The five-point estate plan

The five-point estate plan


Many people believe an estate plan starts and ends with a will, but that’s just one piece of the picture. A sound estate plan should meet 5 objectives:  name the people to receive your assets at your death, name the people who will make your financial and health care decisions should you become disabled, avoid probate, minimize estate tax, and protect your assets from risks.  These objectives can be accomplished using 5 legal documents: a durable financial power of attorney, a health care power of attorney, a will, and trust and beneficiary designation. Each of these documents fulfills a specific purpose.

— A durable financial power of attorney identifies the person who will  manage your financial assets when you can no longer do so. The word “durable” relative to a power of attorney simply means that your agent’s authority continues after you become disabled. If you become disabled and did not sign a power of attorney, your family will not be permitted to access your bank accounts and investments, or manage your real estate and other assets, until a court names a guardian for you — an often slow and expensive process. Court intervention means more time, more legal fees, and more stress for your family.

— Similarly, a health care power of attorney names the person who will make your health care decisions, such as authorizing medical procedures, medications and hospital or nursing home admissions. The Rhode Island form of health care power of attorney also serves as a living will and may instruct your agent to withdraw life support when you are terminally ill and your doctors believe you will not recover. A heath care power of attorney can help avoid emotional anguish and legal battles such as those faced by Terri Schiavo’s family, whose parents and husband disagreed for fifteen years about whether to discontinue her life support.

— A will is the legal document by which an individual names who will inherit his or her property. In the absence of a will, the state effectively writes a will for you. In Rhode Island, the law states that when a married person with children dies without a will, his or her assets are split equally between their spouse and their children. Most people are surprised that all assets will not distribute to the spouse. If you would like certain people to receive your assets, you need a will. In addition, a will names both the guardian for your minor children and the executor of your estate — the person charged with ensuring that the terms of your will are followed. A common misperception about a will is that it avoids probate, however assets that distribute under a will are always subject to the probate process.  Jointly-owned property and assets naming specific beneficiaries, (such as life insurance, annuities and retirement assets) distribute independently  from the terms of a will to the named beneficiaries. In effect, these assets avoid probate because the beneficiary designation overrides the will.  Generally speaking, assets owned in an individual’s sole name and without a beneficiary designation pass at death pursuant to the terms of a will, subject to the probate process.

— A trust is a legal arrangement under which one person, a “trustee” legally owns property on behalf of another person, the “beneficiary.”  The trust agreement instructs the trustee how to invest and distribute the trust assets. Trusts can be used for very different reasons. Most commonly, a revocable or “living” trust is controlled by the creator of the trust and used to avoid probate and save estate tax. However, less expensive alternatives for probate avoidance should also be considered and discussed with an attorney. Other trusts, known as “irrevocable trusts,” involve giving up control of assets during life to save estate tax, qualify for Medicaid, or protect a child’s inheritance from a failed marriage, business or imprudence. Future columns will discuss the positive and negative aspects to trust planning in more depth.

— Coordinating beneficiary designations with the terms of an estate plan is an essential part of the planning process. If you fail to name a beneficiary on an asset, it may distribute at death pursuant to state law or the terms of a policy or retirement plan, which may not be consistent with your wishes. If you wish to leave assets in trust for your children when you die to either protect the assets from “creditors or predators” (think ex-spouse), or to preserve a child’s government benefits (think SSI or Medicaid), you must revise your beneficiary designations to send the life insurance or retirement assets into the trust and not to your child directly. After a person dies, a family can be surprised, if not shocked, by beneficiary designations. Prevent this unpleasant surprise for your family and work with your attorney to revise your beneficiary designations, even if it costs a little more.

Attorney Macrina G. Hjerpe is a partner in the Providence law firm Chace Ruttenberg & Freedman. She practices in the areas of Estate Planning, Probate, Estate Administration, Trust Administration, Trust Litigation, Guardianship, Business Succession Planning, Asset Protection Planning, Elder Law and Estate Litigation.