Advance Financial Planning
Getting the Legal Work Done
By Cheryl Slean, Staff Writer
Managing and protecting yours and your loved one’s assets is an important part of advance planning. This section will help you prepare for ways to protect your loved one’s money and assets should he or she become too ill or incompetent to manage their finances. It also discusses planning for what happens to the assets after the person dies.
It is not a primary resource on these topics, which can be very complex. For more particular information on preparing a
will,
trust, or
financial durable power of attorney for finances, we suggest consulting an attorney who specializes in estate planning or elder law. Please refer to our
resources for further information.
Getting StartedDiscussing the Issues
As a caregiver, you may be involved as an advisor or co-planner for your loved one’s estate. In some cases you may be called upon to start the planning process yourself. Besides gathering basic information about the person’s age, health status, and assets, it’s helpful to have more in-depth knowledge about the person’s values regarding her relationships, money, and quality of life.
CareCommunity's Advance Planning Tool Kit will help you with this conversation.
Invest in Expert Help
Yes, it’s possible to write a will or durable power of attorney without involving an expert. But keep in mind that estate law is complex, changes often, and varies by state. Unfortunately, it’s easy to make a mistake or let something slip through the cracks. The cost of consulting with an attorney now might be much less than having to deal with mistakes later when your loved one can no longer speak for herself. An attorney can also advise you on how to prepare a will that minimizes probate costs and tax liabilities. Low-income assistance may be available for those who can’t afford to hire an attorney. See here for some
resources on getting legal advice.
Depending on your loved one’s financial situation, estate planning may also involve consulting with accountants, financial advisors, brokers, bankers, and life insurance providers.
Caregiver's Story
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“Finances were my biggest worry. I had made a will with my husband a long time ago, but we did it with a friend and it was kind of casual. When my husband got ill I found an attorney through the Alzheimer’s Association who specialized in elder law. He had it set up so I was the durable power of attorney and he also showed me ways that I could soften the financial pressure and protect myself.
I don’t know how different things would have turned out if we hadn’t made all those changes. But it gave me peace of mind, knowing I had worked with an attorney who specialized in these matters. I had done the best I could to protect our assets, and that was comforting.”—Claire, a caregiver from Seattle
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What Is Estate Planning? For many of us, the word
estate conjures images of vast wealth or mansions with grounds and servants. But estate planning is not just for the wealthy. It is simply deciding what to do with your assets after you pass away. If you or your loved one should die without a will, a court decides who will inherit your house and your bank account, not you. Encourage your loved one to prepare a will or trust while she is still alert and able. This will give both of you peace of mind that the things she values will be put into the right hands with a minimum of fuss.
Estate planning determines the transfer of property at death and a variety of other personal matters, like providing for minor children and requesting funeral arrangements. The core document associated with this process is either a
will or a
living trust (or both). Estate planning often involves the following steps.
- Preparing a list of property to distribute that may include financial assets (bank and brokerage accounts, retirement accounts, stocks and bonds, etc.), real property (houses, cars, furniture, jewelry, gold and silver coins, etc.), and family mementos and other items of sentimental value.
- Deciding how and in what order property and assets should be distributed to family, friends, foundations, charities, and other beneficiaries.
- Providing for guardianship, financial arrangements, and other details concerning surviving minor or disabled children.
- Deciding whether to use a will or living trust, or both.
- Choosing an executor for the will and/or a trustee for the living trust.
- Choosing a durable power of attorney to handle financial matters in case of incapacitation.
- Considering tax consequences: for example, how to ensure that heirs pay as little estate tax as possible.
- Naming beneficiaries for life insurance policies, pensions, and retirement accounts.
- Deciding about dispensation of remains after death and funeral arrangements.
- Preparing, executing, and filing the proper documents.
Durable Power of Attorney
A
durable power of attorney is a document that assigns a person, called an
agent or
attorney-in-fact, to make financial decisions for someone (usually called the signer), either temporarily or permanently. It may limit the actions the agent can do, or give the agent broad authority. It may take effect upon signing, or at some future time--for example, if the signer should become incapacitated due to illness or accident.
Why Have a Power of Attorney?
A power of attorney ensures that your loved one’s financial affairs are handled by someone whose judgment he trusts. If your loved one becomes incapacitated without a power of attorney in place, the decision about who manages his finances may rest with a court. And the court’s involvement could mean a long and expensive
guardianship process, which may end with the court’s selecting an agent that your loved one would not have chosen for himself.
What Should the Document Say?
The legal document may state exactly what the agent is permitted to do. For example, a financial agent might have the power to take any or all of the following actions.
- Buy and sell property, stocks, and bonds.
