FUNDAMENTALS OF ESTATE PLANNING

Transcription

1 FUNDAMENTALS OF ESTATE PLANNING By William S. Moore ECONOMIC EDUCATION BULLETIN Published by AMERICAN INSTITUTE FOR ECONOMIC RESEARCH Great Harrington, Massachusetts Copyright American Institute for Economic Research 1990

2 ECONOMIC EDUCATION BULLETIN Vol. XXX No. 11 November 1990 Economic Education Bulletin (ISSN ) (USPS ) is published once a month at Great Barrington, Massachusetts, by American Institute for Economic Research, a scientific and educational organization with no stockholders, chartered under Chapter 180 of the General Laws of Massachusetts. Second class postage paid at Great Barrington, Massachusetts. Printed in the United States of America. Subscription: $25 per year. POSTMASTER: Send address changes to Economic Education Bulletin, American Institute for Economic Research, Great Barrington, Massachusetts

3 About A.I.E.R. American Institute for Economic Research, founded in 1933, is an independent scientific and educational organization. The Institute's research is planned to help individuals protect their personal interests and those of the Nation. The industrious and thrifty, those who pay most of the Nation's taxes, must be the principal guardians of American civilization. By publishing the results of scientific inquiry, carried on with diligence, independence, and integrity, American Institute for Economic Research hopes to help those citizens preserve the best of the Nation's heritage and choose wisely the policies that will determine the Nation's future. The Institute represents no fund, concentration of wealth, or other special interests. Advertising is not accepted in its publications. Financial support for the Institute is provided primarily by the small annual fees from several thousand sustaining members, by receipts from sales of its publications, by tax-deductible contributions, and by the earnings of its wholly owned investment advisory organization, American Investment Services, Inc. Experience suggests that information and advice on economic subjects are most useful when they come from a source that is independent of special interests, either commercial or political. The provisions of the charter and bylaws ensure that neither the Institute itself nor members of its staff may derive profit from organizations or businesses that happen to benefit from the results of Institute research. Institute financial accounts are available for public inspection during normal working hours of the Institute.

4 Contents INTRODUCTION 1 I. DECIDING ON THE DISPOSITION OF YOUR ASSETS 4 A. Introduction 4 B. Develop Your Dispositive Wishes With Care and then Implement Them Precisely 4 C. Understand the Role ofiïusts and Make the Decisions Necessary Concerning Them 7 ü. DECIDING WHO SHOULD ADMINISTER YOUR ESTATE PLAN A. Introduction 11 B. Responsibilities of Executors, Trustees, and Guardians Executors Trustees Guardians 14 C. The Bases for Selecting the Persons or Entities to Administer the Estate Plan Decide Whom You Would TVust the Most to Serve in a Particular Fiduciary Capacity The Possible Need for Specialized Knowledge and Training in Probate Procedures, Taxes, and Investments Checks and Balances: Different Fiduciaries or Co-Fiduciaries? The Issue of Fees Successors Making Changes in Fiduciaries When Needed 20 m. A REVOCABLE TRUST AGREEMENT AND A WILL? 21 A. Introduction 21 B. Possible Reasons for Establishing a Revocable Trust During Lifetime Avoidance of Probate Avoidance of Onerous State Laws Other Than Those Concerning Probate Avoiding Claims by a Surviving Spouse and Creditors Providing for the Administration and Investment of the Assets of a Disabled or Failing Person During His or Her Lifetime Preservation of Privacy and Avoidance of Will Contests 25 C. Possible Countervailing Considerations Possible Tax Problems The Impossibility orl npracticalityof TYansferring Certain Assets to a Revocable Tïust During Lifetime 26 D. Conclusion 26

5 IV. OTHER NECESSARY ARRANGEMENTS 28 A. Introduction 28 B. Titling of Assets 28 C. Assets Subject to Designation of Beneficiary Forms 29 D. Other, More Specialized Arrangements Concerning the Disposition of Property 30 V. PLANNING FOR ILLNESS AND DISABILITY 32 A. Introduction 32 B. Arrangements for the Administration of Your Property in the Event of Disability Powers of Attorney A Funded Revocable Trust 35 C. Arrangements to Provide for Your Medical Care in the Event of Disability A Durable Power of Attorney for Health Care A Living Will 37 VI. PUTTING IT ALL TOGETHER 40

6 INTRODUCTION* THIS booklet is a companion piece to "Basic Estate Tax Planning," published earlier this year by AIER. That booklet described three useful and well-established methods by which most people can either eliminate altogether or substantially reduce estate taxes on their estates. This booklet considers five essential nontax issues that people need to decide in connection with their estate planning and the factors relevant to their decisions on these issues. Like "Basic Estate Tax Planning," this booklet attempts to focus on the primary issues that confront an individual in planning the disposition of his or her estate. Technicalities abound in estate planning, making it easy to lose sight of the forest for the trees. But it is possible for people to isolate the major issues involved in estate planning and deal with them in a relatively simple and straightforward manner. The objective of this booklet, as well as "Basic Estate Tax Planning," is to assist them in doing so. This booklet is also like "Basic Estate Tax Planning" in that it is not meant to be a substitute for the services of a competent estate planning attorney. It is instead intended to make the process of estate planning with a competent attorney easier, cheaper, and more understandable by describing the major issues the attorney will assist you in deciding and the tools and techniques he or she will use in helping you develop your estate plan. This qualification is an important one, because people who attempt to "go it alone" in estate planning can produce results just the opposite of those they intended. For example, a number of people have used "how to" books to set up trusts during their lifetime and put all their assets in those trusts to avoid probate costs on their deaths. However, as explained more fully below, that will in at least one state result in the imposition of state income taxes that would not otherwise be charged, thereby increasing rather than reducing the total transfer charges. In several other states with simplified probate procedures, the expense and inconvenience of setting up the lifetime trust and transferring assets to it will outweigh any saving in probate costs. The assistance of an attorney familiar with the applicable statutes * This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. I refer those who like complexity and deception in their reading to my mystery novel The Last Surprise, which was published by St. Martin's Press. 1

7 and procedures in the particular state involved, and with all other relevant legal and tax issues, is needed to make decisions such as this. A question people frequently ask, when told that they need a competent estate planning attorney, is how, in this age of great specialization in the legal profession, can they find such an animal. Here are some suggestions: - If you have a friend who is an attorney but does not do estate planning, ask if he or she can, on the basis of personal knowledge or experience, or the personal knowledge or experience of other lawyers whom he or she trusts, recommend a good estate planning lawyer. - Many state and local bar associations have committees or sections devoted to particular areas of practice. Call your state or local bar and ask to speak to someone familiar with the particular section that deals with estate planning matters. Ask that person to give you information concerning the officers and members of that committee or section andreviewthat information to select possibilities as your estate planning attorney. - Also ask your state or local bar if there is in your area an organization of practitioners selected or elected on the basis of their knowledge and experience in estate planning. (Such organizations may include accountants and insurance agents with expertise in estate planning.) If so, get infoimation concerning that organization and its members. Such organizations are often the best source for obtaining an estate planning attorney, since their members are chosen on the basis of their accomplishments in that field. - In addition, ask your state or local bar for information and materials concerning courses that the bar has offered its member attorneys in estate planning in the last few years. Most bar associations will have materials outlining such courses and their instructors, and the instructors giving courses in estate planning to other attorneys are often the most accomplished in that field. - On the basis of the information and materials you obtain from friends, bar associations, and organizations of estate planning attorneys, schedule an initial meeting with one or more attorneys who seem appropriate, and based on that meeting or meetings and your other information, make your selection. Now that you have these guidelines for finding a competent estate planning attorney to assist you, let us turn to the five fundamental nontax decisions concerning your estate planning that you need to make in consultation with that attorney. Those are: 2

8 (1) what dispositive provisions do you want to make, including the question as to whether trusts should be established for certain beneficiaries; (2) what persons or entities should be responsible for administering your estate plan, including caring for any minor or disabled children; (3) whether you should execute a lifetime trust agreement in conjunction with your will and fund that trust, or is only the will needed;* (4) whether you need to retitle assets or take other steps concerning your assets so that they will pass according to your estate plan; and (5) whether you want to make arrangements so that your assets can be administered, and health care decisions can be made for you, in the event you become disabled during your lifetime. * To avoid confusion, it may be useful at this point to clarify the meaning of the terms "trust" and "trust agreement" as used in this booklet and generally. A trust is an arrangement whereby one or more persons the "trustee" or "trustees" invest and administer property for the benefit of one or more other persons the "beneficiary" or "beneficiaries" which typically include not only current beneficiaries but beneficiaries who will not have any right or opportunity to receive the property until some time in the future. To complete the cast of characters, the person establishing the trust is typically called the "settlor" or "grantor" of the trust. The most important point about a trust, for present purposes, is that it is an arrangement that can be established in either a will or a trust agreement. Thus, a person can include provisions for trusts for his children or other beneficiaries entirely in his will, in which case the trusts come into existence upon the person's death. On the other hand, a person can include provisions for a trust in a trust agreement he or she enters into with the trustee or trustees, in which event the trust would come into existence during the person's lifetime. The issue under (3) above, is not whether a person should have trusts for children or others following his death; that issue is covered in (1). The issue under (3) is instead whether it is advisable for a person to incorporate his or her dispositive arrangements in a will and a lifetime trust, rather than just in a will, either to avoid probate costs or for some other reason. Of course, the estate tax planning issues discussed in "Basic Estate Tax Planning" also need to be taken into account in your estate planning, and for persons with large or complex estates or special circumstances, other issues may need to be considered as well.

