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Estate Planning is for the handling of your affairs after you pass away. The main legal tool for this is a Will. Many people also use Trusts for Estate Planning. Life Planning is concerned with handling your affairs during your life, if you become incapacitated. The Life Planning tools are Durable Powers of Attorney, and Health Care Proxies/Directives.
The problems that occur when you fail to plan include the forced distribution of your assets based on the government rules as opposed to your own choice, and the need for costly, and public, guardianship proceedings in the case of incapacity. Almost all planning can be changed or modified over time, but failing to plan can be disastrous when tragedy strikes.
The Basic Tools
A Will is a written document controlling the disposition of an individual’s property at death. It must be written, signed, and witnessed by two competent people. It may be changed at any time but the formalities must always be followed. You should review and update your Will at regular intervals (every three to five years) and upon major life changes (marriages, births, deaths).
In your Will you get to say who will receive your property after you die. You may give specific items to specific people (“my stamp collection to my nephew George”), or general gifts to groups (“all of my property to my children, in equal shares”) or any combination that you choose. In your Will you nominate the person that you want to be in charge of your estate after your death (executor or “personal representative”) and if necessary the person that will take care of your minor children (guardian). When there is no Will the intestate formula in the law determines who receives the decedent’s property. These rules are inflexible and do not allow for any special circumstances.
Estate Taxes are based on the taxable value of the estate. The tax is paid by the Estate before the heirs receive their shares. Many items are included in your taxable estate even though they don’t pass by your Will. Federal law allows a certain amount to pass without any tax. The exemption amount is $5,000,000. Federal law also allows an unlimited amount to pass tax-free to a spouse.
Probate is the official procedure whereby all expenses, taxes, and debts are paid and the remainder of the decedent’s property is transferred to the proper parties. The procedure is supervised by the probate court, whose duty it is to ensure that everything is done fairly and properly. This system protects the intended recipients of a decedent’s property. All property owned solely by an individual must go through the Probate process whether or not there is a Will. Jointly owned property and property with a named beneficiary (life insurance, IRA’s) and property held in a Trust, does not become part of the Probate process.
A Power Of Attorney is a written authorization, granting power to act for another. The “Principal” designates an “Attorney-In-Fact” or “Agent.” It is similar to hiring an employee, however an “Attorney-In-Fact” is usually an unpaid friend or relative. A Power Of Attorney is “durable” when it is written so that it remains in effect even if you are incapacitated, and your Attorney-In-Fact can still carry on your affairs; personal and business (to the extent you granted those powers).
If you become incapacitated without an Attorney-In-Fact your family will have to go to court to have a Guardian or Conservator appointed to handle your affairs. This may cause delays and significant legal costs. With a Power of Attorney, you share your rights and powers with an Agent. In a Guardianship, you lose all of your rights and powers to the Guardian.
This is a special Power of Attorney that names someone to make health care decisions for you if you cannot. Massachusetts law calls this a Health Care Proxy while the New Hampshire term is Power of Attorney for Health Care. The power granted includes authorization to allow or refuse all medical procedures. You put your life in the hands of the person you name as your health care agent, but this is preferable to leaving it uncertain or up to the court system. Your agent’s power only comes into effect when you cannot make health care decisions for yourself. If you can communicate a preference, your wishes will be followed. The person you name in your Proxy will have authority to make life and death decisions for you, if you cannot do so yourself, so you must trust this person with your life. You may also have a statement of your wishes, called a Living Will or an Advance Directive.
You can create flexibility in the management and use of assets with a Trust. Trusts can administer your assets if you become disabled and pass them to (or hold them for the benefit of) your chosen heirs/beneficiaries when you die.
A Trust is an arrangement that transfers legal ownership of property (money, stocks, real estate) from an individual to a trustee who holds, manages and distributes the property for the beneficiaries of the trust. The written terms of the trust control the use and distribution of the property.
The terms of a “testamentary” trust are written into your Will, and are effective only upon death. The handling of a testamentary trust is subject to the oversight of the Probate Court. A testamentary trust must be executed with all of the formalities of a Will. A trust that is separate from a Will is created the moment it is signed. Thus the creator is "living" when the trust terms come in to effect. The formalities for creating and changing a “Living Trust” are relatively simple. Living Trusts are not usually subject to the jurisdiction of the Probate Court.
If the trust, by its terms, can be changed, modified, or terminated, it is called “revocable.” An “irrevocable” trust is unchangeable and cannot be terminated except within its own terms.
The probate process controls the transfer of assets from someone who has died, to those still living. Probate only deals with assets owned by the deceased person. Trust property is "owned" by the Trust and is handled by the Trustee according to the terms of the Trust, and does not go through probate.
Trust terms can be as specific as you want. You can tell your trustee exactly what to do with the trust assets, or you can give general directions and allow your trustee the flexibility to do what is necessary under the circumstances as they arise. Some trusts only give general directions as to caring for the person who created the trust, and so may require that the trustee balance your needs with the needs of the beneficiaries who will receive the trust property after you have died.
You can ensure your proper care by having trust terms that require the trustee to pay for your medical or nursing home care, provide for your additional needs, and to disregard the needs of the future beneficiaries while you still need the benefits of the trust assets.
Most Trusts do not protect assets from nursing home costs. The assets of a Revocable Trust are "countable" for Medicaid eligibility purposes, and will not be safe. An Irrevocable Trust can be used for “Medicaid Planning” purposes.
An Irrevocable Income Only Trust (IIOT) is used for Medicaid and other Asset-Protection planning. The assets of the trust are non-countable for Medicaid purposes and are protected. The general terms of an IIOT are that the creator gives up all rights to the principal assets of the trust, but reserves the right to income generated by those assets. If a house is owned by the trust, the trust creator can still live in it. An IIOT provides flexibility because real estate can be sold, and a new home purchased by the trustee, while keeping the principal assets protected.
An IIOT is irrevocable. You cannot change your mind later. Once you transfer assets to the trust, you can never get them back. Without a Trust, you can sell your home and use the money for a trip around the world or the monthly fee at a retirement home. Once you transfer an asset to an Irrevocable Trust, your use of that asset will be restricted forever. What you gain, of course, is the assurance that your chosen heirs (the future beneficiaries of the trust) will inherit the asset, and it won’t have to be sold and spent on your nursing home care.
This type of trust is used to remove the value of a life insurance policy from your taxable estate. Life insurance owned by an irrevocable trust is not included in your taxable estate. You give up the rights to the insurance policy, including the right to change the beneficiaries, the right to borrow against the policy, and the right to cash it in and get any residual value of the policy. But use of this kind of trust can reduce estate taxes and save your heirs tens of thousands of dollars.
Cautionary Note
This summary is a simplified guide to a complex area of law. Do not act on this summary without the guidance of an attorney at law. This summary is based on Federal, Massachusetts and New Hampshire laws and regulations and may not be accurate in other jurisdictions. Laws are frequently changed; the information in this summary may become outdated and inaccurate. This summary is for educational purposes only and should not be construed as legal advice. Consult your attorney for all legal advice.