Estate Planning, Basic Documents, and Why They Are Important
When the singer Prince passed away in 2016 at age 57, he left behind an estate worth about $200 million. He was twice divorced and unmarried at the time of his death and had no children. Prince had numerous full- and half-siblings. Two of the siblings predeceased Prince, one of whom had a child. These people and others claimed to be rightful heirs to part of the estate; the situation was made even more complicated by the fact that Prince did not have a will! Since he didn’t have a will, Prince did not exercise his right to determine who would and would not inherit a share of his estate or which shares the heirs would inherit.
In 2020, actor Chadwick Boseman passed away leaving behind a $4 million estate. Boseman starred as the Black Panther in the Marvel superhero franchise. Like Prince, Boseman did not have a will or any estate planning documents completed. As a result, his family lost more than $900,000 in lawyer fees alone as the estate passed through the probate process.
Basic estate planning, and the documents produced, are essential to avoid drastic results like these. Even small estates warrant thoughtful planning. Estate planning is for everyone who has personal belongings, a home, property, financial accounts, or other items and would like them to be distributed a certain way after death.
A basic will can save your estate money and your loved ones further grief and logistical gymnastics when administering your estate. Ancillary documents such as a durable power of attorney, health care proxy, HIPAA release, and living will further clarify your wishes and afford your agents and loved ones ease in navigating and carrying out your plans.
What are the basic documents and what do they do?
WILL OR TRUST
At the most basic level, a will is a legal document that instructs what to do with your estate (income, assets, personal effects, real property) upon your passing. It dictates who your beneficiaries are, who will handle the legal affairs for your estate, and who will care for minor children. If you do not have one, it is likely the laws of your state and the court will decide those matters for you. In New York, for example, if you are married and have children and die without a will, $50,000 and half of your estate will go to your spouse, and the balance will go to your children. Many people assume their entire estate would go to their spouse.
Alternatively, if you have a will, after your passing your will must be submitted to the probate court (called the Surrogate’s Court in New York) and the court will authorize your executor, who you named in the will, to carry out the business of your estate. A trust is a different instrument, which accomplishes the tasks much the same way, but avoids the probate process. A trust must be funded with your assets prior to your passing; that is, your accounts and property must be placed in the name of the trust, so the trust instrument works correctly as intended. Your trustee will administer the trust pursuant to its terms and conditions.
One of the most profound decisions a will memorializes is who you would like to care for your minor child(ren) if you have passed away and no other parent is living or able to take custody. Families often are left debating who is best for the child and who you would have wanted and often the scenario has to be played out in court with a judicial determination naming a guardian. Alternatively, you as the parent decide who that person will be and leave those instructions under the will. Absent any rare and unusual circumstances, your will controls that appointment and must be followed.
On another level, a properly drafted will can also help you save on estate taxes. Specific techniques used to draft what is commonly referred to as tax-planning documents can save your estate from paying a “death tax” to your state. Not all states have estate or inheritance taxes. Some, like New York, have an estate tax “cliff” that, if triggered, can cause your entire estate to become taxable. In New York, the estate tax exemption is currently $6,580,000. That exemption is phased out if your taxable estate exceeds 105% of the exemption amount ($6,909,000) and if you exceed that amount, your estate is taxed on the first dollar of the estate, not just the amount over the exemption amount. That is why it is referred to as a tax “cliff’ because if your estate is more than 5% of the exclusion amount, you essentially fall off the cliff and cannot take advantage of any of New York’s exclusion.
Wills and trusts can be used to mitigate and resolve many issues including reduction of estate taxes, taxes for non-citizens, leaving benefits for a person with a disability, charitable giving, business succession, etc. As needs vary, estate plans should be individualized to support the wishes and needs of the testator, namely, the person making the will.
POWER OF ATTORNEY
A power of attorney (POA) is a legal document in which a person, also referred to as the principal, designates another person, called an agent or attorney-in-fact, to make decisions for the principal and carry out acts in specific matters if the principal is unable to. The main role of the agent is to make decisions on the principal’s behalf if he or she is unable to due to illness, hospitalization, or loss of mental capacity. The agent can be given extensive or limited authority to make legal decisions for the principal. Some, but not all, of the powers the agent can be given are:
Access the principal’s financial accounts to pay bills and other obligations.