9 I. DECIDING ON THE DISPOSITION OF YOUR ASSETS A. Introduction It is important for you to decide how you want your property disposed of upon your death, and to incorporate your dispositive provisions in a will or in a combination of a will and lifetime trust. Otherwise, your property will pass according to state laws of succession. Those laws may have your property go to persons other than those you would select as your beneficiaries; or, if those laws did convey property to the same people who would be your beneficiaries, they might have it go to them in ways you would not want if you considered the matter. As an example of the latter point, the state intestacy laws might have your property go to your children on your death. But if your children were minors, that would mean that a guardian would have to be appointed for them. As discussed below, a guardianship is not an advisable means of having property administered for a minor. Thus, you need to decide on your own dispositive provisions. The preceding statement implies that you are completely free to dispose of your property as you wish upon your death, and in this booklet I generally speak as if that were so; but you should understand that that is not completely the case. State statutes often give surviving spouses the right to claim a portion of their deceased spouses' estates, and that right can be exercised even where the deceased spouse wanted no property to pass to the surviving spouse. In addition, a Federal statute gives surviving spouses rights in certain types of pension, profit-sharing, and other retirement plans unless they have waived thoserights.property settlement agreements incident to a divorce can also give a former spouse rights to property in an estate, and creditors of a person also have rights in his or her estate. In the great majority of cases, these factors do not significantly impede a person's ability to dispose of his or her property after death. Where they might be a problem, they need to be understood and dealt with properly. This is yet another reason why you need a skilled estate planning attorney familiar with your particular circumstances to give you "hands on" help with your estate plan. With this important preliminary point understood, we can now turn to the steps you need to take to decide upon your dispositive provisions. B. Develop Your Dispositive Wishes With Care and then Implement Them Precisely Deciding upon the dispositions you want made following your death requires much more than just consideration of which individuals and/or entities you want to be the objects of your bounty. For example, you may want to leave all or the bulk of your estate to your children, but if they are 4

10 still young, you almost certainly will not want to leave it to them outright. If your children are minors, a guardian would need to be appointed to handle their property, and that property would have to be administered in a way that is more inflexible and expensive than necessary. Even if your children are not minors, you may believe that they are too young to handle large amounts of property on their own, and therefore will not want to leave the property to them outright. To deal with these concerns, you almost certainly will want to set up trusts for your children rather than leaving your property to them outright. And to set up such trusts, you must address such issues as who you want to administer your property for your children if you should die while they are still young, what payments you would want made to them, and how old you believe your children should be before the property goes to them outright. In addition, no matter what the ages of your children and whether property is left to them outright or in trust, you should deal with the unfortunate possibility that they may also die before receiving the funds you have left for them under your will or trust agreement. Thus, you must also consider what you want to have happen to your property in that event. Two important maxims will help you deal with circumstances and contingencies such as those presented in the preceding example concerning property left for young children. The first is that you must plan for the disposition of your property as if your death might occur the next day, because you cannot rely on actuarial tables to predict when your estate plan will take effect. Indeed, one of the main reasons to plan now for the disposition of your estate is that we simply cannot predict when life's vicissitudes may strike us down. Thus, in the example above, if your children are relatively young, you must assume that they will still be young at the time of your death. The second important maxim is not to assume that you will have the opportunity and inclination to revise your will or trust agreement if a dramatic event affecting your estate planning occurs. It is possible that you will be disabled at that time and thus unable to make a new will or trust agreement or revise your old one. Also, if the dramatic event is a family tragedy, you and other family members may be so absorbed in the tragedy that you will have difficulty focusing on your estate planning. Accordingly, you need to structure your dispositive provisions so that they take into account all possible contingencies, including the possibility of untimely deaths by children or other beneficiaries. To do this, you should focus on the different circumstances that might obtain upon your death or at any time thereafter and decide what you want done with your property in each case. For most families, the three major scenarios are (1) what disposition should be made upon the death of one parent, (2) what disposi- 5

11 tion should be made after both parents have died,* and (3) what disposition should be made of any property remaining after both parents and all children are deceased. I have found that breaking down estate planning in this manner helps people think in a much more organized way about it, and make better decisions, than they otherwise would. In addition to following these two maxims, you need to refine your estate planning desires in otherrespectsas well. Suppose, for example, that you are helping provide for an elderly parent and want to make sure that help would continue if you were to predecease that parent. In light of all the variables involved when your death will occur, when your parent's death will occur, whether your parent will have increased needs as he or she grows older it is impossible to quantify the amount of an outright, lumpsum gift to the parent that will provide the assistance you have in mind. Moreover, there are disadvantages to a lump-sum gift. If the parent were to die soon afterreceivingthat gift, theremainingproperty would pass under the parent's will, not yours, which might well result in a disposition other than you would make of the remaining property. Thus, a lump-sum gift probably is not appropriate. You therefore need to consider putting the property into a trust for the parent that will provide for him or her during lifetime and then upon the parent's death dispose of anyremainingproperty as you want. In this connection, you need to decide how much property to set aside in trust for the parent, how it should be administered and what payments should be made during his or her lifetime, and what disposition should be made of it following the parent's death. Decisions like these need to be made with respect to all the gifts you plan to make. Usually they are not difficult with respect to several gifts made in a will or trust agreement, such as gifts of jewelry, clothes, furniture and furnishings, or gifts of relatively small amounts of property. Because these gifts are not large, the main decision that has to be made withrespectto them is what should happen if the designatedrecipientof a gift does not survive. However, after these so-called "specific bequests" have been made, the balance of a person's estate, typicallyreferredto in a will as theresidue,remains,and this can be quite large. Deciding how the residue should be divided and how the "residuary gifts" should be made often requires application of both of the maxims discussed above and other methods of refining your wishes. It also requires further consideration of the role of trusts in estate planning and the decisions that need to be made concerning any trusts established. * The issue of what should be done in the event of the simultaneous deaths of both parents generally is subsumed within this broader issue. Tax factors such as those discussed in "Basic Estate Tax Planning" should also be considered in deciding upon residuary gifts. 6

12 C. Understand the Role of TVusts and Make the Decisions Necessary Concerning Them A trust is an arrangement whereby property is controlled and distributed by one or more persons. In many cases there is no need for property to be administered for a person or persons, and thus that property can be distributed outright. This rather obvious statement focuses attention on a fundamental point concerning trusts, which is that a trust is established to deal with one or more specific needs and should be carefully designed to address that need or those needs. Where there is a need for property to be administered for a person or persons, a trust is often the most advantageous method of doing that. The primary reason for this is that trusts are very flexible a person can tailor them just as he or she wants and can name whomever he or she wants to be in charge of them.* It is also worth noting that in many states, trusts are not subject to accounting requirements or court supervision to any extent, which reduces the cost and inconvenience of administering them. Thus, the first step in deciding whether there should be a trust is to determine if there is a specific need or needs that could best be served by a trust. This is obviously the situation in the case of gifts to minor children who do not have the legal capacity or the experience and expertise to administer property. This same rationale may apply in the case of other beneficiaries, such as disabled persons or persons who have had little or no experience managing substantial assets. Another reason for establishing a trust is to provide limited assistance to a person for a period and then have the balance of the assets involved go to another person. This would be the rationale for establishing a trust to provide for an elderly parent in his or her declining years. It might also be a reason to set up a trust for a surviving spouse for his or her lifetime, with the remainder of the trust * Some people are suspicious of trusts because they have heard of situations in which trust funds were "locked up" and either could not be or were not used as intended. Such situations have occurred and will again. In most cases, however, they have resulted because the trust involved was not sufficiently flexible in one way or another. For example, the trust may have provided for fixed payments to the beneficiary but with price inflation those payments became insufficient. Or the trust may have named an institutional trustee that over a period of years took a different approach than the settlor of the trust intended. To avoid these problems, it is generally a good idea to build maximum flexibility into a trust in such ways as giving the trustee at least some discretion concerning payments to the beneficiary and giving someone the power to change the trustee. I do not mean to imply that a significant outright gift should not be made to a person unless he or she has vast investment expertise and familiarity with related legal and tax matters. People can obtain investment advice (as well as legal and tax advice). In my view, the critical test for determining whether an outright gift should be made is simply whether the person has the common sense to obtain any assistance he or she needs to manage the assets received and make competent decisions based on that advice. 7

13 then to go to the couple's children. Trusts can also be advisable for a variety of other reasons, including, as indicated in "Basic Estate Tax Planning," to accomplish certain tax objectives. Certain trusts can accomplish more than one important objective. For example, the charitable remainder trusts discussed in "Basic Estate Tax Planning" can be used to provide a steady stream of income for one or more family members for life, benefit a favorite charity, and obtain an advantageous charitable deduction. Once it has been determined that there is a need that justifies the use of a trust, the issue becomes what provisions should be included in the trust. To a large extent, the specific reason a trust is created will determine what its provisions should be. This point, and the process followed in deciding upon the terms of a trust, can be illustrated by using again the example of a trust for minor children.* The first issue, with respect to trusts for children, is whether there should be different trusts, or different provisions, for different children. For example, if one child has a disability, it may be advisable to set aside a different amount for that child than for other children, and even if that is not done, different provisions concerning distribution usually need to be made for that child than for other children. If there is other reason to believe that one child may have greater needs than another, such as the fact that he or she suffers from a continuing illness, it may also be advisable to set aside more assets in trust for that child. Even if all children are to be treated equally, parents planning their estates have a fundamental decision to make as to what constitutes equal treatment. Many parents believe that equality is achieved if their property is divided into equal, separate trusts for the children when trusts for the children are first set up, which generally will occur upon the death of the second parent to die. However, other parents believe that equality results if all their property is held in a single so-called "pot" or "family" trust until all children have achieved an age at which they are likely to have obtained their educations and then that trust is divided equally. The theory underlying the "pot" trust approach is that children have different needs * One important trust provision the designation of the trustee or trustees is discussed in the following chapter of this booklet. The problems of providing for disabled children are quite complex and trusts for them need to be designed very carefully to deal with often competing considerations. For example, while it would seem logical to require a trustee to make distributions to a disabled child for any needs he or she may have, this often should not be done because it may disqualify the child from receiving certain forms of care under government programs in which the provision of care is dependent upon the resources otherwise available to the child. 8

14 and expenses as they grow to adulthood one may go through medical school while another may go to work after high school and a "pot" trust functions more like a family in providing for the different needs without "penalizing" a particular child for having greater needs than others. Proponents of the "pot" trust approach would in fact say that the opposite approach of dividing a couple's assets into separate trusts as soon as both parents have died can produce a disincentive to children to get the education they need because if they do not get that education, which would be funded from their separate trusts, there would be more in those trusts than if they had done so. As this discussion probably indicates, I am generally a proponent of the "pot" trust approach. Each couple, however, needs to decide which approach best suits their desires and circumstances.* The next question concerning trusts for children is how the assets to be set aside in trust and the income earned on them should be used as long as they are in trust. Since the purpose of the trusts is to provide for the children until they can provide for themselves, the answer is fairly straightforward the income and assets should be used for the children's food, shelter, health needs, other forms of support, and education and training in the broadest sense. Often the provisions of the trust concerning the use to be made of trust income and assets should be this general and the trustees should be given considerable discretion in making payments. That is so because it is impossible to predict all the eventualities that may occur and including too narrowly tailored distributive powers in a trust can result in its not achieving its intended purpose. The third main issue to be resolved concerning trusts for children is when the assets in the trusts should be distributed outright to the children. If children are in their mid- to late teens when the parents do their estate planning, the parents may have a good idea, based on the character, education and experience of their children, when that should be. If the children are younger, though, the parents will often have to rely on their * The decision as to which form of trust is more appropriate can depend on factors such as the ages of the children involved and the amount of assets involved. For example, if there is a wide disparity in the ages of the children, a "pot" trust can prevent older children from receiving property outright when that otherwise would be appropriate. For example, if the children involved were 20 and 10 and a "pot" trust were established providing that the trust was to be distributed outright to the children when the younger child was 25, the older child would not receive his or her share until he or she was 35, 10 years older than the younger child when that child received his or her share. With respect to the amount of assets involved, if there are questions whether the assets available will be sufficient to provide for children's support and education until adulthood, a "pot" trust is usually better because it allows assets to be devoted to particular needs as they arise and saved for future use when anticipated needs do not develop. This is, of course, an application of the general principle that trusts should be flexible. 9

