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Estate Planning News Letters
ESTATE PLANNING 101: TOOLS IN THE TOOLBOX
By Kim K. Steffan, Attorney
Copyright 2003
Clients often ask me about the basics of estate planning, to help them organize their thoughts and to create the best plan for them.
Basic estate planning tools are as follows:
Wills: A will is often the first tool to come to mind in estate planning. A will designates who will inherit your
property after your death. It also designates a person to administer your estate. When beneficiaries are minors, it is critical to
name a trustee to manage their inheritance. A will names a guardian to raise minor children in the parents’ absence. Tax reduction
tools can be included for estates that may exceed the exemption level.
Life Insurance: Life insurance policies pay proceeds by contract to the named beneficiary, outside of the estate.
If an insurance beneficiary is also named in the will, he will receive both the insurance proceeds and the bequest provided in the will.
If minor children are primary or contingent beneficiaries on an insurance policy, naming a trustee to receive legal title to the funds
and manage them for the children will prevent the Clerk of Court becoming involved in managing the funds. Life insurance companies usually
have trust designation forms. Alternatively, the policyholder can name “my estate” as the beneficiary instead of the children, and leave
more detailed trust instructions in the will. Some retirement plans also name a death beneficiary, and these are paid by contract like
life insurance proceeds.
Power of Attorney: A power of attorney names someone to manage your financial affairs if you were unable to do so.
Although married persons may own many items of property jointly, there are always some items that cannot be jointly titled – e.g. retirement
plans and government benefits – necessitating a power of attorney. If a person cannot manage his own financial affairs and no power of
attorney exists, a guardian must be appointed through the Clerk of Court, which is expensive and time consuming.
Health Care Power of Attorney: A health care power of attorney names someone to make health care decisions for you
if you were unable to make those decisions yourself. Some doctors simply ask the family what to do. However, some doctors or hospitals
will not take action unless there is a health care power of attorney, living will or a court order. Even if a doctor is willing to
implement a family’s decision informally, sometimes family members disagree; a health care power of attorney appoints one person to make
the decision.
Living Wills: A living will is a declaration that a person wishes to die a natural death, without extraordinary measures,
if he is in a persistent coma, vegetative state or suffers severe dementia. A living will is binding on doctors and health care agents.
A living will can be contained within a health care power of attorney, or can be a separate document.
Living Trusts: Living trusts take in all of the owner’s property while she is alive, with beneficiaries named to take
the property after her death. The usual purpose of living trusts is to avoid probate, or for privacy. Fortunately, in North Carolina probate
is simple and not costly, so we do not have the need to avoid probate that exists in some other states. Living trusts can meet some specialized
estate planning needs.
Attorneys can provide more detailed information on these documents. Insurance agents can assist you with various choices in life insurance.
HEALTH CARE POWERS OF ATTORNEY AND LIVING WILLS
By Kim K. Steffan, Attorney
Copyright 2003
Q: What are “Living Wills” and “Health Care Powers of Attorney”?
A: Health Care Powers of Attorney and Living Wills are documents that allow you to choose how medical decisions will be made in the event you became
unable to make these decisions personally. The need may arise because an older person’s health declines or because a younger person is in a serious
accident. Not having these documents when you need them can cause needless expenditure of time and money for your family. Keep in mind that a
Health Care Power of Attorney is different than a general Power of Attorney; the latter concerns financial matters and will be discussed in a later
column.
A “Health Care Power of Attorney” appoints someone to make medical decisions only in the event you cannot make or communicate those decisions yourself.
The person you appoint, called your “health care agent,” is usually a family member or trusted friend.
Why are Health Care Powers of Attorney important? When the patient cannot make medical decisions, some doctors simply ask the closest family member
his or her preference, and act on it. However, some doctors will not do this. Those doctors want the protection of legal paperwork, and say that
they will not act unless and until they are given a Health Care Power of Attorney or a court order. Obviously, going to get a court guardianship
order to discontinue life support or to start or stop some treatment is not what a family wants to do when a loved one is critically ill. This type
of court action is also very expensive. When a family wants life support discontinued, there is another financial toll, because while waiting for
the court order, the patient’s estate can be depleted by thousands of dollars each day in intensive care charges.
A “Living Will” can be included in a Health Care Power of Attorney, or can be done on its own. A Living Will instructs medical providers about care,
especially about whether to provide extraordinary measures like artificial respiration. A Living Will is ideal when a person feels very strongly about
not wanting extraordinary measures to keep them alive in the event of terminal illness, permanent coma, severe dementia, or a persistent vegetative state.
