Health Care Directive is probably the most important document you will ever sign. This document allows you to make some advance health care decisions, and to choose an agent to make other health care decisions for you if you cannot. As with the financial power of attorney, the key to having this document work for you is to choose the right agent or combination of agents. Naming more than one agent (i.e., co-agents) means that you have a team of people making decisions for you. Often this means that more of your wishes are actually carried out, and, just as importantly, that one scared agent cannot make any rash decisions concerning your medical care.

Unlike the Durable Power of Attorney, the Advance Health Care Directive does not confer any financial power on your agent. For this reason, naming a second spouse (or someone from whom you have worked to segregate your estate) is fine.

If you do not have anyone locally to name as agent under your health care directive, consider naming an “emergency” agent. This is someone who lives locally, usually a close friend, neighbor or a relative, and who can be with you in the event of a medical emergency. While they have power to act or make decisions for you ONLY in an emergency situation, their primary function is to contact your agents, pass on whatever medical information is available about your condition, and facilitate communication between your agents and your doctor.

Funeral plans: If you know what type of funeral or cremation you want, consider arranging it in advance in order to have your wishes carried out. Whether you pre-arrange or not, make certain that your successor trustee or executor know what type of funeral service you want, and is willing to make certain you get what you want. Your funeral wishes are better delivered to your agent/ successor trustee in a letter that is independent of your will or trust, as wills and trusts are often not read (sometimes even found) until after burial. If you have chosen cremation, Virginia law requires that your “next of kin” signs off on the cremation, so make sure that your agent or successor trustee is willing to agree to cremation.

Children and the Estate Planning Process

Many clients come into my office to do estate planning with the express intention of making their estates as easy as possible to settle, often out of thoughtfulness for their children. It is ironic, then, that some of the same people have difficulty in deciding on the specifics of an estate plan because of concerns about their children’s feelings. To what extent should your children, or your concerns about your children, factor into your estate planning?

Two important principles come first: the first is that your estate is yours, and you may do with it whatever you choose. Obviously, promises made to a deceased spouse should be honored; otherwise, your options are open. The second important principle is that sticky issues, with children or otherwise, should not prevent anyone from establishing at least a basic estate plan. Even one that is not completely perfect is still preferable to the chaos caused in a family by someone dying intestate (without a will).

While your children may not be able to immediately see the validity of your estate planning choices, you know your family situation, and you know the strengths and weaknesses of each of your children. My major goal in estate planning is trying to preserve the harmony in my clients’ families after they are gone, so I feel that it is important to discuss some issues that arise when dealing with children in the estate planning process, and some potential ways to resolve the problems.

Do you need to give copies of your estate planning documents to your children? In general, my advice to my clients is not to give the kids copies. Giving the kids access to your plans may seem to them as if you are asking for their approval. Not only might this make your kids see you as less than in control, it also opens a door to their critiquing your plan. Also, some clients view showing their plans to their kids as a tacit promise that this is the way the estate will be divided, and then are reluctant to amend the documents when changes are needed. To make sure the kids have your documents when you need them to have them, simply tell the kids that your important papers are in a particular location (such as your safe), and that they can get them if they need to (i.e., you are in the hospital), but, in the meantime they are to remain private.

Does each of your children need to have equal opportunity to act under your estate plan? Often clients want to name one child as successor trustee, one as agent under the financial power of attorney and one as agent under the medical power of attorney, so they are being “fair” to each of the kids. While I believe in giving each responsible child a say in the settling of a parent’s estate, the goal in choosing your trustee/ executor/ agent has to be to have your best interests served. If one of your children is disorganized and/ or does not manage money well, naming him or her as financial agent / executor/ trustee is asking for trouble, both for the child and for yourself. Looking at each of your children’s strengths will help you make the right choices. Choosing a child who has the respect for you to carry out your wishes is also important. If you cannot decide, ask your estate planner for advice- he or she has probably seen other families grappling with the same questions, and can guide you in your choices. For instance, if you have three or fewer children who all get along, you may want to name them as co-successor trustees/ co-agents/ co-executors. Then they can divide the work involved among them as they choose, and everyone gets a say.