15 general views as to when children become capable of handling substantial assets. A compromise approach is to have one-half of the trust assets distributed at one age and the rest at another, or to have even more partial distributions. Another approach is to provide for the trusts to continue for the children's lifetimes but give the trustee discretion to distribute the trust assets, and thereby terminate the trusts, at any time after a certain age. Sometimes, however, this approach creates tension between the beneficiaries and the trustee. These, then, are the main decisions that need to be made concerning trusts for children. And the same approach of matching the provisions of the trust to the needs for which it is established should be followed with respect to other trusts. 10

16 II. DECIDING WHO SHOULD ADMINISTER YOUR ESTATE PLAN A. Introduction No matter how good an estate plan may appear on paper, problems can arise if it is not administered properly. Thus, the selection of the people to administer the estate plan, including those who will care for any minor or disabled children, is very important. The persons primarily responsible for administering an estate plan are the executors of the decedent's estate (sometimes called "personal representatives"), the trustees of any trusts provided for under the will or trust agreement, and the "guardians" or "conservators" responsible for the care of minor or disabled children. All of these persons are referred to generally as "fiduciaries," which is a term for persons who have certain special types of responsibilities to another person or persons. This chapter of the booklet first describes the responsibilities and functions of each of these different fiduciaries, then discusses the considerations involved in selecting the persons to serve in these capacities.* B. Responsibilities of Executors, Trustees, and Guardians 1. Executors The basic responsibility of an executor is to administer a person's probate estate and pass it on to those designated to receive it under the person's will. A person's probate estate typically consists only of property that the person owned individually at his or her death and of any life insurance proceeds, retirement plan benefits, or other, similar benefits payable to his or her estate. The probate estate does not include property that a person owned jointly at his or her death with another person (because the deceased person's interest in joint property passes automatically to the surviving joint owner at death), life insurance proceeds, retirement plan benefits, or other such assets that are designated to pass to anyone other than the estate, or property that the person put into a trust during lifetime (unless that trust is payable to the person's estate at death, which usually will not be the case). In some cases, such as where a husband died owning all or most of his property jointly with his wife and had his life insurance proceeds and retirement plan benefits payable to her, there would be either no probate estate or only a small one and the executor's duties would be * Many of the same considerations are involved in selecting all three types of fiduciaries, so it makes sense to treat the selection criteria for all three together rather than discussing separately the bases for selecting executors, trustees, and guardians. 11

17 very limited.* In other cases, it may be possible, under the particular state's laws, to waive certain probate requirements. The period involved in administration of a probate estate typically ranges from a few months to a few years, depending upon the size and complexity of the estate, state laws, dealings with tax authorities, and other circumstances. It is important to note, however, that even in large estates, an executor's duties are relatively short term in that they usually last at most a few years. This affects the manner in which certain of those duties are performed, and, as discussed below, it can also affect the choice of an executor. While the functions required in administration of a decedent's probate estate can differ to an extent from state to state, they are fairly standard. Generally, they include marshaling the decedent's assets, making decisions concerning investment of those assets, filing an inventory of the assets with the probate court or other appropriate judicial or administrative entity, filing one or more accountings, and distributing the probate estate as provided in the decedent's will. Certain tax matters are also involved. If the decedent's gross estate exceeds $600,000, the executor has to file a Federal estate tax return reporting all assets in the gross estate and paying any tax due. The gross estate includes not only the individually owned assets that pass into the probate estate, but also the decedent's interest in jointly owned property and other assets such as life insurance proceeds and retirement plan benefits, and the executor needs to value all assets in the gross estate to prepare the Federal estate tax return. A state inheritance or estate tax return may also be required. Moreover, Federal, state, and local income tax returns need to be prepared and filed for any year of the decedent's life other than the year of death for which no returns have been filed. In addition, for the year of death, individual tax returns need to be filed for the decedent computing the income he or she received during the last year of his or her life until the date of death, and the estate as a separate taxpayer has to file income tax returns for income received from the date of decedent's death until the date of distribution. In this era of rapidly fluctuating values in real estate, securities, and other assets, executors need to focus particular attention on their investment responsibilities. Traditionally, the executor has been viewed as one who marshals the assets of a decedent, holds them as long as necessary to administer the estate, and then passes them on to the decedent's beneficia- * If there were no probate estate, the only action required might well be to file the decedent's will, which is required in most states even if there is no probate estate. Many states have so-called "small estate" procedures that require only limited administration where the probate estate is under a certain dollar amount, with the amount varying from state to state. 12

18 ries. However, this traditional view must give way to the realities of the current marketplace. Soon after appointment, the executor should focus on whether there are assets that should be sold, either because funds need to be raised to pay expenses or because the market for the assets is declining and volatile, and he or she should get whatever formal or informal advice is needed to make this decision. The executor should also, if possible, get the views of the beneficiaries concerning possible sales. Where sales are called for, the executor should proceed to make them expeditiously. He or she should also keep a continuing eye out for changes in the value of estate assets and make additional sale decisions where appropriate. Generally, if the executor is not a bank, trust company, or lawyer, the executor will need a lawyer to assist with the intricacies of preparing inventories, accounts, and other documents. In addition, a layperson serving as an executor will often need the services of an accountant to prepare tax returns for the estate. As discussed below, this does not mean that laypersons should not serve as executors (or as trustees or guardians, for that matter). 2. Trustees Trustees, like executors, are responsible for investment of the assets under their care and for preparing such reports as tax returns and accountings concerning those assets and the income earned on them (although trustees often are not required to file formal accountings in court, while executors typically are). There are, however, two significant differences between the responsibilities of executors and trustees. The first relates to the matter of payments and distributions. In the case of a probate estate, the payments and distributions involved are primarily large distributions made after the completion of probate to the beneficiaries under the decedent's will. Executors usually do not make periodic payments or partial distributions to beneficiaries during the period of probate, and even when they do, those distributions are made on a relatively shortterm basis because the probate administration typically lasts only from a few months to a few years;. By contrast, a major function of trustees, if not the major function, is to make ongoing distributions to the beneficiary or beneficiaries in the manner authorized by the terms of the trust. As indicated above, those terms typically set forth certain fairly general purposes for which distributions can be made health, support, education, assistance in purchasing a house, assistance in beginning in a business or profession and give the trustee a degree of discretion concerning whether and to what extent distributions should be made for those purposes. Thus, an important criterion for trustees, particularly as compared to executors, is that trustees should be informed concerning the beneficiaries' circum- 13

19 stances and make reasonable judgments concerning payments and distributions to them based on those circumstances. For example, in the common case of a trustee for young children, the trustee should be a person who either is likely to be informed concerning the children's circumstances by his or her proximity or dealings with them, such as where the trustee is also the guardian or a guardian of the children, or he or she must be willing to inform himself about their circumstances. Of equal importance, the trustee should be a person that you believe will make proper judgments concerning distributions. You do not want a trustee who will pay the children anything they want from the trust just to keep them happy, but on the other hand, you do not want a trustee who will be too parsimonious in providing for your children.* The second important distinction between executors and trustees, one alluded to in the preceding paragraphs, is that executors' duties are relatively short term while trustees' duties can be quite long term. This obviously affects not just distribution decisions but also investment decisions. For example, not only does the trustee for minor children hypothesized in the preceding paragraph have to make current distribution decisions with an eye on future needs, he or she also has to make investment decisions, based on competent advice, with those needs in mind. And in general, he or she should treat his or her trusteeship as a long-term enterprise and make arrangements for receiving investment advice, having tax planning and preparation done, and taking other such steps on a regularized basis. 3. Guardians Guardians are persons appointed by a court to care for and administer the assets of a person who does not have the capacity to do these things for himself or herself, either because he or she is a minor or is disabled. The discussion here will focus on guardianship of minors, because for most * An important point here is that it is generally a very good idea to communicate with your trustees and your other fiduciaries concerning such matters as the types of payments you want made on your children's behalf. The will or trust agreement is itself a form of communication with the trustees, setting forth the general purposes for which trust funds can be employed and the standard of discretion the trustees can employ in deciding on payments. However, because trust provisions should be flexible and because the specifics of your desires for your children will constantly be evolving, there is also considerable need for informal communications. For example, if you want the trust to pay for your children's educations for as long as they go to school, at the best schools they desire to go to, you should tell your trustees and your guardians that. Although guardians are appointed by a court, the court will generally, either because of statutorily set priorities concerning the appointment of a guardian or as a matter of practice, appoint a guardian named in the will of the second parent to die. A minor child's natural parents are considered the child's "natural guardians," and without appointment, they can consent to virtually all actions taken on the child's behalf. 14

20 people this is the kind of guardianship at issue and because guardianship of a disabled person can present certain complicated problems. However, much of the discussion also applies to guardianship of disabled persons. There are two clear-cut aspects of guardianship: (1) care and custody of the minor, and (2) administration of the assets of the minor. The first entails making decisions as to where the minor will live, which is usually with the guardian or guardians, and making decisions concerning the minor's medical care, education, and general well-being. The second involves administration of assets that are owned by the minor himself or herself rather than by a trust. Often there will be very few if any assets that a minor would own outright and that would therefore be administered by a guardian. As indicated above, it generally is advisable to have assets for the benefit of a minor go into a trust for the minor rather than outright to him or her. The reasons for that, as indicated above, are that guardianship imposes expensive and onerous requirements on administration of a minor's assets and that those assets usually have to be turned over to the minor at age 18, the age of majority in most states, which is often too young an age for a person to know how to administer substantial property. To the extent a minor does own property in his or her own name, a guardian for the minor is responsible for investing it and filing court accountings and tax returns concerning it. The most important function of a guardian of a minor usually is to make decisions concerning the minor's care and well-being. This generally includes raising the minor in the guardian's own home, as part of his or her own family, which is the most important role that any fiduciary fills. Accordingly, the guardian should be someone whose values, actions, and overall life you agree with and believe would be good models for your minor child. In addition, your child should be compatible not only with the guardians, but also with the guardian's family, because they will, if necessary, become in essence your child's new family. C. The Bases for Selecting the Persons or Entities to Administer the Estate Plan As indicated above, many of the considerations involved in picking one type of fiduciary involved in administering the estate plan are the same as or similar to the considerations involved in picking the other two typer> of fiduciaries involved. Accordingly, we discuss the applicable considerations together, highlighting respects in which a particular consideration or factor may be of special importance in picking a particular fiduciary. 15

