Estate Planning 101: The Basics

1. What is a Will and why do I need one?
In a recent Harris Interactive survey of the general population, done for rocketlawyer.com, 61% of Americans do not have a Will. The reasons given for not having a Will: they haven't gotten around to it, they don't think it is urgent, and they don't have a lawyer.

A Will is an important document that dictates to whom your property will pass upon your death, and how your property will be distributed. Most people have an idea as to whom they would like to distribute property upon their deaths, and a Will is the instrument that allows a person to dictate his or her wishes. No matter how many assets a person may have (i.e., the size of his or her estate), a Will is a very important document to have. A Will is one of the only documents in which you can name Guardians for your minor children after you die. If you wish to give property to a person who is a minor or disabled, you can establish a trust for their benefit in your Will which will allow a responsible person to decide how to use the money you have left for the minor or disabled person. Also, if you have a large estate, a Will can provide certain estate tax savings under the law.
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2. What happens if I die without a Will?
Most people think that if they die without a will, their spouse will automatically get everything. This is NOT the case... Dying without a will is called "intestacy." If you die without a Will ("intestate") the laws of New York State dictate who will administer your estate and to whom your property will pass. Many people are surprised by what the intestacy laws say. For example, if you are married and have children, your property will not automatically pass to your spouse. Instead, your spouse will receive the first $50,000 from the estate, and the balance will be split between your spouse and your children. If your children are minors, the assets will be placed into a special custodian account with a person the court names as custodian. Your spouse may need to account to the court as to how he or she spends the share that has passed to the children.

The situation described above is usually not what a person wants to have happen with their property after their death. However, without a Will to dictate your wishes, you will not be able to stop this process. Also, if you die intestate leaving no spouse and no children, your parents and siblings will inherit the assets left in your estate, even if your wishes were contrary to this.

What about unmarried partners?
A Will is even more important to have if you want to leave assets to a partner that you are not married to. In New York, the laws governing estates for people who die intestate are very harsh for unmarried couples. Even if you have been living with your partner for 15 or more years, that partner could end up with nothing and even be forced out of your shared home if there is no Will that dictates your wishes for your partner to take from your estate.

KEY POINT: it is VERY important for everybody to have a Will so that your wishes are followed through after you die rather than leaving it up to the courts to decide what should happen with your property.
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3. What about my retirement accounts (401(k), IRA, etc.), pension plan, and life insurance policy?
When you sign up for a retirement account, pension plan or life insurance policy, the plan typically asks you to designate who the beneficiaries of those plans would be when you die. The beneficiaries you name in each individual account are the ones that will receive the assets in these accounts automatically upon your death. Therefore, you could have a situation where your beneficiaries of a life insurance policy are different from the beneficiaries in your will. In this case, the beneficiaries of the life insurance policy could take those assets, even if your will says otherwise.

Beneficiaries of a life insurance policy generally receive death benefit proceeds income tax free. This is unlike property disposed of in a will because insurance proceeds do not automatically go through probate.

It is a good idea to review your beneficiaries of your existing plans periodically, and especially whenever your marital status changes or you are changing your Will. Be sure to contact a qualified tax and legal professional if you have any questions regarding the beneficiary designations you have made.
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4. What is a "Living Will"?
A "Living Will" (also known as an "advance medical directive") is a document that states what type of medical care you would like to receive should you become terminally ill or unable to communicate your wishes regarding medical treatment. Unlike a regular Will, a Living Will is used when you are alive, not upon your death.

Healthcare providers take your wishes regarding your medical treatment very seriously. A Living Will is one of the best ways to have a say in your medical care when you can't express yourself otherwise.
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5. What is the difference between a Living Will and a Healthcare Proxy?
A companion document to a Living Will is a Health Care Proxy or Medical Power of Attorney. In this document, you name someone to make medical decisions for you in the event you are unable to do so yourself. You do not need to be terminally ill for the Health Care Proxy to take effect, just unable to make your own medical decisions.

It is important to know that the terms of your directives included in your Living Will are subject to interpretation by your doctors and the medical institution that is undertaking your care. Because of this, your chances of enforcing your directives are increased when you assign a person of your choosing to be your health care agent and to advocate on your behalf to your doctors.

*** NB: You should make sure your doctor has a copy of your Living Will and Health Care Proxy. It is also recommend you keep copies in your nightstand, glove compartment, and take a copy on vacations with you, so that your wishes will be known in the event of an emergency.
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6. Do I need a Power of Attorney?
Maybe. A Power of Attorney is a very important document that allows a person that you name to make financial decisions on your behalf. It is yet another measure to ensure that if for some reason you are unable to handle the business of your life (i.e., paying bills, managing investments, or making key financial decisions), someone that you designate is able to manage your financial affairs.

A Power of Attorney can be limited, as in the case where you give the agent the power to close on the sale of your home, or general, where your attorney-in-fact (the person you designate as your agent under the Power of Attorney) can take any and all actions with your finances that you would be able to take.