What do you do when a child won’t discuss any estate planning issues with you? This is a tough, but fairly common, problem. Often a child’s reluctance to discuss estate planning is caused by discomfort with the idea of the aging and eventual death of the parents. The aging parent, however, needs to know that the children are willing to help when needed, whether taking a non-driving parent on errands, or acting as agent under a medical power of attorney. In this situation, communicating to each of your children, either verbally or in writing, the immediate age- related concerns that you have, and that you need to have a plan in place to deal with the lack of control that is inevitable, may help. Letting the children know that you are going ahead to establish a plan, with or without their input, often opens the door to communication.

What do you do when you want to divide assets differentially between children? Many family situations seem to call for differential division of an estate. Sometimes one child is disabled, and incapable of being fully self-supporting. Sometimes parents have spent much more on one child in life- paying for an expensive education, purchasing the child a house, or lending them money to start a business. Many times, one child is the “primary caretaker” of the elderly parents, and the parents would like to reward the efforts of this child. Whatever the reason, there is no rule stating that you must divide your estate equally among your children. The key to family harmony here is to explain to the kids, generally in a letter attached to your will or trust, your reasons for the distribution you have chosen. Reminding your children that you love them all equally, and that your estate is yours to divide, also can help.

What do you do when you want to leave assets in trust for a child? There are many reasons for leaving an inheritance to a child in trust for his or her benefit. Maybe the child does not manage money well and the parent is concerned about the child’s having money in his or her retirement years. Sometimes a child is young, and the parent is concerned about their ability to handle an inheritance. Often a child is in an unsatisfactory marriage, and the parent is trying to prevent the inheritance becoming part of a divorce settlement. Whatever the reason, a trust is often the means to protect a child’s inheritance, but can insult the child in question. An explanation of your reasoning (and, again, a reminder that your estate is yours to distribute as you please) may be in order here, to let the child know that you are thinking of his or her long-term interests. The other possibility is to structure the child’s inheritance so that s/he receives a free-and-clear-of-trust gift at the time of your death, with the remainder of the inheritance remaining in trust.

Anytime we have children, life becomes complicated. These issues, and others, can play a large part in determining the specifics of an estate plan. The key is not to allow these issues to prevent your creating an estate plan, as the lack of one can create even more divisive problems within a family. A good estate planner will work through family issues with you, giving you the benefit of having seen similar issues in other families, and will help you to work out solutions that will help in your particular family situation.

Estate Planning for a Retarded or Disabled Child

Estate Planning for a Retarded or Disabled Child

John and Susan Smith are 67 years old, and have been married for 39 years. They have four children, one of whom, Evan, has Multiple Sclerosis. Evan is 35, and was married for several years, but is now divorced and lives with John and Susan. He has a degree in math, but is unable to work full time. He currently works part time as a consultant, and supplements his income by tutoring children after school.

John and Susan are aware that Evan’s illness may progress to the point that he will be unable to support himself and they have come to my office seeking an estate plan that will provide for Evan after their deaths.

John and Susan have an estate worth approximately $1.25 million, including a $250,000 life insurance policy on John’s life. Before Evan became ill, John and Susan intended to divide their estate equally between their children, but now they are uncertain. Their other three children are all self-supporting; Tom is a principal of a high school, Elizabeth is a travel agent, and Rebecca is a nurse. Each of the Smith’s healthy children has two children, for a total of 6 grandchildren.

With bypass trusts, the Smiths will not have to worry about estate taxation, so taking care of Evan without disinheriting their other children is their major concern. To care for Evan while still respecting the needs of their other children can be accomplished with a Special Needs Trust.

A special needs trust is a trust that provides for a disabled individual without jeopardizing any entitlements to public benefits that the individual may have as a result of his or her illness or disability. An entitlement may be Social Security benefits, Medicaid or any other public benefit which the individual may receive. Benefits under these programs may be jeopardized if the individual has assets or income in excess of what the benefits program allows them to have. In Evan’s case, he is still working and does not yet receive any public assistance. If his illness progresses so that he cannot work, he may have to apply for benefits to be able to support himself. Once his application for benefits is approved, he will not want to do anything to jeopardize his right to receive the benefits.