21 1. Decide Whom You Would Trust the Most to Serve in a Particular Fiduciary Capacity This statement seems obvious, but it is worth stating, and using as the starting point for picking fiduciaries, because too often people get bogged down with other, lesser considerations. Many of my clients seem to start the selection process with questions such as whether an executor needs to be a resident of the state involved and know the probate rules, how much investment experience a trustee needs, whether co-fiduciaries should be named to have a "check and balance" or for any other reason, and how much banks charge for probating estates and administering trusts. These questions have their place in the selection process and are dealt with below. But the starting point is, leaving aside technicalities of state law and such questions as whether knowledge and experience concerning specialized subjects like probate are involved, whom would you trust the most to serve a particular fiduciary role. This criterion includes not just honesty, but whether a person has the character and decision-making capabilities required of the fiduciary, and whether he or she can be relied upon to get the information necessary to make good decisions (once again leaving aside for the moment information concerning certain specialized subjects). For example, in selecting a trustee for minor children, you should choose a person who will find out the relevant information concerning the children's needs and other available resources, will make he kind of decisions you believe should be made based on that information, and has the character and fortitude to resist what he or she believes are unreasonable demands. If the trust could last for a fairly long time, you will also want to consider the ability of prospective trustees to plan for the future as well as to satisfy current needs. For the even more important position of a guardian for minor children, you need to select someone you can rely on to raise your children as you believe would be appropriate and to make them comfortable in his or her household. 2. The Possible Need for Specialized Knowledge and Training in Probate Procedures, Taxes, and Investments In general, you do not need to select as executor or trustee a bank or attorney or some other entity or person with specialized knowledge and training concerning probate procedures, taxes, investments, or other specialized subjects. Instead, you need to select someone who you are confident realizes what he or she does not know concerning such subjects and will get the needed help. In most cases, you will be close enough to the people you are considering naming as executors and trustees to know how they handle related matters in their own lives and can determine, on this 16

22 basis, whether they satisfy this criterion. For example, if a person under consideration appears to make a good salary and handle it well, making reasonable judgments about such important investments as houses and cars and possibly having a broker or tax accountant, then the chances are that he will handle his probate, tax, and investment responsibilities as a fiduciary responsibly and carefully. There can be limits on the extent to which a person's lifetime experiences can be extrapolated to how he or she would function as a fiduciary, however. An obvious example here is that a person who has earned a reasonable salary and handled it well probably should not be named as trustee of a multi-million dollar trust, because his or her life experiences simply have not prepared him or her for such a task. One final point concerning the possible need for knowledge and experience concerning specialized subjects is that this consideration is least important when selecting a guardian for minor children. That is so both because the consideration of a person's capacity to raise the children is of great importance here and because specialized knowledge is generally less necessary for guardians than for executors and trustees, at least where the minor child involved does not have large sums of money titled directly in his or her name. 3. Checks and Balances: Different Fiduciaries or Co-Fiduciaries? A question that often comes up, in my consultations with clients, is whether it is advisable to name different persons in different fiduciary capacities, such as one person as the trustee for minor children and another as their guardian, or co-fiduciaries, such as co-trustees, as a means of preventing one person from acting improperly or contrary to the best interests of the beneficiaries. To a considerable extent, the decision whether such a "check and balance" arrangement is advisable is a personal one, based on a person's experiences and resulting views about human behavior. In my view, however, this consideration should not be given great importance for the following reasons: - For many people, there are only a few people they would trust to make the important decisions involved in administering their estate plan and raising their minor children, and often one person or one couple stands above other possibilities as the "fiduciary of choice." In such a case, I generally believe it is advisable to name that person or couple to serve in all fiduciary capacities rather than naming a second choice in one fiduciary capacity merely as a "check and balance" on the first choice. 17

23 - The typical requirements that executors and guardians file annual accountings, the requirement that all three types of fiduciaries file tax returns, and other statutory and procedural requirements and standards, including grounds and procedures for removal of a fiduciary in appropriate cases, provide considerable protection against a fiduciary's running amuck. Further protection could be obtained by requiring that a fiduciary give copies of accountings, tax returns, and other such documents to a third party. In deciding whether to impose such a requirement, you should, however, consider whether it might be counterproductive in that the fiduciary might feel he or she was not trusted sufficiently and was being watched. - There can be competing considerations to the "check and balance" factor. For example, if one person or couple is named as guardian and the children live in their house but another person is named as trustee, the trustee may not know with any precision the child's needs and expenses. Moreover, the guardian may feel placed in an awkward position of going "hat in hand" to the trustee. The possibility that a "check and balance" arrangement will produce this kind of result should be weighed carefully before deciding upon it. For these reasons, then, it is in my view questionable whether different persons should be named in different fiduciary capacities, or co-fiduciaries should be named, simply to establish a check and balance. There can, however, be other, compelling reasons to name different persons as different fiduciaries, or as co-fiduciaries, in particular circumstances. One reason is that different people may have different strengths. For example, if you are convinced that your minor children should be raised by a particular couple but do not believe that they have the experience to administer the amount of funds you would leave in trust, you may want to name them as guardians but name someone else as trustee or name one or both of the guardians as trustees along with another person with considerable experience in handling large sums of money. The latter approach would have the double virtue of establishing considerable identity between the guardians and trustees, which should foster the necessary coordination between the two, and prevent the guardians from feeling they are completely "shut out" from financial decisions. This consideration of preventing people you care about or rely on from feeling left out can be another reason to name co-fiduciaries. Where children are grown, parents often want to name them as co-executors and co-trustees on the death of the surviving parent, at least where there are only two or three children, so that no one will feel left out. In my view, the underlying objective here of leaving to children not just property but the sense that they are valued and trusted generally justifies such a step. 18

24 Whenever co-trustees are named, however, the possibilities for disputes and deadlocks should be considered. Where three or more cofiduciaries are named, this danger can be mitigated somewhat by including a "majority rule" provision.* However, even in such a case, the personalities of the prospective co-fiduciaries and other relevant considerations should be considered, and if the possibility of friction is too great, co-fiduciaries probably should not be named. 4. The Issue of Fees In most states statutes authorize executors, trustees, and guardians to recover fees for their services, as well as out-of-pocket expenses. Typically, these statutes set percentage ranges or other general standards for the fees and a court determines the amount in a particular case based on a petition submitted by the fiduciary involved. In some circumstances in which a fiduciary is not directly under court supervision and is not required to file accountings, as is often the case with trustees, the fiduciary can set his or her own fee without obtaining court approval, subject to the applicable state statutes. In such a case, however, the fiduciary often will seek the approval of the beneficiaries, at least where they have the legal capacity to give approvals, and of other interested parties. Banks and trust companies typically have schedules of the fees they charge for serving as fiduciaries. Lawyers usually charge either based on their hourly rates or based on the standards in state statutes. A fiduciary is also entitled to reimbursement for reasonable services he obtains from investment advisors, attorneys, and accountants. In some states, such as Maryland, the statutory maximum fees for administering an estate apply to the total fees for both the executor and his or her attorney. Thus, where an attorney performs considerable services for an estate, as will often be necessary, the executor will be entitled to recover only a relatively small amount, if any. Aside from these factual observations concerning fiduciary fees, there are two important practical points to keep in mind. One is that while persons are entitled to receive fees for serving as a fiduciary, they are not required to charge fees, and family members and friends, particularly close family members, often do not. This may sometimes be a consider- * Such a provision is generally advisable because the state laws may otherwise require unanimity or be unclear on what would otherwise be required. As discussed above in this booklet, there can also be situations in which at least one resident of the state in which you live must be an executor, trustee, or guardian. In such a situation, it usually will be possible to name the primary person you want to serve as executor, trustee, or guardian in that capacity even if he or she is not a resident, as long as a resident is named as co-fiduciary, and to make formal or informal arrangements so that your primary executor, trustee, or guardian will effectively be in charge. 19

25 ation, particularly where the estate involved is not large and the beneficiaries are young and will have considerable expenses before they are able to care for themselves. The other important practical point is that if banks, trust companies, and attorneys are retained to perform specific functions, their charges usually will be much less than if they act as fiduciaries. For example, a bank will render investment advice to an estate or trust for substantially less than it will charge for serving as executor or trustee. Thus, if you believe a bank is needed only to make investment decisions, you may want to name someone else as executor or trustee and request or require that they seek investment advice from a bank (or broker) rather than naming the bank itself as executor or trustee. 5. Successors Untimely death, disability, and other such problems can occur with respect to fiduciaries just as they can with respect to anyone else. Accordingly, you should be sure to name one or more successors to your fiduciaries or, alternatively, provide that a fiduciary or someone else has the power to designate a successor to the fiduciary. This is particularly important when the initial fiduciaries are fairly old, such as when grandparents are named trustees and guardians for minor children, or when the fiduciary will have to serve for a long period, such as when a trust is to be established for a disabled child. 6. Making Changes in the Fiduciaries When Needed Because the choice of fiduciaries is exceedingly important, you should make changes in the persons named to serve as fiduciaries when circumstances come to your attention that warrant changes. Thus, if a couple named as guardians have divorced* or if you have reason to believe a person named as trustee has become financially irresponsible, you should make a change. In this, as in all other matters relating to the selection of fiduciaries, the interests of the beneficiaries, particularly if they are minor children, must be paramount. You should not let yourself be concerned that a particular family member or friend may be offended that he or she was not named as the executor, trustee, or guardian, or was passed over in the first instance. The first consideration is that you select the best executor, trustee, or guardian. * In this era of frequent divorces, consideration should be given to including in your guardianship provisions a proviso that if a couple named as guardians are divorced at the time a guardian is needed, the couple named as successor guardians are to serve instead. On a light note, one client of mine got to the point that she was skittish about naming guardians for her children because every time she named a couple as guardians, that seemed to doom them to instant divorce. 20