- Enable or disable trusts.
- Sign checks.
- Open and close accounts with financial institutions.
The document may also exclude certain actions. Or it could give an agent the ability to take any financial action necessary for the person’s welfare. In order to perform some of these acts, like buying or selling property, the power of attorney document must be presented.
Being an Agent
If your loved one asks you to be her financial representative, it’s important that you know how she wants her finances handled in the event she becomes incapacitated. Does she prefer that you sell the stock portfolio before the car or the house? How does she want her investments managed? Does she want to make annual gifts to children or grandchildren? Become familiar with her financial situation and talk over different scenarios for the future. The more you understand your loved one’s wishes for her assets while she’s still alert, the more confident you’ll both be in your ability to manage them should the time come.
WillsA will is a legal document that states how all the property and assets in a person’s estate will be distributed after he dies. Wills goes through a probate link to glossary process, in which a court makes sure the will is authentic and legal and that its instructions are carried out.
What a Will Can Do
A will provides for the distribution of property owned by someone at the time of his death in any manner he chooses, subject to the laws of his state. The document generally lists the assets to be distributed, to whom, and in what order. A will can also do the following.
- Name an executor to oversee the probate process; in some states having an executor eliminates the need for court supervision. An executor can be either a person or an institution--for example, a bank or accounting firm.
- Designate a guardian for any minor or mentally disabled children if both parents are deceased.
- Establish a testamentary trust and assign a trustee, to eliminate the need for court supervision of minor or disabled children and their estates.
- Acknowledge or otherwise provide for other individuals, like godchildren, stepchildren, and elderly parents.
- If someone is acting as custodian for the assets of a child or grandchild, the will may designate a successor custodian and avoid the expense of a court appointment.
- Provide instructions for dispensation of remains, including organ donation, and specify funeral arrangements.
What a Will Can’t Do
Wills cannot specify distribution of assets in violation of the forced-heir laws of states that prevent disinheriting a spouse or children. Also, a will cannot specify distribution of non-probate property, including the following assets.
- Jointly owned property, which passes directly to the joint owner and does not go through probate.
- Any property owned by trusts.
- Annuities (e.g., IRAs) and retirement benefits, which have pre-assigned beneficiaries.
- Life insurance policies--same as for annuities.
Dying without a Will
If someone dies intestate (without a will), state law determines how property and assets are distributed to heirs.
- Each state has a different formula for who receives what, but all involve spouse and children, or if none, other family members.
- The laws may not reflect your loved one’s wishes, but in the absence of a written will, there is very little you can do about it.
- If minor or disabled children are left with no surviving parents, the court will appoint a guardian to raise the children and oversee their assets. This may or may not be the person your loved one would have chosen.
- When there is no will, the probate process is more complicated, time-consuming, and expensive.
A clearly written will is the best way to ensure that your loved one’s property is distributed according to his wishes, with the smallest expense and the least dispute among heirs.
All the responsibility of carrying out the will’s instructions rests with the executor. The choice of who fills that role is therefore very important and should be given careful thought.
If the estate does not hire an attorney, the executor alone is responsible for navigating probate, which means the executor will need to become familiar with estate law and tax law. An executor should be someone who is responsible, honest, and capable of handling financial matters, and must be someone your loved one and her family respect and trust. For large and varied estates, hiring an attorney to assist the executor is strongly recommended. In some cases, an institution like a bank or a foundation may be assigned as executor.
Preparing and Executing a Will
It’s best to make a printed will, rather than a handwritten or oral one. If you and your loved one do not plan to consult with an attorney, many books and websites provide a range of forms that you can use as guidelines. See our
resources for suggestions. States have different requirements about how a will should be
executed. Usually, a notarized signature and the signature of two witnesses are needed. It’s best not to use witnesses who are named beneficiaries in the will.
About Probate
Probate is the legal process that oversees settlement of an estate. The costs of probate are paid for by the estate. The executor is in charge of the process, which is court-supervised. During the probate process, the executor and the court take care of the following.
- Authenticating the will and the executor appointment.
- Gathering all the estate’s assets for distribution. The executor may reconfigure some assets (for example, sell securities or property) to pay the estate’s creditors and taxes.
- Paying all creditors’ timely claims on the estate, in a particular order determined by state law. This includes, but is not limited to, outstanding medical bills, estate and income taxes, secured debt (mortgages, cars, etc.) and unsecured debt (credit cards, personal loans, etc.).
- Cutting off claims of creditors who have not made timely claims. “Timely” means during the probate period, which varies by state, but is usually around 120 days. Estate taxes, which take up to nine months to be assessed, are an exception.