Some clients prefer to make this instruction in a Living Will so that their family will not have the burden of deciding. However, not every person feels
strongly about extraordinary measures. Some feel that the best decision depends on the circumstances, and prefer to leave the decision to their appointed
agent. Those persons would not want to do a Living Will, but would instead want to discuss their general preferences with the person appointed in their
Health Care Power of Attorney.
Because decisions may be necessary on topics not covered by a Living Will, I recommend that clients include Living Will provisions within a Health Care
Power of Attorney, instead of doing only a Living Will. By including the Living Will within the Health Care Power of Attorney, someone will be appointed
to make decisions that are not covered by the Living Will if the need arises.
POWERS OF ATTORNEY
By Kim K. Steffan, Attorney
Copyright 2003
Q: What is a “Power of Attorney?”
A: A “Power of Attorney” appoints someone to handle your financial matters and personal business in the event you are unable to do
so yourself. A general Power of Attorney appoints someone to do anything with your financial affairs that you could do yourself. A general Power of
Attorney is often prepared so that is does not take effect unless or until the person who signed it became physically or mentally unable to manage his
or her own affairs. A common use for general Powers of Attorney is for someone to be able to handle financial matters for an older relative who is in
ill health. They also help younger persons who may be hospitalized for an extended time after an accident. Under a general Power of Attorney, the
person appointed can do things like pay bills, apply for government or insurance benefits, sell property if necessary, transfer funds between accounts,
etc. It is good advance planning to prepare a general Power of Attorney now, ahead of when you think you may need it, since no one knows when an accident
or ill health may happen.
A limited Power of Attorney appoints someone to do a specific thing on your behalf. For example, if you will be working out of town for an extended time,
someone at home may need to do your banking while you are gone. As another example, you may want a realtor to attend a real estate closing for you; a
limited power of attorney will allow that.
The person you appoint is called your “attorney-in-fact.” Although the person you appoint is called an “attorney-in-fact,” this does not mean the person
you appoint is necessarily an attorney. Usually, your attorney-in-fact is someone in your family or a trusted friend. By law, an attorney-in-fact has
the duty to act in the best interest of the person who appointed him or her. If an attorney-in-fact intentionally violates that duty, he risks civil
and/or criminal liability, especially if he did so in order to enrich himself.
In most cases, a Power of Attorney can be revoked, and a new attorney-in-fact appointed. That is important if circumstances change so that the person
who was originally appointed is no longer the best person to serve.
It is important to have a “durable” Power of Attorney, meaning that it is worded so as to remain in effect even if the signer later becomes mentally
incapacitated. A Power of Attorney necessarily expires when the person who signed it dies. A Will is needed to appoint someone to handle the estate
after one’s death, since a Power of Attorney cannot do that.
What happens if you become physically or mentally unable (either temporarily or permanently) to handle your own financial matters and you don’t have
a Power of Attorney? Your family would need to have a guardian appointed by the Clerk of Court. That is expensive and takes time when your family
probably already has their hands full. Having a Power of Attorney in place before it is needed is an inexpensive and more convenient alternative to
a guardianship.
AVOIDING ESTATE TAXES BY A RENUNCIATION TRUST
By Kim K. Steffan, Attorney
Copyright 2003
Q: How can a “renunciation trust” help avoid estate taxes?
A: Including a renunciation trust in a will is an excellent way to help avoid estate taxes. Tax law allows a married person to leave
an unlimited amount of property to a spouse without incurring estate taxes. Problems can arise with the death of the second spouse, not the first.
For simplicity, assume that the husband dies first, and the wife second. When the wife dies, tax law currently allows one million dollars to pass through
her estate to children or other beneficiaries without estate taxes. If the husband’s death put the entire combined estate into the wife’s name, then the
wife’s estate may be over the limit. The husband’s exemption has been lost. Planning with a renunciation trust could have avoided this, preserving the
husband’s one million dollar exemption and combining it with the wife’s one million dollar exemption, allowing two million dollars to pass without estate
taxes.
A renunciation trust allows the surviving spouse (here, the wife) to take outright from her husband’s estate the amount up to her one million dollar
exemption. She then “renounces” the rest of the husband’s estate into a trust. The wife can use the trust principal and interest for support and
maintenance, even though she doesn’t own those assets. All of those assets the wife does not use will pass at her death from the husband’s estate
(through the trust) to beneficiaries, not passing through her estate. The trust assets will not cause her estate to be over the exemption limit.