A special needs trust provides funds to buy extras for the beneficiary when his basic needs are met by public assistance. The trust assets do not count as excess assets when computing the beneficiary’s benefits under an entitlement program because the beneficiary does not have any ownership interest or absolute right to the trust assets. Distributions under the trust provisions are at the discretion of the trustee, whose job it is to see that the distributions do not interfere with the entitlements. Caution: this is not a trust to try to do yourself- if a special needs trust is not written to comply with state law, the trust assets may be taken by whatever agency provides the benefits, and the assets will be used to support the disabled individual. In addition, any entitlement will be lost due to an excess of assets in the ownership of the person receiving the benefits.

John and Susan decide to execute a special needs trust for Evans benefit. The provisions of the trust are that one half of their combined estate, less the life insurance proceeds, will be distributed equally between their three healthy children at the time they both die. The remaining half, plus the life insurance proceeds, are held in trust for Evan’s benefit under the provisions of the special needs trust. The Smiths choose Rebecca as the trustee because of her sensitivity to Evan’s needs and her medical knowledge. She will oversee the investment, management and distribution of trust assets for Evan’s lifetime. The special needs for which the trust may provide are needs beyond those of everyday maintenance or support needs (everyday support and maintenance needs are assumed to be provided by public entitlement). The trust, for instance, might provide for trips, entertainment, extra clothing or furniture. It might provide a new television set or a stereo system. If there is a desired medical procedure that is not covered by Medicaid, the trust might pay for it.

At Evan’s death, since he has no children of his own, whatever remains of the trust will be divided equally between Tom, Elizabeth and Rebecca. If any of the siblings die before Evan, the share of the deceased child passes to his or her children.

A special needs trust is a very helpful tool for a family with a disabled child who may not be, is not, self-supporting. Whether the child is 6 or 40, mentally ill, mentally retarded, autistic or ill, a special needs trust provides funds to care for that individual. Whether funded with family assets (in the case of a family with a large estate) or funded with a life insurance policy bought specifically for that purpose, the trust provides a sense of security to the parents and the siblings of the disabled individual because their disabled loved one will be cared for. Since the parents can usually care for the child during their lifetimes, a second to die life insurance policy (one that insures the lives of both parents) can be an inexpensive way to fund a special needs trust. The brothers and sisters of the disabled child are spared the daunting task of trying to care for their own children and their disabled sibling, and generally agreeable to a larger-than-equal share of the family assets going to fund the trust.

The Advance Health Care Directive and the Impact of HIPPA

The Advance Health Care Directive and the Impact of HIPPA

Nancy Foster has just found out that she has to have surgery. The abdominal pain she has been suffering results from gallstones, and her doctor recommends that the gallbladder be removed. Nancy has some other health issues that complicate her prospects for successful surgery, so she is concerned about the outcome.

She has come into my office to make sure that “all of her affairs are in order” prior to the surgery. As we discuss her questions and concerns, it becomes obvious that Nancy is focusing on what happens if she does not survive the surgery, and is concentrating on the distribution of assets from her estate.

I have to point out to Nancy that, especially with her upcoming surgery, her critical need is for an Advance Health Care Directive. Nancy is unfamiliar with a Health Care Directive, and asks me to explain.

In general, testamentary documents, such as a Will or Trust, are more useful after your death, as the major purpose of a testamentary document, especially the Will, is to distribute assets after death. But what about periods of incompetency or incapacity? We are living longer, but we are not necessarily living better. More and more of us are living long enough that we lose enough of our faculties that we become dependent on someone else for at least some of our care. In doing so, we give up control over the way we choose to live our lives. By using Powers of Attorney, legal documents allowing us to appoint someone we trust to take care of us, we can maximize our chances for quality of life if we become incompetent. To do this, the creator of the document, called the principal, appoints an agent to whom s/he delegates decision-making capability.