- Making sure all the provisions in the will are legal, and making adjustments when they are not (for example, if the state has laws requiring a certain percentage of assets to go to a spouse).
- Distributing assets to beneficiaries as specified in the will.
Should You Avoid Probate?
The procedures vary from state to state, and some states--California, for example--are notorious for their cumbersome and expensive probate processes. In these states (and for other reasons), a
living trust, which bypasses probate, is often considered as an alternative to a will. There are
pros and cons to each.
Trusts
A trust is another way to describe the inheritance of assets. Every trust has the following components.
- A settlor or grantor, who is the person who owns the property being placed in trust.
- A trustee, who manages the property held in trust according to the provisions of the trust declaration or statement. (The settlor can also be the trustee, at least while the settlor is alive.)
- The beneficiaries, who receive the benefits of the trust. The settlor can also be a beneficiary.
- The assets, which are the properties transferred to the trust.
Depending on what kind of trust it is, it may take the place of a will or be established by a will upon the settlor’s death. Unlike a will, a trust does not go through probate, and is therefore popular in states where the probate process is complicated and expensive.
There are two main kinds of trust. Either one may provide for property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor.
- A living trust is created during someone’s lifetime. It has a trustee who is serving now, and generally owns property that has been transferred into the trust’s name. The trustee can be the same person as the settlor, until the person’s incapacitation, in which case the trust management passes to a successor trustee (e.g., a spouse or child). Upon the settlor’s death, the trustee distributes some or all of the property to beneficiaries and/or continues to manage some or all of it for the benefit of the beneficiaries. A living trust replaces a will.
- A trust created by a will is called a testamentary trust. The provisions for property held in this kind of trust are given in the settlor’s will. The rest of the trust operates the same way a living trust does upon the settlor’s death.
A trust may be either revocable, subject to change or termination, or irrevocable, which cannot be revoked. Assets cannot be removed from an irrevocable trust once they are contributed, but it may be possible to amend some provisions of the trust.
Legal Tip
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| “Most people think setting up a living trust will help them avoid or minimize estate taxes. But if a will is properly drafted, the choice between a living trust and a will is a tax-neutral decision, meaning that neither is more or less effective when it comes to tax savings.”—Jane McCormmach |
Trusts vs. Wills: Pros and Cons
In some states, there may be some tax advantage to setting up a trust. Also, unlike wills, trusts generally do not go through court-supervised probate. No probate means time and cost savings, but it means other things, too, including the following.
- There is no time limit for creditors making claims. This could be a problem with professional people who had clients or patients that could come forward with delayed claims or suits.
- There is no court supervision of distribution of assets. A will could be more appropriate in the case of blended families or other situations in which the court might be needed to referee between competing interests.
- In some states, there may be mini-probate processes available to trusts that secure creditor cutoff and some court supervision.
- A trust can be a more complicated legal document than a will, and it’s likely you’ll need to consult with an attorney to prepare one.
Legal Tip
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| “The pros and cons of using a trust or will should be considered for your state. If you live in a state with a fairly straightforward probate process, you will probably benefit from the creditor protection and court supervision of a will. In a state where the probate process is cumbersome, and you don’t foresee a need for mediation of disputes, a trust may be preferable.” —Jane McCormmach |
Keeping an Estate Plan Up-to-Date
Wills and trusts should be reviewed every couple of years to make sure they still reflect your loved one’s wishes, to record changes in her financial situation, and to make any adjustments necessary due to changes in the law. For example, your loved one may wish to arrange things differently if the threshold amount for estate tax changes, as it frequently does.
Advance Financial Planning FAQs
What if I move?
State laws regarding wills, trusts, and powers of attorney vary. Generally, the laws of the state you live in when you sign these documents apply. If the document was valid when you signed it, it should remain valid if you move to a new state, although some of its provisions may no longer apply, and there may be different tax issues in the new state. It’s a good idea to update your estate documents after a move.
Will my Power of Attorney expire?
Most states permit a “durable” Power of Attorney that remains valid until you die or revoke the document.
Are trusts only for the wealthy?
No. Couples with minor or adult disabled children may set up a testamentary or living trust to take care of things for these children should anything happen to both parents. A trustee manages the children’s assets until they are mature enough to manage their own affairs. Trusts are also becoming more popular as “will-replacements” in states where probate is complicated and expensive.
What’s the difference between a power of attorney agent and a trustee?