26 ffl. A REVOCABLE TRUST AGREEMENT AND A WILL? A. Introduction A fairly popular estate planning arrangement is one in which a person executes both a revocable trust agreement and a so-called "pour over" will. Under such an arrangement, the revocable trust agreement, not the will, contains the person's principal dispositive provisions. Depending upon the reasons for which the revocable trust agreement is established, the person may during lifetime add all or virtually all of his or her assets to the trust under that trust agreement, add only some of his or her assets, or not fund that trust at all. Upon the person's death, his or her will adds, or "pours over," to the trust under the trust agreement probate assets not added to that trust during lifetime. Typically, such assets as life insurance proceeds and death benefits under retirement plans are also made payable to that trust. The assets added to the trust upon the person's death, along with those already in the trust, are then distributed according to the dispositive provisions of the trust effective upon the person's death.* Although, as I have said, this "pour over" will/revocable trust arrangement is popular, my view is that it is probably overused. In my opinion, the decision whether to use such an arrangement should be based on an analysis of the possible reasons for using or not using the arrangement as applied to the specific circumstances of the person involved, including, in particular, the relevant laws of that person's state of residence. I believe that the arrangement is often used without such an analysis having been made, and that that results in its being used in circumstances where it should not be. In any event, in this chapter of the booklet, I set forth and discuss the principal considerations, both pro and con, bearing on the use of the arrangement. Before turning to this discussion, two preliminary points need to be made. The first is to distinguish lifetime revocable trusts, the type of trusts under consideration here, from irrevocable trusts established during a person's lifetime. As the adjectives indicate, the primary difference between the two types of trusts is that revocable trusts can be amended or revoked entirely during the settlor's lifetime, while irrevocable trusts usually cannot * The trustees under a revocable trust agreement usually are the settlor of the trust and those he or she wants to act as trustees following his or her death. Thus, the decision as to who should be trustees does not differ to any extent depending upon whether only a will or a "pour over" will/revocable trust arrangement is used; the only difference is that when a "pour over" will/revocable trust is used, the settlor is a trustee during his or her lifetime along with those who would be trustees after his or her death under either arrangement. 21

27 be modified to any extent after they have been executed.* This leads to a sharp difference in the uses of the two types of trusts. Because under an irrevocable trust, the settlor gives up control over the property being transferred, such a trust is often used as a means of making gifts to reduce the settlor's income, gift, or estate taxes. See, for example, the discussion of irrevocable insurance trusts and charitable remainder trusts in "Basic Estate Tax Planning." By contrast, revocable trusts cannot be used for these purposes because the settlor retains the right to recover the property transferred to the trust. They are, accordingly, used for completely different reasons, as discussed in detail below. The important point is not to confuse irrevocable trusts with the revocable trusts under consideration here. The second clarifying point is that, as indicated above, revocable trusts are often funded to different degrees during lifetime and may even be completely unfunded during lifetime. Surprising as it may seem, a revocable trust that either is not funded at all or is only partially funded during a person's lifetime can in certain circumstances accomplish important estate planning objectives. On the other hand, there are other reasons for establishing revocable trusts that will not be advanced at all if the trusts are not substantially funded. Accordingly, in discussing the different reasons why a revocable trust may be advisable, I will indicate whether the trust needs to be funded to accomplish a particular objective. B. Possible Reasons for Establishing a Revocable Trust During Lifetime 1. Avoidance of Probate Most people believe the principal reason for establishing a revocable trust during lifetime is to avoid the inconvenience and expense of probate. To prevent assets that would otherwise go into the probate estate from doing so, those assets have to be added to the revocable trust during the settlor's lifetime. Thus, to avoid probate costs, the trust under the trust agreement would have to be funded. In some cases, avoiding probate through the use of a funded revocable trust can produce substantial tax savings. That is particularly the case in states where the supervision of probate is heavy-handed, requiring prior court approval of asset sales or insisting upon nit-picking review of inventories and accounts. In other states, however, although probate proceedings can be aggravating and unnecessary, the savings in time and money likely to be obtained through the use of a funded revocable trust probably will not be great. That is so for the following reasons: - Certain types of assets, such as jointly owned property and life * Revocable trusts become irrevocable upon the settlor's death. 22

28 insurance, retirement plans, and other assets for which a beneficiary can be designated, will not go into the probate estate in any event; the jointly owned assets will pass to the surviving joint owner outside of probate, and the assets for which a beneficiary can be designated will go to the designated beneficiary, which in most cases will be a person or entity other than the probate estate. Such assets will not have to be inventoried or accounted for according to probate procedures whether or not there is a funded revocable trust. - The costs of probate are often overstated to include costs that would be incurred whether or not there was a probate. For example, where a person's gross estate for Federal estate tax purposes exceeds $600,000,* a Federal estate tax return will have to be prepared, and the substantial costs of preparing that return, including obtaining valuations of all the decedent's property, would be incurred whether or not there was a probate. Similarly, the costs of administering and investing property, such as the carrying costs of a house and a broker's investment fees, will be incurred whether the property is in probate or in a revocable trust. When these unavoidable costs are excluded and only "pure" probate costs are taken into account, the savings in probate costs through the use of a funded revocable trust often are not great, even in states with fairly heavy-handed probate procedures. - Many states now have more simplified probate procedures than in the past. For example, in a number of states, the requirement that accounts be filed can be waived in certain fairly common circumstances. Of course, in such states the probate savings through the use of a funded revocable trust would be less. - The costs of preparing the revocable trust agreement and transferring assets to the trust under it, which can require quite a bit of retitling, are offsetting expenses to any savings in probate expenses. Thus, the savings obtained through the use of a revocable trust agreement often will not be great and in some cases there will be no savings at all. 2. Avoidance of Onerous State Laws Other Than Those Concerning Probate In some cases, including dispositive provisions in a separate trust agreement, rather than in the will, will prevent certain onerous state * Remember, the gross estate for Federal estate tax purposes consists not only of the probate assets but also of the decedent's interest in jointly owned property, life insurance proceeds, and other nonprobate assets. 23

29 requirements from applying. In Virginia, for example, trustees of a trust established under a will are required to file court accounts every year that the trust is in existence. However, if a "pour over" will/revocable trust arrangement is used and at least one trustee is a resident of Virginia, no court accountings will need to be filed even though the trust is not funded at all during the decedent's lifetime. In such a situation, the "pour over" will/revocable trust arrangement generally should be used. In certain states, use of a revocable trust will also allow a decedent to avoid residency requirements applicable to executors or trustees under a will. For example, in states requiring that at least one executor or one trustee of a trust under a will be a resident of that state, a person could effectively avoid thatrequirementby establishing a revocable trust during lifetime and funding the trust with most if not all of the person's assets, because then those assets could be administered upon the person's death solely by a nonresident trustee of the lifetime trust, without any executor or trustee of a trust under a will being involved. Thus, aresidentof such a state who felt strongly that he wanted his assets administered after death only by a particular nonresident might establish a funded revocable trust with that nonresident as trustee. 3. Avoiding Claims by a Surviving Spouse and Creditors As indicated above, many states by statute give a surviving spouse the right to claim part of the deceased spouse's property at death even if the deceased spouse expressly did not want that to happen. In some of these states, however, this right to override the wishes of a deceased spouse does not apply to property in a revocable trust at the time of the deceased spouse's death. Thus, a spouse in one of these states who wanted to prevent his or her spouse from claiming a portion of his or her assets could establish and fund arevocabletrust during lifetime. There may also be states in which a person can defeat the right of creditors to make claims against his or her assets at death by putting those assets in arevocabletrust during lifetime, although this is probably possible in at most only a few states. Where such a protection is possible and desired, it might well be advisable to establish and fund arevocabletrust during lifetime. 4. Providing for the Administration and Investment of the Assets of a Disabled or Failing Person During His or Her Lifetime In some cases, a lifetime revocable trust can be advisable not for any reasonrelatingto the disposition of the settlor's assets following his or her death, but because this allows the settlor's assets to be administered and distributed for the settlor during his or her lifetime. Thus, if a person is 24

30 losing capacity or is failing physically, it may be advisable for that person to set up and fund a revocable trust, thereby giving a trusted relative or friend the right to handle his or her property. This rationale for establishing a revocable trust is discussed further below in Chapter V of this booklet, in connection with other alternatives for providing for administration of a disabled or failing person's assets. As indicated there, it can in certain circumstances be a compelling reason for establishing a lifetime revocable trust.* 5. Preservation of Privacy and Avoidance of Will Contests Another rationale advanced for establishing revocable trusts is that this can preserve privacy, since trust agreements, unlike wills, are not public documents. One reason this privacy may be appealing, it is said, is because it may prevent parties disgruntled over the decedent's dispositive provisions from knowing enough about the provisions to challenge them. A funded revocable trust may also prevent challenges more directly because (1) the fact the transfers were made during lifetime rather than by will should make it more difficult to challenge them, and (2) a party would have to bring his or her own court action to challenge them, which would be more expensive than simply filing a claim in existing probate proceedings. In my view, the privacy consideration generally is not a compelling one, because in most cases the best way to deal with a disappointed beneficiary or potential beneficiary is to give him or her the dispositive document, thus showing that there is nothing to hide. The other factors have more weight and should be given careful consideration where there is reason to be concerned about a challenge to the dispositions to be made. C. Possible Countervailing Considerations 1. Possible Tax Problems Under Federal income and estate tax law, there are certain disadvantages to a funded revocable trust as compared to an estate. With respect to income taxes, estates are allowed to have a taxable year other than a calendar year, which trusts are not, and this allows estates to defer the payment of income taxes for a period. In a large estate, this advantage can save beneficiaries thousands of dollars. In addition, trusts are required to make estimated tax payments while estates, for the first 2 years they are in * Another situation in which a revocable trust might be established and funded for lifetime objectives is where significant assets were left outright to a person without the experience or inclination to manage them. In such a case, that person may want to set up a revocable trust to have the assets administered during his or her lifetime. In certain circumstances, a person may also want to establish and fund a revocable trust during lifetime to make a judgment concerning how the trustee would handle the assets after the person's death. 25