In recent years, the concept of the Living Will has become popular. A Living Will is a legal document that allows us to prepare for a possible time when we will not be able to make our own medical decisions by making some of those decisions now. This fundamental document has allowed patients throughout the United States to make choices now that they do, or do not, wish to have various medical treatments (cardiac resuscitation, invasive diagnostic procedures, kidney dialysis, artificial nutrition- i.e., the “feeding tube,” etc.) if they are in end-of-life situations. This document has been used by many people in recent years, and is commonly understood and respected by the medical community.

A Living Will has its limitations, however. It allows the patient to make choices on medical treatment in end-of-life situations, but most people have many episodes of medical treatment in everyday situations (such as appendicitis, broken bones or childbirth) that do not come under the heading of “end-of-life” situations. What happens then? Does the Living Will control?

The short answer is no, the Living Will has no bearing on routine medical situations. To close this gap, the Living Will has evolved into an Advance Health Care Directive, a more comprehensive legal document which combines the Living Will with a Medical Power of Attorney. The Medical Power of Attorney allows the patient (the principal) to name a trusted family member or friend (the agent) to make medical decisions for him or her if a situation arises when the patient is unable to make medical decisions for himself/ herself.

This is an important addition to the Living Will under current law. Without specific direction otherwise, the medical profession is required to do everything it can do to keep a patient alive. Only by giving the agent written authorization is the agent permitted to refuse or withdraw treatment on the patient’s behalf. In Nancy’s case, say her surgery does not go well. Maybe she has complications, or suffers a stroke or heart attack while in surgery. She will not be able to speak for herself. The fundamental question for her, and for all of us, is, if we are in a situation where we cannot speak for ourselves, whom do we want making our medical decisions during this very critical time? With a valid Advance Health Care Directive, Nancy can choose her husband and/ or her children to make decisions on her behalf. Without the document, the law states that the doctors must do all that they can to keep her alive, even past the point where she might want them to stop treatment.

The Advance Health Care Directive can also be very important for a patient who becomes mentally incompetent and cannot make medical decisions for himself/ herself. The document allows the agent to determine the course of the medical treatment for the principal, including being able to fill out insurance forms and file medical insurance and long term care insurance claims. How is the ability of a health care agent acting under an Advance Health Care Directive affected by recent legislative changes?

In 1996, Congress enacted the health insurance portability and Accountability Act (HIPPA), which is designed to protect the privacy of medical information in the United States. The act restricts the dissemination of medical information to transactions that are deemed necessary for the operation of the medical and insurance establishment (see http://aspe.hhs.gov/admnsimp for more information on HIPPA), but prohibits most other transfers of private medical information. While it is relatively easy for a patient to obtain copies of his or her own medical records and other information necessary to file insurance claims, HIPPA makes it more difficult to have an agent obtain medical information, even if the reason that the agent needs the information is legitimate.

To be certain that your agent can have access to your medical records under your Advance Health Care Directive, read it carefully and be certain that your document contains this, or similar language:

My agent shall have the power to request, receive and review any information, verbal or written, regarding my physical or mental health, including, but not limited to, medical and hospital records and to consent to or refuse the disclosure of this information.

Even more specific language may be found in your Advance Health Care Directive, such as the following:

The power to authorize any physician, health care professional, dentist, health plan/ HMO, hospital, clinic, laboratory, pharmacy or other covered health care provider, any insurance company and the Medical Information Bureau, Inc. or other health care clearinghouse that has provided treatment or services to me or that has paid for or is seeking payment from me for such services to give, disclose and release to my agent, without restriction, all of my individually identifiable health information and medical records regarding any past, present or future medical condition, including all information relating to the diagnosis and treatment of HIV/ AIDS, sexually transmitted diseases, mental illness and drug or alcohol use. This authority given my agent shall supersede any prior agreement that I have made with my health care providers to restrict access or to the disclosure of my individually identifiable health information. The authority given my agent has no expiration date and shall expire only if this document is revoked, or if I specifically revoke this authority in a writing delivered to my health care provider.

If your document does not contain this, or similar, language, or, if you do not have a directive, its time for a new Advance Health Care Directive. Remember, by having an Advance Health Care Directive in place, you are doing all that you can to protect your own quality of life. Your Advance Health Care Directive is quite possibly the most important document you will ever sign; take advantage of what it offers you.