Your life insurance and retirement accounts will only become part of your probate estate, and hence subject to the terms of your will if you name "my estate" as beneficiary. In a well-planned estate, it is rare that your estate will be named as beneficiary.
A person can have the proper will and trust documents in place and still fail to achieve his estate planning objectives if the person has not (i) properly titled his investment assets and (ii) named the correct beneficiary designations on his life insurance policies, annuities, and retirement plan accounts.
An important part of the service we provide is to instruct a client on asset titling and beneficiary designation issues.
The purpose of estate planning is to ensure the transfer of an individual´s property at death to the beneficiaries of his or her choice in a simple and efficient manner under the circumstances. A well planned estate should reduce or eliminate involvement with the court-supervised probate system and should foster and encourage family harmony throughout the process. An effective estate plan generally requires the preparation and execution of wills, revocable trust agreements, financial powers of attorney and advance medical directives. Upon execution of such documents, it will also be necessary for the individual to update beneficiary designations on life insurance and retirement accounts and perhaps change title to investment accounts and real estate.
A will is a legal document that provides for the passage of a deceased person's "probate estate."
Not all of a person's wealth passes under his will. Many assets are transferred at death outside of the probate estate and without regard to the terms of the will. Assets owned jointly with rights of survivorship by two or more individuals will automatically be owned by the surviving individual(s) at the death of one owner.
Bank accounts and certificates of deposit may be designated “P.O.D.” (payable on death) to a specified beneficiary. Similarly, investment accounts may include a “T.O.D.” (transfer on death) direction.
Life insurance and annuity policies provide for named beneficiaries, as do all manner of retirement accounts (pension and profit-sharing accounts, 401(k)s and IRAs).
An effective estate plan coordinates the disposition of all of an individual´s property and financial resources. In most instances this requires more than just the preparation of a valid will.
Nevertheless a will is almost always a vital estate planning document. A valid will avoids the application of Virginia´s intestacy laws with respect to the probate estate. The will also appoints an executor who is responsible for paying estate expenses and marshalling the estate´s assets.
A well-drafted will can reduce estate administration costs by relieving the executor of the necessity of obtaining a costly surety bond, and may provide for the appointment of guardians for minor children.
A revocable trust agreement is a document created by an individual (the “grantor”) for the purpose of managing certain assets of the grantor. The trust agreement appoints a trustee who holds title to the trust property and performs the day-to-day management of the trust. The grantor, alone or with the spouse, typically serves as trustee of the trust as long as he or she is competent to do so. The grantor can change any of the trust terms or revoke the trust agreement during his or her lifetime.
At the grantor’s death or in the event of the grantor´s incapacity, the trust becomes irrevocable. However, "irrevocability" is largely a tax term. A well drafted trust agreement is a very flexible instrument, if the grantor so desires. We often include provisions to the following effect in our trust agreements:
I reserve the unrestricted right to amend this Trust Agreement by a writing (other than a will) signed by me and delivered to the Trustee. I also reserve for the Trust Advisor the limited right to amend this Trust Agreement as may be necessary, in the opinion of the Trust Advisor, to carry out the purposes of this Trust Agreement or any trust under this Trust Agreement, such as technical or conforming amendments in or to the powers, discretions or provisions of this Trust Agreement as the Trust Advisor may consider necessary or desirable to complement my overall estate plan. These amendments may include but are not limited to (i) trust provisions to correct a drafting error that defeats my intent, (ii) trust administrative provisions relating to the identity, qualifications, succession, removal, and appointment of the Trustee and Trust Advisor, (iii) the financial powers of the Trustee, and (iv) trust provisions that address changes in the tax laws as they existed on the date this document was executed. However, no such amendment shall enlarge, reduce or shift any beneficial interests under this Trust Agreement except as an incidental consequence of such amendment, and no such amendment shall deprive me, my estate, any trust under this Trust Agreement, or any beneficiary of any deduction, exclusion or other tax benefit which would otherwise be applicable without the written consent of the parties adversely affected. Any amendment made by the Trust Advisor shall be in writing, signed by the Trust Advisor and delivered to the Trustee.
If the grantor was serving alone as trustee, a successor trustee is appointed according to the terms of the trust agreement. The successor trustee then is responsible for distributing the trust assets, or retaining the assets in further trust, as directed by the document.
The assets that are held or received by the trust can remain in trust long after the grantor’s death. This allows the grantor to keep a trust in place for a spouse, children, grandchildren or even great-grandchildren.
The expenses to administer ongoing trusts for the benefit of the grantor´s family or other beneficiaries are lower than the expenses incurred for testamentary trusts created by a will. For example, trusts created under a revocable trust agreement are not subject to an annual review by the court nor required to file annual accountings with the Commissioner of Accounts. Appointment of additional or successor trustees are also handled privately without the need for a court order.
When a grantor transfers assets to the trustee under a revocable trust agreement during lifetime, it is often referred to as a “living trust”. There are several benefits to a revocable trust agreement.
First, if the grantor becomes unable to serve as trustee for health or other reasons, a successor trustee steps in to manage the trust for the grantor´s benefit. The trustee invests the assets prudently, and pays the grantor´s debts and living expenses. The living trust is generally safer than a general power of attorney for purposes of managing the grantor’s property in the event of his or her incapacity.
Second, assets held in the trust during the grantor´s lifetime, or paid to the trust at the grantor´s death by appropriate beneficiary designation, are not part of the grantor´s probate estate. This usually results in reducing the expenses of estate settlement. Virginia probate taxes, assessed by the state and locality (about 15% of 1% of the value of the assets) only apply to probate assets, i.e., those assets passing under a will. The executor´s commission and fees paid to the Commissioner of Accounts are similarly reduced.