File taxes on behalf of the principal.
Make investments on behalf of the principal.
Manage and sell the principal’s property.
Apply for public benefits for the principal.
The agent has a fiduciary obligation to act in the principal’s best interest. The agent’s failure to do so would result in a breach of fiduciary duty, for which the agent can be held accountable. The principal must be mentally competent to make the power of attorney designation. A power of attorney completed ahead of time ensures personal and financial affairs are attended to when the principal cannot handle his or her own affairs. Other reasons than a health issue or crisis that a power of attorney is needed are: cases of expatriate workers and families needing their affairs in America taken care of while overseas; younger people who travel a great deal wanting a family member or parent to handle their affairs; and additionally, if one is aging and getting ahead of any health crisis or deterioration by planning his or her affairs. Having a power of attorney in place often obviates the need for a guardianship upon a later incapacity. A guardianship involves a court of law deciding who will be designated and what powers will be given a person to act on behalf of the incapacitated person. By completing a power of attorney, a person keeps control of
who an agent will be and what powers will be given to him or her. Elderly persons can also be taken advantage of through scams, undue influence, and exploitation. Having an agent take over finances protects the principal from such invasive and harmful activity. Lastly, a power of attorney is only valid through the life of the principal. At death, the power of attorney is no longer in effect. At that time, typically the executor or trustee of a trust will be appointed to administer the estate.
HEALTH CARE PROXY & HIPAA RELEASE
With a health care proxy, you are appointing someone to handle your medical decisions for you if you are no longer able to. You do not have to be terminally ill to designate a health care proxy or for the proxy to make decisions on your behalf. Typically, your proxy will make treatment decisions whenever you are incapacitated and unable to communicate due to a temporary or permanent illness or injury.
With a properly executed health care proxy and HIPAA release, you are controlling who can access your medical information and carry out your wishes as it pertains to medical treatment. Your proxy will be able to make decisions for you only if you are unable to. Your proxy may also have access to your health records and other information, depending on the permissions you give them. If you want to place restrictions on what your proxy can do or see, you should include these in your health care proxy document.
If you want additional individuals to be able to talk to your doctors or health care professionals, you can also designate those agents under a HIPPA release where they would be authorized to obtain your medical information. In the case of the elderly or persons with disabilities, this is often a method to have doctors communicate with your family on your behalf.
Both a health care proxy and HIPAA release should be made in advance of any health complications. You can then keep them on file with your primary care provider or any other health professionals. It is also advisable your proxy or agent has a copy in the event of an emergency.
LIVING WILL
A living will is a document in which an individual records end-of-life and critical health care decisions. In the event of vegetative state or a terminal illness, when you can no longer talk or make decisions for yourself, your wishes are pre-recorded. Your health care agent or proxy is required to follow your wishes within the living will document. Often, people select to have comfort care over life-sustaining treatment. In New York, you may also complete a Medical Order for Life Sustaining Treatment (MOLST) form with your doctor as an alternative.
Why should I have an attorney help me establish my estate plan and draft my documents?
Estate planning is about making sure your family understands how you want your assets and affairs to be managed in the event of your death or incapacitation, but starting the process can often seem overwhelming.
That is where estate planning attorneys come in. These professionals guide you through the ins and outs to help make sure your wishes will be followed. Attorneys offer a personal and customized plan to you and your specific needs and wishes. Through their experience, knowledge of the law, and personal approach, you can be assured that your wishes will be carried out and your affairs are in order.
Additionally, as the sayings go, “buyer beware” and “you get what you pay for,” often ring true when it comes to online forms. Often the forms offer a one-size-fits-all plan that do not fit your needs and offer no actual planning. Planning is strategizing on what is best for your estate – whether that is tax savings, avoiding probate, having a blended family, setting up special trusts for children with disabilities, retirement funds, insurance, and more. Likewise, complex long-term care and Medicaid planning are not services offered by online forms. Your belongings and estate are what you worked hard to obtain and maintain, and equal respect should be given to their distribution.
