Estate planning is a process that enables you to control the disposition of your property after your death or incapacity and avoid the uncertainties that a state law intestacy can impose. Proper estate planning will help preserve the assets you have worked hard to accumulate over the course of your lifetime. Moreover, it may also minimize or eliminate estate taxes on your assets (which will reduce the amounts your heirs or family may receive) after your passing. For these reasons, among others, it is vitally important to have a fundamental estate plan in place at the very least. The basic estate plan is comprised of the following components: a Trust, Will, Durable Financial Power of Attorney, and Advance Health Care Directive.
Trust
A trust is essentially a relationship between three parties: the ‘settlor’ (or ‘grantor’), who creates the trust and contributes assets to it; the ‘trustee’ who is technically the legal owner of the trust property and administers the trust assets by reinvesting or paying out funds; and the ‘beneficiary’ who, although not the legal owner of the property, is entitled to benefit from it. Often in an estate planning context, the same person or persons occupy all three roles. The rights and powers of the settlor, trustee, and beneficiary are set forth in the applicable terms governing the trust. Again, in an estate planning context, the trust is created for the benefit of the settlor or settlors during their lives, but it allows the settlor or settlors to still maintain control over their assets. In the event of your incapacity or death, the trustee administers the assets the settlor or settlors have transferred into the trust. The trust instructs how the assets are to be managed, and after the settlor’s death, how they are to be distributed. A trust can have more than one settlor and more than one trustee—in a community property state like California, married couples often create a joint trust, where they are each a settlor and a trustee. under certain circumstances, there can be more than one trust—sometimes couples will create a joint trust for their community property and also have an individual separate property trust for his or her separate property assets.
Further, a trust can be either revocable or irrevocable. For basic estate planning, people generally create revocable trusts (also called living trusts or intervivos trusts) during their lifetime. This means that they can alter, amend, or completely revoke the trust at any time prior to death or incapacity. After their deaths, the trust (or some portion thereof in the case of a married couple) becomes irrevocable which means the trust can no longer be changed. The establishment of a revocable trust involves the transfer of your principal assets to the trust by deed or assignment. Certain assets, such as life insurance policies, pension plans, IRAs, 401-k’s and like tax deferred benefits continue to pass pursuant to a beneficiary designation which should be coordinated with the estate plan. Irrevocable trusts can also be used during a settlor’s lifetime for complex estate and gift tax planning.
Will
A will is a document that states what you want to happen to your property at your death. Your will nominates an executor to handle the estate administration and distribution. People who have a revocable trust typically have what is called a “Pourover Will” which states that all property not included in the trust will be distributed at the time of death to the trustee of the trust. This means that most, if not all, of your assets will be handled and managed in your trust instead of under your will. If you have minor children, you can also nominate guardians for them in your will.
Durable Financial Power of Attorney
A durable financial power of attorney (sometimes called a general durable power of attorney or just a durable power of attorney) designates a person called an attorney-in-fact to handle financial rights and obligations that are personal to you. This designation may include financial matters such as paying taxes, managing credits cards, buying/selling real estate, operating a small business, or managing assets not held in a trust. This document supplements a revocable trust and allows your attorney-in-fact to manage your personal affairs if you are unable to do so yourself. The creator of this document is called the principal. Generally, people designate the same person both as attorney-in-fact and as successor trustee to facilitate an efficient management of their assets, so that one person is handling assets included and excluded from the trust.
Advance Health Care Directive
An advance health care directive is a document that allows you (the principal) to appoint a person you trust, called an agent or an attorney-in-fact, to make health care decisions on your behalf if you are unable to do so yourself. This is also the document where you can set forth your wishes regarding medical treatment, end-of-life care, and funeral arrangements.
Charitable Giving
Charitable giving can be a way to provide for charitable or philanthropic organizations which you support after your death or even before you pass away. If your estate is taxable for federal estate tax purposes, charitable giving can also be used to reduce the amount of estate taxes your estate will have to pay. Charitable donations are deductible from your estate. As a result, charitable giving can be an important savings for your estate.
Charitable giving can be accomplished in a variety of ways. The most common way to provide for charities is to simply make a bequest or gift to that charity in your will or trust. You can give cash, stocks, bonds, real property, or a specific percentage of your estate. A revocable living trust can have a provision which makes a charitable bequest, and the remainder of the estate can be divided among the other beneficiaries you have chosen. A charitable gift through a revocable trust (which is not subject to court administration as is a will) can usually be distributed more rapidly than if distributed via a will.
In addition to trusts, there are more complex charitable giving techniques that can be used as part of your estate plan. Several types of irrevocable trusts can be used to provide a benefit for charities. A Charitable Remainder Trust (CRT) is a type of irrevocable trust in which you place assets to provide an annual specified amount for you for a specific period of time or for the balance of your life. At the end of that period, the assets which were transferred into the trust will be given to the charity or charities you have chosen. This type of trust is irrevocable which means you as the donor give up any right to control the assets of the trust, however, depending on the type of asset(s) in the trust, this arrangement may have significant benefits to you in the form of a steady stream of income, an income tax charitable deduction upon formation, and reduced gift, estate, or capital gains taxes.
A Charitable Lead Trust (CLT) is sort of the reverse of a CRT. It is set up to pay an income to a charity for a certain number of years or during your lifetime and upon expiration of the time period or your death, the asset is distributed to your beneficiaries. The basic difference between a CRT and a CLT is that in a CRT, the charity receives the trust assets at the end of the term, whereas in a CLT the charity or charities receive the specified payment stream, and the beneficiaries receive the trust assets at the end of the term.
Other ways you can give to a charity include designating a charity as a beneficiary of a life insurance policy or an IRA. A donor-advised fund is another way if you want to donate to a charitable fund administered by a public charity where you (or your heirs) can select charities for distribution over the period in which the fund is administered. A donor-advised fund is similar to setting up a foundation which would manage your charitable giving. You can also set up your own private foundation which can provide periodic gifts, or can fund scholarships, grants, or donate to other worthy causes. The establishment of a private foundation normally involves a substantial gift and significant paperwork to receive tax exempt status from the state and federal taxing authorities.
Stephen is a Partner with Leech Tishman and a member of the Trusts & Estates Practice Group, where he focuses on the full spectrum of clients’ estate planning needs, trust and estate administration, and succession planning.