31 existence, are not. In a large estate, this advantage can again produce thousands of dollars in income tax savings. On the estate tax side, in borderline cases as to whether certain expenses are deductible on the Federal estate tax return, there might be less chance that the deductibility of an expense would be challenged by the IRS, and that the IRS would prevail on such a challenge, if the expense were related to property in an estate rather than to property in a trust under a trust agreement. In large estates, these tax considerations would probably weigh in favor of having property go into the probate estate at death rather than putting it into a revocable trust during lifetime. In at least one state, Maryland, there can be quite a cost in state taxes in establishing and funding a lifetime revocable trust. In Maryland, state and local income taxes, which in most areas amount to 7.5 percent, are charged on trusts but not on estates. As a result, if a large amount of incomeproducing property were put into a revocable trust during lifetime rather than going into the probate estate at death, the tax cost could be tens of thousands of dollars. Under other states' tax laws, there may also be disadvantages of a "pour over" will/revocable trust arrangement as compared to just a will. 2. The Impossibility or Impracticality of Transferring Certain Assets to a Revocable Trust During Lifetime In a number of states, the laws governing professional corporations prohibit ownership of stock in such a corporation by a trust. Thus, in those states, members of professional corporations cannot legally transfer their stock to fund a revocable trust during lifetime. With respect to certain other types of property, certain Federal tax advantages otherwise available will not be available if the property is put in trust. Accordingly, where a lifetime revocable trust is contemplated, it should be determined whether any of these types of property exist and, if so, whether they make such a trust impractical. D. Conclusion In sum, establishing a lifetime revocable trust is not always the right step. In some cases, such a trust can produce substantial savings or other benefits that will justify the establishment of the trust. In other cases, though, there will be little or no savings through establishment of the trust, and in certain circumstances the trust will result in greater costs or other significant disadvantages. Thus, the decision whether to establish such a trust should be made on a case by case basis, taking into account the particular person's circumstances and the laws of his state of residence. 26

32 And the decision should only be made after consultation with a lawyer familiar with the relevant circumstances and laws.* * It should be noted that certain estate planning attorneys appear to favor the "pour over" will/revocable trust arrangement more than I do. For example, Frederick R. Keydel, in his excellent article "Revocable Trusts" in Use of Trusts in Estate Planning 1988, published by the Practising Law Institute, indicates that this arrangement generally should be used when there will be trusts in the estate plan unless there is a specific reason for not using the arrangement. (I acknowledge the assistance of Mr. Keydel's article in preparing this booklet.) 27

33 IV. OTHER NECESSARY ARRANGEMENTS A. Introduction Even after you have decided upon your dispositive provisions, selected the persons you want to administer your estate plan, and incorporated those decisions in a will or a "pour over" will/revocable trust arrangement, there often will still be steps you need to take to make sure your property will pass as you want upon your death. These steps typically include changing the titles on assets and changing the beneficiary designations concerning assets that will pass according to such designations, and can, depending on your assets, involve other, more complicated arrangements. The need to take such steps, in appropriate circumstances, can easily be illustrated. For example, if you are married and have established trusts under your will for your spouse but you own most or all of your property jointly with your spouse, the trusts under your will will not be funded upon your death. That is so because upon your death, if you predecease your spouse, your joint property will pass outright to your spouse as surviving joint owner and will not be available to fund the trusts. To give yet another common example, suppose that you and your spouse have provided in your wills that your property will pass into trust for your minor children after both of you have died, but you and your spouse have named your children, rather than the trusts for them, as the contingent beneficiaries of your insurance. In that event, if you and your spouse were to die while the children were minors, a guardian or guardians would have to be appointed to administer the insurance proceeds on behalf of your children. That would entail problems increased administrative expenses and distribution of the insurance proceeds to your children when they had attained age 18. Thus, to complete your estate planning, it is essential that you review the titling of your property, your beneficiary designations, and other arrangements affecting the disposition of your property at death and make any changes in those arrangements that are appropriate. In this chapter of the booklet, I discuss the kinds of changes that need to be made in this connection. B. Titling of Assets This first step in making sure that your property will pass according to your estate plan is to check the titles to your assets, to the extent there are title documents, and make changes as necessary. One obvious but sometimes overlooked point here is that if you have 28

34 decided to establish a funded revocable trust during your lifetime because in your state of residence that will avoid high probate costs or be otherwise advantageous, your objectives will not be accomplished unless during your lifetime you title the property to be transferred to the trust in the name of the trustees. Thus, deeds transferring real estate to go into the trust from you to the trustees will need to be prepared and recorded, stock certificates and other such title documents will need to be reissued in the trustees' names, and bank and brokerage accounts will likewise need to be put into their names. In addition, care must be taken so that when new property is acquired that should go into the trust, it is titled in the names of the trustees. Retitling may also be required when property is not to be transferred to a trust during your lifetime but is to go into a trust upon your death. Thus, as indicated in the introduction to this chapter, if property is to go into trust for your spouse upon your death if your spouse survives you, that property must be titled in your name alone, and not jointly with your spouse, to be available to fund the trust upon your death. Because trusts for a surviving spouse are frequently established to save estate taxes, this kind of retitling, and other steps necessary to fund a trust for a surviving spouse, are discussed extensively in "Basic Estate Tax Planning." A special word is in order concerning tangible personal property, which includes such items as furniture and furnishings, clothes, and jewelry. Typically there are no title documents concerning such property, and with respect to tangible personal property of a husband and wife, this property is often presumed to be jointly owned, which means that it passes to the surviving spouse by operation of law upon the death of the first to die. These facts concerning tangible personal property can make it difficult to add such property to a trust during lifetime or at death. Often it is not desirable to add tangible personal property to a trust in any event, because it generally is for personal use and not for investment. But where it is desired to put even tangible personal property into a trust during lifetime to avoid any probate whatsoever, or where there is valuable artwork that it makes sense to go into trust at death, special arrangements need to be made to accomplish these objectives. C. Assets Subject to Designation of Beneficiary Forms With respect to assets subject to designation of beneficiary forms, the basic objective is again to have the assets pass in accordance with the estate plan. Thus, if you have set up an estate plan in which your property is to go into a trust for a surviving spouse or a minor or disabled child, you want to name that trust, rather than the spouse or child, as the beneficiary of the assets. In this connection, do not overlook the contingent beneficiary designations. As indicated above, you and your spouse may want to 29

35 have all your property, including your life insurance and other assets subject to designation of beneficiary forms, pass to the survivor of the two of you, and thus may not need to change your primary beneficiary when you do your estate planning. But if you and your spouse intend for your property to go into trusts for your children upon the death of the survivor of the two of you, you need to designate those trusts, and not your children, as your contingent beneficiaries. These principles apply with respect to all assets as to which beneficiaries can be designated, including life insurance, pension, profit-sharing, and other retirement plans, and IRAs.* You should also be aware that under a fairly recent Federal statute, a substantial portion of the benefits under certain common types of pension, profit-sharing, and other retirement plans must pass to the surviving spouse unless he or she agrees to waive those benefits. Thus, if under the estate plan it is intended for death benefits under such a plan to pass into trust for a surviving spouse rather than outright to him or her, a waiver will have to be executed in order for that to be done. A final point with respect to assets subject to designation of beneficiary forms is that decisions other than the naming of the beneficiaries may be required concerning these assets. In particular, there can be questions whether the death benefits should be paid out in a lump sum or a lifetime annuity for the designated beneficiary or beneficiaries. Generally speaking, it is best to try to prese ve flexibility in making such decisions and provide for the decisions to be made by the designated beneficiary or beneficiaries at death, in light of the circumstances existing then. However, if a decision on such matters has to be made during your lifetime or you feel strongly that a particular choice should be made and do not want to leave the decision to the designated beneficiary or beneficiaries, you should be sure to make the decision during your lifetime. D. Other, More Specialized Arrangements Concerning the Disposition of Property Other, more specialized arrangements may be required to have certain types of property pass in accordance with your estate plan. For example, there may be restrictions on the transfer of interests in businesses, particularly interests in relatively small partnerships and corporations. In some * Under Social Security, Civil Service, and some private employers' plans, there is little if any discretion in designating the beneficiary of death benefits. Many such plans have forms that can be used for such a waiver, but there are certain technical requirements concerning the waiver. To make sure these requirements are complied with, and to understand the consequences of the waiver, you should consult your estate planning lawyer concerning it. 30

36 cases these interests must be sold to the business or the other owners upon the death of one owner, or the business or other owners will have an option to purchase the interest of a deceased owner or a right of first refusal concerning that interest. The partnership agreement or the relevant corporate documents should be reviewed carefully to determine whether such limitations exist, and if they do, it may be advisable, if possible, to change them. There are also a number of other issues that can arise upon the death of a small business owner and that should be anticipated and dealt with during lifetime, such as the mechanism for valuing the interest if there is to be a sale or option to purchase upon an owner's death.* Accordingly, where a small business interest constitutes part of an estate, care needs to be taken so that that interest will pass in accordance with the estate plan, where that is possible, and is otherwise dealt with properly. In addition, if during lifetime you have named yourself as trustee of a trust for a child or as custodian of a gift for a child under a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, one of which exists in virtually every state, you should be sure to name a successor trustee or custodian so that someone can step in and administer the property for the child in the event of your death.** * The choice of such a mechanism is complicated by the fact that it will also bear on the valuation of the interest for Federal estate tax purposes. In fact, where a small business interest will constitute a substantial part of the estate, this will often affect the dispositive decisions made concerning the estate plan, because important issues in the estate planning may be who should manage the business interest after the owner's death and can the mechanisms for proper management be coordinated with having the beneficial interest in the business go to those the owner intended. Other aspects of estate planning can also be affected by the presence of certain types of business interests. Thus, as indicated above, stock in a professional corporation usually cannot be transferred to a revocable trust, so in most cases it will not be advisable for an owner of stock in such a corporation to set up a funded revocable trust during lifetime. To give another common example, Subchapter S stock can be held only in a trust with certain provisions, so if Subchapter S stock is to be put into a trust either during lifetime or at death, that trust will have to contain those provisions. In addition, there are certain Federal estate tax elections available where small business interests constitute a significant part of an estate, and planning may be necessary to make advantageous use of those elections. ** See "Basic Estate Tax Planning" for a discussion of the advisability of making such gifts to children. 31