A trustee manages property held in trust for the trust, while an attorney-in-fact (agent) manages property held in someone’s name. The distinction may involve little practical difference except for how documents are signed, but legally, the roles are quite different. Also, a trustee and a settlor (creator) of a trust can be the same person, whereas an attorney-in-fact must always be someone else. A power-of-attorney document can limit the scope and time frame of an agent; for example, to as long as it takes to sell a house. A trustee, on the other hand, manages all property placed in the trust until the trust is either amended or dissolves.
Glossary
Advance directives. Documents that provide instructions for healthcare and financial decisions in the case of incompetence, including assigning healthcare and financial representative(s). Advance care directives consist of a durable power of attorney for healthcare and a living will. Financial advance directives consist of a financial durable power of attorney.
Competence. The ability to make informed decisions about financial and healthcare matters (assumed at age 18 in most states).
Do-Not-Resuscitate (DNR) order. A written order that directs medical personnel not to attempt life-saving measures in the case of loss of circulation (heart and/or breathing stopped).
Durable power of attorney for finances. A document that designates someone to handle financial matters in the case of incompetence, including but not limited to terminal illness.
Durable power of attorney for healthcare. A document that designates someone to make medical decisions in the case of incompetence, including but not limited to terminal illness.
Durable. When referring to a power of attorney, it means the agent or proxy assignment is binding until death or the power is revoked in writing.
Estate. Everything someone owns: all of the person’s assets, whether real property or personal property, and liabilities.
Execute a legal document. “Executing” changes a piece of paper to a legally binding document when it is properly signed, witnessed, and notarized. Different legal documents require different combinations of signatures, etc.
Incapacity. Another term for incompetence, specifically pertaining to unconsciousness or other medical condition that impairs mental function.
Incompetence. The inability to make informed decisions about financial and healthcare matters because of injury or disability; usually assessed in writing by two doctors.
Irrevocable trust. A trust which cannot be revoked and from which assets cannot be removed once they are contributed to the trust. It may be possible to amend some provisions of the trust.
Legal Guardian. Sometimes called a
conservator, a court-appointed representative who handles the financial and/or medical affairs of a person deemed incompetent who has not specified their own representatives in advance. Unlike with a power of attorney, a guardian’s performance is reviewed periodically by a court.
Living trust. A trust that goes into effect while a person is still alive.
Living will. A document indicating whether doctors should use aggressive treatment to prolong life in the case of a terminal illness.
No Code order. A specific kind of Do-Not-Resuscitate (DNR) order posted in hospital rooms.
Physician’s Orders forms. A class of medical instruction form that varies from state to state, giving more detailed instructions for life-sustaining procedures besides resuscitation, such as the use of antibiotics, breathing assistance, and nutrition assistance.
Probate. The legal process of proving a will, appointing an executor, and administering and distributing an estate.
Revocable trust. A trust that can be changed or revoked at any time.
Testamentary trust. A trust that goes into effect after a person dies.
Trust. A legal entity, managed by a trustee that holds property in trust for a beneficiary.
Will. A legal document declaring a person's wishes regarding the disposal of their property when they die.
Resources and Further Information
Legal Counsel for the Elderly (LCE) has state‑specific guidebooks about advance directives. To order a booklet, send $5 per booklet (for shipping and handling) to the following address.
Legal Counsel for the Elderly (LCE)
American Association of Retired Persons
P.O. Box 96474
Washington, DC 20090‑6474
National Academy of Elder Law Attorneys answers legal questions; provides referrals to member lawyers.
(520) 881-4005
http://www.naela.org/
American Association for Retired Persons runs a program that gives legal advice on wills and advance directives.
(800) 424-3410
http://www.aarp.org/
Your Area Agency on Aging may offer legal aid to people over age 60.
Check the Eldercare Locator at (800) 677-1116 or
http://www.eldercare.gov/
Local chapters of condition-specific organizations, such as the American Cancer Society (
http://www.cancer.org/docroot/home/index.asp) and AIDS organizations, can provide legal advice, references to attorneys, and other resources.
Hospital associations, medical societies, and bar associations in your state or county, as well as your local area agency on aging (AAA), may also provide advance directive and estate planning advice for your state.
Nolo Press publishes self-help books on legal issues, including sample forms for wills and powers of attorney. (800) 728-3555, or
http://www.nolo.com/.
American College of Trust and Estate Counsel (ACTEC) produces videos about estate planning and taxes, among other advance planning topics, that have been featured on the PBS series “Inside the Law.” For more information, see
http://www.actecfoundation.org/
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Expert Consultant
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Seattle-based Jane McCormmach has practiced law for 30 years, specializing in estate law and probate. She was named to Washington Law and Politics magazine’s “super lawyers list” (top 5%) in her field in Washington state, and also made the magazine’s list of the 50 best woman attorneys in the state in any specialty.
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