Most people are familiar with the television personality, Ron Popeil. His tagline? “Set it and forget it!” While this might work for your slow cooked roast, it does not work for your estate plan! Reviewing your plan each year will help keep your Estate up-to-date and avoid time-consuming (and sometimes costly) issues for your successors.
1. Beneficiary Designations.
Make sure the beneficiary designations of IRAs, 401-Ks, and life insurance policies are up-to-date and coordinated with the estate plan. Often, when a spouse dies, the beneficiary designations for the surviving spouse are not updated and there is no contingent beneficiary – leaving the assets payable to the estate of the surviving spouse. This could cause the payment of the death benefit of these accounts to be made to an unintended beneficiary or to a minor, special needs beneficiary, or other vulnerable individual without appropriate protections. It could also cause a costly and time consuming probate proceeding.
The death beneficiary of assets such as IRAs, 401k’s, and life insurance are not normally controlled by the terms contained in a Will or a trust. The beneficiary is usually named in the contract itself. Where there is a conflict between the contractual designation and the beneficiaries named under a Will or trust, generally the contract prevails. As an example, if the eldest son is named as beneficiary of a life insurance policy and the Trust of the insured instructs the trustee to divide all the assets of his estate equally among all children, the life insurance death benefit would be paid solely to the son. This may or may not be what the decedent intended. The provision in the Trust does not legally obligate the son to split the life insurance death benefit with his siblings.
2. Incapacity Planning.
You should periodically review the names of the persons who you named as your agents (attorneys in fact) under your durable power of attorney and successor trustees of your trust. This is important because your durable power of attorney for finances and living trust can prove to be invaluable tools in the event you are found to lack the capacity to manage your own financial affairs due to dementia, Alzheimer’s disease or similar conditions. These estate planning documents allow a trusted individual (known as the agent or trustee) to pay the bills and handle the finances of the incapacitated individual. Without such documents, a costly legal proceeding (known as a conservatorship in California) would be required. If a conservatorship is needed, the person appointed by the court (known as a conservator) may need to be bonded and will be required to file an accounting with the court annually. The conservator may be required to get court permission before taking certain actions. Some advisors advocate for a conservatorship proceeding because of the existence of court oversight. However, a similar result can be achieved without the ongoing legal fees and court interference by requiring the agent under a power of attorney and a trustee to deliver periodic reports and supply copies of bank records to a second trusted individual. If the designated individual finds improprieties in the manner the finances are being handled, he or she can remove the agent or trustee and enlist the assistance of the court at that time, if necessary, to recover the funds.
3. Making Health Care Wishes Known.
We have all heard about persons being kept alive through use of a feeding tube or breathing machine. The United States Supreme Court case involving Terri Schiavo is just one of countless examples. While the use of this life prolonging medical equipment can be very beneficial, many individuals do not desire to be maintained indefinitely when the possibility of recovery is non-existent. The presence of an advance health care directive allows a designated agent to make health care decisions for a person who is not capable of making these decisions for himself or herself. But these documents do much more than that. They designate an agent to determine whether or not to have a medical procedure performed and also allows for the choice of health care decisions such as end-of-life care and organ donation. For these reasons, an advance health care directive s a very important component of a comprehensive estate plan. You should review your advance health care directive to see if the agents you have named are still appropriate and whether your selected health care decisions still reflect your wishes.
The Health Insurance Portability and Accountability Act (HIPAA) provides that protected health information is not disseminated by medical and health care personnel. While the protection of this information is vital, it can often interfere with an agent or trustee obtaining information needed for the efficient administration of an incapacitated person’s health care and finances. For this reason, it is vital also to have a HIPAA Authorization Form, which designates the individuals who can obtain protected health care information in the event of incapacity. The individuals who are typically pre-authorized to have access to this information are the designated agents, trustees, and close family members. Again, review this document in your portfolio binder to see if it is up to date.
4. Use of a Revocable Living Trust.
A probate is a legal proceeding through which the assets of the decedent are inventoried, creditor claims are received and either paid off or rejected, taxes and other government claims are paid, and the residual of the estate is paid to beneficiaries. When a person dies intestate (without a Will), the beneficiaries of his or her estate are determined under state law. A probate proceeding is open to the public, can take a year or more to conclude, and can cost thousands of dollars in legal fees, executor fees, court costs, and administration expenses.
A common misconception is that the creation of a Will avoids probate. In fact, a Will generally mandates a probate administration, because one of the functions of a probate is to determine whether the Will is valid. A common way to avoid probate is to create a revocable living trust. The assets owned by a revocable living trust are distributed without the need for a probate proceeding and as directed by the terms of the trust. During the lifetime and competency of the creator(s) of the trust, he, she, or they have complete control over the assets of the trust and can change the terms of the trust, if desired. After death, the assets CAN be distributed outright to the intended beneficiaries. They can also be further held in trust for the beneficiaries designated under the trust. Holding assets in trust allows for the management of assets intended to benefit a minor beneficiary, a person with special needs, or an individual who is incapable of managing his or her financial affairs due to immaturity or problems with taxes, excessive debt, gambling, alcohol, and/or drugs. The trust for the beneficiary can last indefinitely or cease to exist when certain conditions are met (attaining a designated age, being drug-free for a designated period, or demonstrating the ability to manage the trust assets are three of many possibilities). To take full advantage of the benefits of your trust, review the beneficiary designations and the manner in which they will obtain their inheritances to see if they reflect your current intentions.
5. Funding of the Trust.
The New Year is the perfect time to review the ownership of all assets. Assets owned individually (rather than by a trust) will not avoid probate (as explained above). Oftentimes, individuals create a trust but don’t transfer ownership of all assets to the trust. A trust that is unfunded (contains no assets) can be analogized to a treasure chest that contains no booty or a car with no gas in the tank. You have the treasure chest or vehicle, but it serves no function other than maybe serving as a conversation piece. Once a living trust is created, the ownership of the creator’s assets must be transferred to the trust. This is accomplished by contacting the bank or brokerage company to effectuate a change of ownership of financial assets, or in the case of real estate, recording a deed transferring title to the trust. If the death benefit from an IRA, life insurance, or other assets with a beneficiary designation is to be controlled by the terms of the trust, a change of beneficiary forms designating the trust as beneficiary will need to be executed. As assets are bought, sold, or transferred during the life of the creator, any new assets should be titled in the name of the trust. Failure to provide for ownership of assets by the trust may cause these assets to be subject to probate upon death. Please review your deeds and accounts to see if they are properly titled in your trust.
6. Safeguarding Original Documents.
For clients of our firm, when we set up their estate plan we provided them with their original signed documents in a white envelope and copies of those documents in a three-ring burgundy binder. We advise our cleints to keep the original documents in either a fireproof safe or safe deposit box. We also advised them to note the location of the original documents in the binder under the “Locations Lists” tab. If you are one of our clients and have not done so, please do so immediately. It is critical that your original documents be located after your death on incapacity. Copies may not be sufficient.
7. The Guided Tour Booklet.
In the inside front pocket of the burgundy binder given to our clients, we provided them with a booklet entitled “A Guided Tour to Your Estate Plan.” It takes them section by section through their binder and explains the documents therein. It also provides specific instructions about information that they should insert in the binder. Doing so will make it much easier for the successor trustee when they assume their responsibilities.
8. We’re Here to Help.
If your review reveals that your estate plan needs a tune up or you have other questions, help is just a phone call away. Please call us at (916) 437-3500 if we can be of assistance.