37 V. PLANNING FOR ILLNESS OR DISABILITY A. Introduction Thus far in this booklet we have primarily discussed arrangements for disposing of your property as you want upon your death. An adequate estate plan also demands that you consider whether to make arrangements to deal with the possibility that you will become disabled and be unable to administer your property or make decisions concerning your medical care. This chapter discusses the basic decisions to be made, and the options available, in this regard.* B. Arrangements for the Administration of Your Property in the Event of Disability When a person becomes disabled, it may be possible for others to make some decisions concerning his or her property. For example, if the disabled person holds a bank account jointly with another person, that other person usually can make withdrawals on the disabled person's behalf. However, absent special arrangements, the individually owned property of a disabled person usually cannot be used for his or her benefit or otherwise administered without the appointment of a guardian or conservator, which is usually quite time-consuming and expensive. Thus, the issue arises whether you should make special arrangements so that your property can be dealt with in the event of your disability. There are two common types of special arrangements used to deal with the management of property in the event of disability powers of attorney and funded revocable trusts and this chapter describes those arrangements and discusses the pros and cons of each. 1. Powers of Attorney A power of attorney is simply an arrangement whereby one person authorizes another to take action on the first person's behalf as his or her agent. Most agency relations are terminated upon the disability of the "principal" the person authorizing someone to act for him but by statute in all states and the District of Columbia, so-called "durable" powers of attorney powers of attorney that survive the disability of the principal are authorized. It is generally essential that a power of attorney appointment be "durable" and thus effective in the event of the principal's disability because that is the primary situation most powers of attorney are intended to deal with. To establish a durable power of attor- * It should perhaps be noted that the arrangements discussed in this chapter must be put in place before you become disabled. If you wait until after you have become disabled or there is a serious question concerning possible disability, any arrangements you attempted to put into place would be subject to challenge. 32

38 ney, the operative document needs to state explicitly that it is to continue to be effective in the event of the principal's disability.* Powers of attorney can and often do include certain provisions that authorize the person acting under the power of attorney sometimes called the "attorney-in-fact" to take certain steps to care for the principal in the event of disability. However, the traditional objective of a power of attorney, which is still its primary objective in most cases, is to allow the attorney-in-fact to handle and administer the principal's assets. It can be a very valuable tool in such circumstances, because it is easy and inexpensive to implement and can allow a disabled person's property to be administered for him. There are also risks to a power of attorney, however, because as discussed further below, it typically gives the attomey-in-fact very broad powers with the principal's property. For this reason, a power of attorney should not be used unless the principal has great trust or confidence in the person (or persons) to be named as attorney-in-fact. There are several options available with respect to powers of attorney. One option available in some, but not all, states is to establish a power of attorney that does not become effective when the operative document is executed, as most do, but instead becomes effective only in the event of the principal's disability. This type of power of attorney often called a "springing" power for obvious reasons would appear to be the perfect type, since it is not effective while the principal is competent and thus is not susceptible to being used improperly in that situation, and then comes into effect precisely when it is needed, upon the principal's disability. There can, however, be practical problems with a springing power. To begin with, if a judicial determination of disability is necessary to activate the power, the advantage of having a power of attorney is to a large extent eliminated, because then a guardianship proceeding, or some other court proceeding, will have to be held. To an extent, this problem can be dealt with by writing into the power of attorney itself a mechanism for determining disability, such as a notarized statement that the principal is disabled by one or more physicians. However, a doctor may be unwilling to give such a statement, even though the principal is disabled, because of liability concerns. And even where such a statement is obtained, the third parties with whom the attomey-in-fact attempts to deal may believe it is risky to act on the basis of the springing power and the notarized statement, and there usually is no obligation on their part to deal with an attorney-in-fact as the agent of the principal. An alternative to a "spring- * Even durable powers of attorney do not survive the principal's death, so powers of attorney are not effective following a principal's death. However, to protect the person acting under a power of attorney, most powers of attorney excuse him or her from liability for any actions taken without knowledge of the principal's death. 33

39 ing" power, when the principal prefers not to have the power of attorney available to be used until he is disabled, is for the principal to execute a durable power of attorney effective from the date of execution and give it to a third party, such as his or her lawyer, to hold until the third party receives satisfactory evidence of disability, at which point he would then deliver it to the person named as attorney-in-fact* Another decision is whether the power of attorney should give the attorney-in-fact limited authority to take a few specific actions or very broad authority to take any actions that may conceivably be necessary in the event of disability. Limited powers of attorney are often used to authorize someone to take a specific action for a nondisabled principal, such as enter into a particular real estate transaction or deal with the Internal Revenue Service, but when the point of a power of attorney is to protect against the possibility that important actions cannot be taken in the event of disability, it is usually a good idea to give the attorney-in-fact authority to act in every conceivable situation. Thus, powers of attorney often give the attorney-infact authority to endorse checks, sell all types of assets, make gifts and establish trusts, and seek approval as guardian if that becomes necessary. It may be that the attorney-in-fact will not be able to exercise effectively all powers given, either because state law does not allow a particular power to be delegated or because third parties are unwilling to deal with the attorneyin-fact when he or she attempts to exercise a particular power. But if you want your attorney-in-fact to be able to exercise a particular power, you should include it in the power of attorney, recognizing that as a practical matter he may not be able to exercise it Another issue is whether to name only one person as attorney-in-fact or two or more, and if two or more, whether to provide that each can act * Another possible option, where a person is concerned about having the power of attorney effective prior to disability, is to give a power of attorney to two people that can only be exercised by both of them jointly. Then neither of the two attorneys-in-fact, acting alone, could misuse the power. However, as discussed more fully below, the fact that both persons given the power would have to be available to exercise it can make it harder to use when it is needed. More generally, if a person is considerably concerned about possible misuse of a power of attorney by the person or persons to be named as attorney-in-fact, he probably should not execute a power of attorney. In this connection, it is advisable to list in detail the powers that an attomey-in-fact is to have under a general power of attorney, rather than just making general statements to the effect that he or she has all powers that the principal could exercise if present, because some third parties will not deal with an attorney-in-fact attempting to exercise a particular power unless the power of attorney specifically sets forth that power. Some state statutes contain what are in essence forms of powers of attorney, and in those states these forms generally should be used because they are more likely to be accepted in the particular state involved. Such statutory forms generally provide that other powers besides those listed in the form can be given, so additional provisions that are desired can usually be added. 34

40 individually or they must act jointly. You may also want to consider whether to name a successor to act if the "primary" attomey-in-fact is not available or becomes disabled himself or herself. If there is only one person whom you trust to have the extensive powers provided under a general power of attorney, then the decision-making is simple: you should name only that person as attomey-in-fact. If there are two or more people you are willing to have serve as attomey-in-fact, then it often is a good idea to name all of them as attomeys-in-fact and give each of them the power to act separately. This is particularly advisable if one or more of them travels to a considerable extent and thus might not be available when needed. In my view, it is generally a good idea to have multiple "primary" attomeysin-fact, rather than a primary attomey-in-fact with successors, because if the successor attempts to act, the third parties with whom he attempts to deal may question whether the "primary" attomey-in-fact is unavailable or disabled. In some cases, however, people may feel more comfortable with a "primary" attorney-in-fact/successor arrangement, such as where a husband and wife desire to name each other as "primary" attomey-in-fact and their children as successors. Finally, requiring that two or more attomeysin-fact must act together usually is not a good idea, because if one is unavailable, the power of attorney cannot be exercised. This can, however, be appropriate in certain circumstances. For example, in some "second marriage" situations, it may be appropriate to name the second spouse and adult children of the first marriage as attomeys-in-fact to act jointly. Thus, a power of attorney is a fairly flexible instrument that can be implemented easily and inexpensively to give someone else authority to deal with the assets of a disabled person. As some of the above comments indicate, the main disadvantage of a power of attorney is that third parties may be unwilling to deal with the attomey-in-fact as agent of the principal, and there often will be no persuasion or compulsion that can, as a practical matter, be imposed to force them to deal with the attomey-infact. Generally, however, if a close family member is given a fairly standard general power of attorney and the power to be exercised is not an unusual one, third parties will deal with the attomey-in-fact.* 2. A Funded Revocable Trust As indicated above, a possible reason to establish a funded, revocable * An unfortunate development concerning powers of attorney is that some banks and other financial institutions have come up with their own forms of powers of attorney and will not act on the basis of other powers of attorney or will do so only after considerable persuasion. As a result, if you decide to use a power of attorney to provide for the possibility of disability, you should not only execute an appropriate durable power of attorney, you should also check with your banks and other financial institutions to see if they require a special form. 35

41 trust during lifetime is that then the trustees can deal with the property in the trust during your lifetime. A distinct advantage that a funded revocable trust has over a power of attorney is that the trustees of the trust are the legal owners of the trust property, not agents for the legal owners, and thus third parties are generally more comfortable dealing with the trustees and often will be required to deal with them, as the owners of the particular property involved. The disadvantage of a funded revocable trust as a means of dealing with possible disability is that it is obviously more expensive and inconvenient to establish a revocable trust agreement than to execute a power of attorney. Because of the increased burden involved,, a funded revocable trust often is not used as a means of providing for disability unless the possibility of disability is significant or there are other reasons for establishing a revocable trust during lifetime. In other cases, a durable general power of appointment is often more appropriate.* C. Arrangements to Provide for Your Medical Care in the Event of Disability! As is the case with management of property during disability, there will often be some health care decisions that can be made by others without special arrangements. Thus, doctors and hospitals will perform many medical procedures for a person who is unable to give his or her own consent upon the basis of consent by a spouse or adult children.** There can, however, be situations in which doctors and hospitals will not perform medical procedures based on these kinds of informal arrangements. In particular, they almost certainly will not cease providing life-sustaining procedures to a person who is terminally ill solely on the family member's insistence that that is what the person would want. Moreover, even if a court proceeding is instituted to compel the doctors and hospital involved to cease providing life-sustaining care, the Supreme Court in the recent Cruzan case held that courts should not give such relief unless there is * Another option to consider, in planning for the management of property during lifetime, including a period of possible disability, is a charitable remainder trust. As explained in "Basic Estate Tax Planning," such a trust can be established during lifetime to provide a steady stream of income to the settlor for his or her remaining years, and this would also relieve the settlor of the burden of managing the property put into the trust. I acknowledge the assistance, in the preparation of this part of the booklet, of the article by Francis V. Collins, Jr. on "Planning and Drafting Durable Powers of Attorney for Health Care" in The Twenty-Second Annual Philip E. Heckerling Institute on Estate Planning (1988), published by Matthew Bender. ** Some states have so-called "family consent" statutes that give certain family members the right to consent to medical care but the application of such statutes in specific circumstances often is not clear. Cruzan v, Missouri Department of Health, 58 U.S.L.W (June 25,1990). In Cruzan, 36