Unlike a will, which when recorded at death becomes a public document, a revocable trust agreement remains private. The value of the assets held under the trust agreement at death, and the disposition of those assets, are only revealed to those who have an interest in the trust agreement.
The first consideration in choosing an executor and trustee is determining whether the position should be filled by a family member (or other trusted friend) or by a professional fiduciary. Clients often prefer family members as the primary choice for these positions, someone with "skin in the game."
In planning with married couples, we usually suggest that one spouse serve as executor and trustee for the other, but that is not true 100% of the time. If another family member possesses the characteristics needed in a fiduciary, that may be the preferable choice. What are the characteristics of a good fiduciary? Trustworthiness, reliability, the perseverance to see a job through to completion, a diplomatic yet businesslike personality, all come to mind.
But as someone once observed, 90% of genius is just showing up. So even if your son the emergency room surgeon in a city 2000 miles away or your daughter the senior foreign service officer posted to Japan would be perfect in every other way, it is unlikely either one of them could take on the task of being an executor or trustee.
When a client concludes that there is no family member or close friend who has the skill set and the availability needed to serve as executor or trustee, a client's only practical option is a Professional Executor or a Professional Trustee, i.e., an individual, law firm, bank, or trust company that regularly serves in these roles. Professional fiduciaries are generally knowledgeable and experienced in administering estates and trusts, and especially mindful of the requirements for investing prudently. However, naming a professional fiduciary may be more expensive in some cases than naming a family member who retains professional assistance. Professional fiduciaries usually charge commissions as executors and trustees based on their published fee schedules. Commissions are generally based on the size of the estate or trust.
If the estate or trust is complicated to administer, a professional fiduciary, serving alone or with a family representative, may be the best choice. In other cases an appropriate solution is to name an individual as the initial executor and trustee, with a professional fiduciary as the successor. All the available alternatives, with their advantages and disadvantages, are considered in greater detail in the estate planning process.
A power of attorney is a document created by the “principal” naming an “agent” to act for him or her with respect to management of the principal’s property and financial affairs. A “general” power of attorney is written very broadly to permit the agent to do almost anything that the principal could do himself or herself. The following language is common in a power of attorney:
I confer upon my Agent the full, complete and general authority to do all such acts, matters and things in relation to all or any part of, or interest in, my property, affairs or business of any kind or description in the Commonwealth of Virginia, or elsewhere, now or at any time in the future, that I could do if acting personally. I intend that this general grant of authority be construed broadly so as to confer the greatest possible grant of authority upon my Agent.
A “durable” power of attorney remains effective in the event of the principal´s disability or incapacity. A power of attorney can be revoked by the principal at any time, and ceases to be effective at the principal’s death.
Virginia law expressly validates advance medical directives and provides a suggested form for implementation. The advance medical directive typically accomplishes the following: (i) it provides a statement of the signatory’s wishes in the event the signatory has a terminal condition and is unable to speak for himself or herself (sometimes known as a “living will”), (ii) it appoints the signatory’s agents who can make health care decisions on the signatory’s behalf in the event of the signatory’s incapacity, and (iii) it provides authorization under HIPAA for the release of the signatory’s medical information to selected persons by hospitals, doctors, and insurance providers. It may also authorize anatomical gifts of a signatory’s body or body parts upon death, for those who wish to make such gifts.
We find many clients are under the mistaken impression that end-of-life wishes are the most important thing about a medical directive. We believe the most important thing about a medical directive is the appointment of an informal "patient advocate," someone that doctors and hospitals know must be listened to during a hospitalization. Even if a patient is not incapacitated, it may be hard for a patient who has had a bad night's sleep or is under the influence of a sedative to be fully cognizant of all that might be happening around him. So our form of medical directive focuses on the selection of such persons.
Clients with minor children have special estate planning issues to address. First, the clients should name a guardian or guardians for the custody of their children until they reach majority (age 18). The guardians are typically nominated in the will. The actual appointment of the guardian(s) is made by court order, but the nomination of the guardian(s) by the parent or parents is routinely honored. The guardian makes the day-to-day decisions that the parents would otherwise make if alive, for example, where the children will live, the schools they will attend, etc.
Second, the estate plan should create appropriate trusts for the benefit of the children. Trusts ensure that the children´s inheritance will be properly managed and applied until the children have the financial experience and maturity to manage the assets themselves. If the client has more than one dependent child, we usually recommend a two-stage approach. In the first stage, all the family´s assets are retained in a single trust which provides for the support, health and education of all the children. The use of a single trust provides the flexibility to address differing needs at different ages, not necessarily in equal amounts, as the parents would do if living. In the second stage, each child´s inheritance is held in a separate trust. The trust is designed to gradually give the child more benefit from and responsibility for the trust assets over time. This approach minimizes the risks that a single financial mistake by the child will result in the loss of his or her inheritance.
Occasionally, clients may have a child with a mental or physical disability. Often the clients would like to provide some financial benefit for the child, but want the child to remain eligible for certain state and federal support. This requires the use of a certain type of trust, often called a Supplemental (or Special) Needs Trust, that contributes to the child´s quality of life while keeping the child eligible for government assistance.
Probably. Although federal tax laws remain the same, there are substantial differences in probate laws from one state to the next. Unanticipated expenses and unintended consequences often result when estate planning documents created for one jurisdiction are used in another.
And it is our own vanity, but we rarely come upon an estate plan prepared in another state, even by a competent estate planning attorney, that we cannot significantly improve.