More assets can pass to beneficiaries without estate taxes.
The beauty of the renunciation trust is that it has no disadvantages. If the estate is small enough not to trigger estate taxes, the wife takes all of the
husband’s estate outright without renouncing anything. There is no reason to have the trust active if it doesn’t save tax dollars. If, on the other hand,
the estate is large enough to cause tax concerns, the wife activates the trust. For that reason, I recommend including renunciation trusts in all wills for
married couples. I do this even for young couples starting out, because the will may never be changed while their estates grow over time. The renunciation
trust language only requires adding one paragraph to the will, so it is not complicated.
The advantage of activating the trust only if needed distinguishes the renunciation trust from other approaches, such as a credit shelter trust. In credit
shelter trusts, the surviving spouse cannot opt out of the trust, but is stuck with it whether it is needed or not.
The one million dollar individual or two million dollar joint limit may not be as far off as one might think. Many ordinary people have a large life
insurance policy or a large death benefit in a retirement plan. When such a life insurance policy or death benefit combines with the other usual assets,
one can be over the limit before realizing it. An attorney can help choose estate plans based on your particular needs.
WHY DO PARENTS OF GROWING CHILDREN NEED A WILL?
By Kim K. Steffan, Attorney
Copyright 2003
Q: As the parent of a growing child, why do I need a will?
A: Parents of growing children need wills, perhaps more than any other group. Why? Otherwise, your property probably will not end
up where you intend, and the Court will have to guess who should raise your children in your absence. A will is the ONLY way to assure that your children
are provided for in the way YOU want.
If you die without a will in North Carolina, the “Intestate Succession Act” controls the estate, specifying who takes what property, and how. You may be
surprised to find that the Intestate Succession Act is not very logical, and probably would not do with your property as you would.
If you are married with one minor child, you probably expect that if you died without a will, your property would go to your spouse, who would use it to
take care of himself (herself) and the child. It doesn’t work that way. Your estate would be divided between your spouse and your child, so that your
spouse would not own everything outright. Then the Clerk of Court (not the surviving parent) oversees management of the child’s share of the property.
If the surviving parent wishes to sell the property inherited by him and the child, he must go through a cumbersome and expensive procedure for the Clerk
of Court to approve the sale. The Clerk also controls how the child’s share of sale proceeds will be invested or spent. No one would wish that on his
or her family.
In some families, a spouse/parent can fully trust that if he/she died, his/her spouse would see that the children are properly cared for – financially,
emotionally and otherwise. In those cases, life would be much simpler for the family if there is a will leaving the entire estate to the surviving parent.
If you wish to leave property to minor children (e.g., if you are a single parent), you need a trustee to take legal title to the property and manage it
for the children. Having a trustee avoids having the Clerk of Court control management of the funds. If you are a single parent because of separation,
depending on the circumstances, you may choose the other parent or a third person (e.g., grandparent) to serve as trustee. You cannot make this choice
without a will.
A major concern for all parents is deciding who would raise their children in their absence. If the parents reside together, there should be a substitute
guardian named in the will in case both parents die in a common tragedy. If the parents do not reside together, the will should designate a preference
(whether it is the other parent or someone else) for guardian. While a court is not bound to appoint the guardian named in a will, that preference usually
carries a great deal of weight.
Why do people put off doing wills? Some don’t want to think about it. However, once it is done, unless the family or financial situation changes, it is
out of the way. Some think only older people need wills. As this article explains, parents of growing children may need wills more than anyone. Some think
it is expensive. While a few people need extensive work with tax expertise, many clients’ needs can be met with modest cost. Many attorneys will discuss
fees with you without obligation.
A will is a necessity and a sound investment for those who want control in providing for loved ones— especially children. A will gives its maker peace of
mind, and saves expense and difficulties for the family later on.
WHAT IS A TRUST?
By Kim K. Steffan, Attorney
Copyright 2003
Q: What is a “trust”?
A: A trust is a legal arrangement allowing a “beneficiary” to have the benefit of trust assets (money or other property) without owning
legal title to the assets. A “trustee” holds legal title to the assets, and manages the assets for the beneficiary. The person who establishes and funds
the trust is called a “trustor” or “settlor.”
The trustee has authority both to disburse money directly to the beneficiary and to pay it out for the beneficiary’s benefit. Examples of the latter include
paying for orthodontic care, rent, or school tuition. The trustee makes all spending decisions as long as the trust lasts. In addition, the trustee is
responsible for managing the trust assets, like selling and investing.