Also, a Power of Attorney can take effect immediately and continue to be effective if you become incapacitated (a "Durable" Power of Attorney) or it can become effective once you become incapacitated (a "Springing" Power of Attorney). A Durable Power of Attorney removes any question or doubt as to whether the document is effective or not. However, with a Springing Power of Attorney, your designated agent would need to show proof, acceptable to the third party, of your incapacity. It is important to keep in mind that a Durable Power of Attorney is effective immediately, and your agent does not need to prove your incapacity in order to sign your name.

If you become incapacitated without having assigned a power of attorney, the courts may have to step in and appoint a guardian on your behalf that will be allowed to manage your affairs. The guardianship proceedings could be costly (well over $1,000) and the person chosen to be your guardian may not be someone you would have picked. Therefore, it is very important for you to consult your attorney to determine which type of Power of Attorney is necessary for you.
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7. What is a Trust?
A trust is a legal mechanism that allows you to put conditions on how your assets are distributed after you de. Typically, a Trustee is appointed and given managerial power over certain assets that are held in the trust for the benefit of another person or persons (the beneficiaries to the trust). The Grantor or Settlor is the person who creates the trust. The Trustee is not allowed to use the assets in the trust for his or her own benefit in the capacity of the Trustee. All of the assets must be managed and distributed for the benefit of the beneficiaries and according to the Grantor's wishes. A trust minimizes estate and gift taxes, and it also distributes assets to your designated beneficiaries without having to go through the probate process after you die.

A trust is very flexible in that the Grantor may also be a Trustee or Beneficiary, and a Beneficiary may be a Trustee. There are many different reasons for creating a trust, either while you are alive (an "inter-vivos trust") or in your Will (a "testamentary trust"). Some of the most common reasons to set up a trust are:

  • • To provide for minor or disabled beneficiaries
  • • To make gifts to beneficiaries where there is concern about the beneficiaries controlling the assets
  • • If you want to leave your estate to your beneficiaries in a way that is not directly and immediately payable to them upon your death (e.g., you don't want your minor children getting $100,000 completely at their disposal until the attain the age of 25, or you want your children to receive their inheritance in 3 parts)
  • • To better protect your assets from creditors and lawsuits
  • • To take advantage of certain exemptions and exclusions in the gift and estate tax laws
  • • To provide for a disabled relative without disqualifying him or her from Medicaid or other government assistance
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8. What is a Living Trust or a Revocable Trust?
A Living Trust or a Revocable Trust is a special type of trust where the Grantor is both the Trustee and Beneficiary during his or her lifetime. A Revocable Trust is essentially a Will substitute, as it will control the distribution of your assets upon your death instead of your Will. In this case, your Will could say, "distribute any assets passing through my Will to my Revocable Trust". You also have the ability to name a successor trustee, who not only manages your trust after you die, but is allowed to manage the trust assets during your lifetime if you become unable to do so.

There are specific situations where it is appropriate to use a Revocable Trust. One is if you live in a state with a lengthy and expensive probate process (like in New York). Another reason is privacy - a Will is a public document but a Revocable Trust is not. A further reason depends on the types of property that you own. For instance, real estate owned in another state is subject to a probate proceeding just for the real estate in that other state - this can be expensive and time consuming. If the Revocable Trust owned the real estate instead of you, the additional probate process would be avoided. Also, it can be beneficial for IRA or Qualified Plan assets to be payable to a trust to achieve some tax savings and control the distribution of the IRA or Qualified Plan to your beneficiaries.

IMPORTANT NOTE: Any assets that are not retitled in the name of the trust are subject to probate through the courts, and if you have not specified in a Will who should get those assets, a court may decide to distribute those assets to heirs that you may not have chosen. So, even if you have a Revocable Trust holding most of your assets, you should still have a "pour-over" Will which directs that any assets outside of the trust at the time of your death are put into the trust so that your assets are distributed according to your wishes.
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9. Does a Will or Revocable Trust help me save taxes?
Maybe. Either a Will or a Revocable Trust can be designed to help you reduce the tax burden on your estate. If your Will or Revocable Trust has been drafted to reduce taxes, it is important that you hold title to, or own, your assets in the proper way to take advantage of the tax savings created in your estate planning documents. Your Will distributes property titled only in your name alone with no beneficiary. Joint property passes to the joint property holder; property with a named beneficiary, such as an IRA, insurance policy, or POD ("payable on death") bank account, passes to that named beneficiary on your death, outside of your Will. Accordingly, you can have the most tax friendly Will ever designed, but if none of your assets are distributed through it, it won't save you any taxes.
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10. How much does a Will cost?
It depends. The fees for creating an estate plan can range from a few hundred dollars to a few thousand or significantly more. It all depends on what kind of assets you have, who your beneficiaries are, and most importantly, what your goals are. Every situation is different, however most attorneys usually have a flat fee system in place depending on which documents you need added or modified as part of your estate plan.
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If you have any questions regarding your current situation or if you are in need of preparing any of the documents discussed above, contact Duggan & Pawlowski LLP today for a free consultation!