42 clear evidence that that is what the person would want. Accordingly, you should consider whether you want to make special arrangements executing a so-called durable power of attorney for health care and/or a "living will" to deal with the possibility that you will not be able to make medical decisions concerning your care in the future. 1. A Durable Power of Attorney for Health Care The obvious purpose of this kind of power of attorney is to give another person the authority to make health care decisions for you, just as the traditional power of attorney gave one person the authority to administer property for another.* Several states have statutes authorizing durable powers of attorney for health care in one form or another, and they should also be accepted in other states where they are not specifically authorized, since durable powers of attorney are authorized everywhere and there is no reason in principle why the authority to consent to health care for another cannot be included in such a power of attorney. It is, however, possible that where no specific statutory authorization for durable powers of attorney exists, doctors, hospitals, and other health care providers will be unwilling to act on the basis of them. Nonetheless, even in such states, a person who wants to have someone make health decisions on his or her behalf in the event of disability has a better chance of having this done if he or she has executed a durable power of attorney for health care. A durable power of attorney for health care should be as specific as reasonably possible, indicating the types of decisions the principal wants taken on his or her behalf. That is so both because the document will reflect the principal's wishes more precisely the more specific it is and because if the attomey-in-fact is given specific authority to make a particular medical decision, the chances are greater that he will be allowed to do so. In particular, the durable power of attorney should, where this is desired, specify that the attorney-in-fact has the authority to authorize the withdrawal of life-sustaining procedures in certain circumstances and state that the principal wants life-sustaining procedures withdrawn in those circumstances. 2. A Living Will A durable power of attorney for health care can serve a role where a person cannot consent to the withdrawal of life-sustaining procedures, but it typically is also directed to other medical decisions. A so-called "living (continued from p. 36) the Court held that the patient had a constitutional right to decide that intravenous feeding be withdrawn, but that she had not given clear and convincing evidence that that was what she wanted before becoming incompetent. * Provisions for health care can be included in a standard general power of attorney; they do not have to be set forth in a separate document. 37

43 will" is, by contrast, designed solely to direct doctors, hospitals, family members, and others to withdraw life-sustaining procedures in certain circumstances. It also differs somewhat from a durable power of attorney for health care in that it does not authorize an agent to make the decision to withdraw life-sustaining procedures; it constitutes a direction by the person himself or herself that that be done. A number of states have enacted statutes authorizing living wills. The problem with most of these statutes is that they authorize the withdrawal of life-sustaining procedures in fewer situations than most people would want. For example, many living will statutes authorize the withholding of life-sustaining procedures only if a person is terminally ill, and not if he or she is in an irreversible coma, and many do not in any circumstances authorize the withdrawal of certain life-sustaining procedures such as intravenous feeding.* The Supreme Court's decision in Cruzan indicates that the Supreme Court would uphold a person's right to direct the withdrawal of life-sustaining procedures in situations not covered by many living will statutes. The problem, however, is that if a particular situation is not covered by a state's living will statute, hospitals and doctors in that state might well be unwilling to authorize the withdrawal of life-sustaining procedures in that situation. It might well be possible to compel them to do so, on the basis of Cruzan, but that probably would require an expensive and time-consuming procedure. In these circumstances, the determination of the steps that people who want life-sustaining procedures withdrawn in certain situations should take to effectuate their wishes will depend upon the specific circumstances in which they want life-sustaining procedures withdrawn and applicable state law. If a state has a statutorily authorized living will form or specifically authorizes the withdrawal of life-sustaining procedures in certain circumstances under a durable power of attorney for health care and individuals are satisfied to have life-sustaining procedures withdrawn only in the circumstances covered by the state authorized living will or durable power of attorney for health care, those individuals need only to execute the authorized living will or durable power of attorney for health care. However, in states where there is no specific legal authorization for a living will or for a durable power of attorney for health care, or in states where the living will or durable power of attorney for health care does not * The state statutes typically provide that instructions other than those in the suggested form of living will given in the statute can be added if those additional instructions are not inconsistent with the statutory form. However, if the statutory form specifies that lifesustaining procedures can be withdrawn when the person is terminally ill, an instruction that life-sustaining procedures can be withdrawn in other circumstances might be viewed as inconsistent with the form. 38

44 authorize the withdrawal of medical care in all the circumstances in which a particular individual wants that done, it may be advisable to execute a combination of documents. These could include both a living will and a durable power of attorney for health care and in appropriate cases an additional document indicating that the individual wants life-sustaining procedures withdrawn in cases in addition to those specifically authorized by the state's existing statutes and case law.* * Persons interested in having life-sustaining procedures withdrawn in certain circumstances should follow developments in this area of the law carefully. Cruzan and the interest and publicity it has generated are likely to lead to significant developments in this area of the law. 39

45 VI. PUTTING IT ALL TOGETHER NOW that we have been through the basic issues involved in estate planning, let us see how they might be dealt with in a particular situation.* Suppose that a married couple, Ralph and Nancy Barnett, both 35, have two children, Megan, age 9, and James, age 7. Ralph is an adjuster for an insurance company while Nancy is a teacher but has stayed home while the children are young and plans to do so for another 2 or 3 years. The Barnetts have the following assets: Asset Ownership Value Residence Tenancy by the Entireties $100,000 (in equity) Checking account Joint $ 15,000 Stocks and bonds Joint $ 50,000 Tangible personal property Joint $ 35,000 Retirement plan Ralph $ 75,000 IRA Nancy $ 15,000 Life insurance Ralph $150,000 (face amount) Life insurance Nancy $ 50,000 (face amount) Ralph has named Nancy as the primary beneficiary and the children as the contingent beneficiaries of his retirement plan and life insurance. Nancy likewise has named Ralph as the primary beneficiary and the children as the contingent beneficiaries of her IRA and life insurance. The Barnetts' total assets are considerably below the $600,000 that can be shielded from Federal estate tax upon a person's death, and if one of them were to die in the next few years, the property left by that person almost certainly would be needed to raise their children. On the basis of these facts and the advice of their estate planning attorney, they have decided that it is not necessary at this time to include in their wills or trust agreements the "bypass trust" arrangement discussed in "Basic Estate Tax Planning" as a means of saving estate taxes upon the death of the survivor of a couple. Instead, they decide to provide that upon the death of the first of them to die, that person's property will pass to the survivor. As a practical matter, since all of their property other than their insurance, * Of course, these basic estate planning steps would need to be coordinated with estate tax planning. Comparing this chapter of this booklet with the "Putting It All Together" chapter of "Basic Estate Tax Planning" will give you a good idea of how this should be done. 40

46 Ralph's retirement plan, and Nancy's IRA are owned jointly, the only step necessary to accomplish this would be to designate each other as primary beneficiary of the insurance, retirement plan, and IRA. However, since they may acquire assets in their separate names in the future, they will include in their wills or trust agreements a provision that separate property of the first to die will pass outright to the survivor. The Barnetts also decide that upon the death of the survivor of them, they want their property to pass into a "pot" or "family" trust for their two children that will continue until their younger child is 25, if both their children have not already attained that age by the survivor's death. If both children have become 25 by the survivor's death, then property will go outright to them in equal shares. The Barnetts prefer the "pot" trust arrangement to "separate share" trusts because they like the fact that the "pot" trust will function much as a family, authorizing distributions based on the different needs of the different children while they are young without having those distributions "count against" the eventual shares of their estate that the children will receive. Also, because their children are close in age, they do not believe the "pot" trust arrangement will result in any unfairness to their children or require that property be held in trust for their older child for an unnecessarily long period.* The most difficult question for the Barnetts is the persons they should select to manage their estate plan and care for their children. Nancy has an older brother John, 45, a businessman, and he and his wife Ruth, 42, a commercial artist, have two college age sons. Ralph has a sister, Ann, 34, an accountant, who is married to Ted Drake, 33, a small businessman. The Drakes have one child, Ruth, age 5. The Barnetts decide to name the Drakes as their guardians, primarily because they still have a child at home. They name John and his wife as successor guardians. Because of John's business and investment experience, and because they want him to continue to be in touch with their children if something should happen to them, the Barnetts decide to name the Drakes and John as trustees, with the survivors to serve if anything should happen to any one trustee. They include a majority vote provision, however, because they believe that while the Drakes should get John's investment advice, they also believe that as the people who would be raising their children in the event that that becomes necessary, the Drakes should be the primary decision-makers. There will be little if any need for a probate, and therefore small probate costs, upon the death of the first of the Barnetts to die. That is so * The Barnetts also decide upon contingency provisions so that in the unlikely but possible event that any of their property remains following their deaths and the deaths of their two children, that property will go to any surviving issue of their children, and if there are no such surviving issue, to specified family members and charities. 41

47 because their joint property and their assets subject to designation of beneficiaries will pass outside the probate estate and as discussed below, they will not have to retitle property or take any other steps to have their property pass as they want upon the death of thefirstto die. The Barnetts' estate planning attorney also advises them that there is no other reason, under their state's laws or otherwise, why they should set up and fund a revocable trust during their lifetimes. Accordingly, they decide to have only wills rather than a "pour over" will/revocable trust arrangement. Because the Barnetts have decided that for now they will have the property of thefirstof them to die pass outright to the survivor rather than setting up a "bypass trust" arrangement upon the death of thefirstto die, they can leave their property titled as it is and their designations of a primary beneficiary for their insurance, retirement plan, and IRA as they are.* However, they will need to change their contingent beneficiary designations so that if both of them should die, their property would not go outright to their children, necessitating the appointment of a guardian and undercutting the trust provisions in their wills. Accordingly, they will designate the trustees of the "pot" trust for their children to be established upon the death of the survivor of the two of them as their contingent beneficiaries. Finally, although the Barnetts are relatively young, they want to protect against the possibility that one of them will become disabled. Accordingly, they execute durable general powers of attorney naming each other as attomeys-in-fact and John, his wife, and the Drakes as successor attomeysin-fact, with each of the successors having the authority to act separately. They include in the powers of attorney provisions authorizing the attorneyin-fact to make decisions concerning health care, including decisions on the withdrawal of life-sustaining procedures in certain specified circumstances, which are broader than those covered by the state's "living will" statute. They also execute a "living will" in compliance with the state statute and a separate one authorizing the withdrawal of life-sustaining procedures in broader circumstances than those covered by the state statute. By making decisions such as these on the five essential nontax issues addressed in this booklet and also taking into account the fundamental estate tax planning issues discussed in "Basic Estate Tax Planning," most people can develop their own appropriate estate plan and put it in place. Accordingly, if you do not now have àíí estate plan in place or do not have one that you believe adequately deals With these issues, you should work with a competent estate planning attorney tö develop and implement such a plan. * See the "Putting It All Together" chapter of "Basié Estate Tax Planning" for an illustration of the kinds of steps that need to be taken when å "bypassing trust" is to be established and funded upon the death of the first to die. 42

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