A trust is used where, for whatever reason, the beneficiary cannot or should not hold legal title to the property or manage it. For example, minor children
cannot legal own property in their names, so a trust is essential for property intended to benefit a minor. Although a college-age adult can legally own
property, a trustor may decide that it is better for the trustee to manage the property until college graduation. In age-related trusts, once the beneficiary
reaches a specified age, the trust assets are distributed to him/her outright. Another situation requiring a trust is when the beneficiary is mentally or
developmentally disabled, such that the beneficiary would be unable to manage the property or would find the task burdensome. Trusts prevent a beneficiary’s
creditors from reaching and depleting trust assets, as long as the assets remain in the trust. Trusts can also be set up to benefit charities.
Trusts can be established while the trustor is living (called a “living trust” or “inter vivos trust”) or by a will upon a person’s death (called a “testamentary
trust”). Living trusts can be useful as part of tax and estate planning. Living trusts are set up with a “trust agreement.” Testamentary trusts are used when
the person making a will wishes to leave the use and benefit of his/her property after he/she dies to a minor, young adult, or disabled person. Testamentary
trusts are set up in a will.
Living trusts can be “revocable” or “irrevocable.” Revocable trusts can be changed or even terminated by the trustor if his/her needs or priorities change
during his/her life. The terms of an irrevocable trust cannot be changed. The IRS recognizes irrevocable trusts as gifts for tax planning purposes, but not
so with revocable trusts.
Trusts should have a “contingent beneficiary,” to become the new beneficiary if the original beneficiary were to die before the trust were terminated by some
other event. Similarly, trusts should also have a “contingent trustee,” who would be the second choice to serve as trustee if the named trustee were unable
to continue to serve. An attorney can assist you in making decisions about whether and when a trust may help you achieve your planning goals.
MAKING GOOD USE OF YOUR “PODs”
By Kim K. Steffan, Attorney
Copyright 2010
If there was a simple way to get assets to your loved ones faster and easier after you are gone, would you do it? Using a “payable on death”
or “POD” beneficiary correctly will do that.
Some types of assets are designed to pass to your beneficiaries outside of your estate. Retirement accounts, life insurance, some bank accounts, and some bonds have a
“payable on death” feature. That means you can name a particular person (or group of people) or charity to receive that asset after your death. You are probably most
familiar with that feature on life insurance, but other assets can work the same way. The money from the insurance, retirement plan or bank account is paid directly to
your named beneficiary as soon as the beneficiary sends in a claim form and death certificate. This is faster than money will reach your beneficiary through your estate.
If an asset has a POD feature but you do not list a beneficiary, it will pass through your estate. By comparison, assets left to a beneficiary through an estate cannot
be distributed to him or her until after the “creditor claim period” ends. That is usually at least 120 days after the date of death, depending on when the estate is
opened and the newspaper notice to creditors is published.
Naming a beneficiary on POD assets also saves money. While Clerk of Court fees for probating a North Carolina estate are not outrageous (particularly when compared to
other states), why pay more money in Clerk fees than you have to? If you own a retirement account but don’t list a beneficiary, when those funds pass through your estate,
the Clerk of Court will collect a fee of four dollars per thousand. In an estate I worked on recently, a retired gentleman passed away with a retirement account of $250,000.
He didn’t name a beneficiary, so the funds went through his estate. The Clerk took a $1000 fee on it. That expense could have been avoided if the gentlemen had listed his
beneficiary by name on the POD form.
Another advantage of naming a beneficiary when you can is that it protects those assets from estate creditors. Because those assets pay outside of the estate, estate creditors cannot reach them.
There is one time you should not use a POD beneficiary feature. You should never, ever list a minor child by name on the POD beneficiary form. Because minors cannot legally
own property, listing a minor child on a beneficiary form means that the Court will have to appoint a guardian to receive the funds for the minor, and the Clerk will take a
fee each year. Similarly, never name as a beneficiary a disabled adult who depends on means-tested government assistance. Leaving money outright to such a disabled adult can
disqualify them for helpful government programs. To safely leave funds to minor children or disabled adults, you’ll need to set up a trust to receive and manage the benefits,
and name the trust on the POD beneficiary form.
Except for those limited circumstances, name the person, people or charity you want to receive your POD asset on the beneficiary designation form. If you don’t know if an asset
has a POD feature, ask. Make good use of every POD asset you have, and your loved ones will be glad you did.
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