In designing your estate plan, we draw from a variety of tools and strategies, often utilizing certain legal documents. It can be challenging to understand what these documents do and why they are important to an estate plan. To help make it easier, we've summarized some of the common estate planning documents below.
Estate Planning Documents Most Often Required
There are certain documents that are essential to every estate plan. Every person over the age of 18 should have a will, power of attorney, and healthcare proxy. If you have a child under the age of 18, you should also have standby guardianship documentation.
A will directs who your assets would go to if you passed away. The will also designates your executor, the person who would be legally responsible for administering your estate and distributing your assets. If you have children under the age of 18, your will should also include a guardianship designation, which indicates who you would want to take care of your children, if necessary.
Power of Attorney
A Power of Attorney is a legal document every person over the age of 18 should have. This document allows you to designate a trusted friend or family member to manage your affairs in the event you become incapacitated. It is a seamless and efficient way to protect your assets and maintain your credit if you become temporarily or permanently incapable of doing so yourself. It allows important personal or family expenses, such as your rent or mortgage and childcare expenses to continue to be paid.
A Healthcare Proxy is a document that authorizes another person to make medical decisions for you in the event you are unable to make those decisions for yourself. This document often comes into play in end-of-life situations; without this document, no one is authorized to refuse life-sustaining measures on your behalf.
A Living Will or Advanced Directive is a document that directs what type of treatment you receive if you are in a permanent vegetative state. The difference between a Healthcare Proxy and a Living Will is that a Living Will mandates certain medical actions/inactions, while a Healthcare Proxy simply designates someone to make medical decisions on your behalf without binding your agent to a certain course of action.
These documents can be executed independently or together.
Standby Guardian Designation
A Standby Guardian Designation indicates your choice of guardian in the event that you become unable to care for your children yourself. While your will includes your choice of guardian as well, that document does not become effective until your death. A Standby Guardian Designation is necessary to indicate your choice of guardian in the event you are incapacitated – if, for example, you were unconscious in the hospital.
A Standby Guardianship Designation can also serve as a stop-gap measure between the time of a parent's death and the time a court formally appoints a permanent guardian, ensuring that your children would never be without a guardian and vulnerable to being placed in state custody.
Note that guardianship designations in either a Standby Designation or a Will only come into effect if neither parent is able to care for the child.
The primary purpose of a Revocable Living Trust is to avoid probate, which can reduce estate administration costs, protect privacy, and facilitate the distribution of your assets to your loved ones. A Revocable Living Trust can also assist in planning for incapacity.
For some clients, a Revocable Living Trust is particularly helpful. If the following apply to you, you might consider creating a Revocable Living Trust:
- You own property outside of the state in which you live. A separate probate must be administered in each state in which you own property. A Revocable Living Trust can avoid the expense and burden of initiating probate in more than one state.)
- Privacy in your estate matters is important to you. In a probate or estate administration proceeding, your will, and the value of your assets becomes a matter of public record. A Revocable Living Trust keeps information about your inheritance private and out of public view.
- The person you want to serve as your executor resides outside the U.S. and is not a U.S. citizen. In New York State, and many other states, a person is not eligible to serve as executor if they are a non-citizen who resides outside the U.S. A Revocable Living Trust solves this problem because it allows you to choose a foreign trustee who can administer the trust assets.
- It is important that your estate proceeds be available to your family immediately. It can often take months, and sometimes longer, for estate assets to be made available to your family in a probate proceeding. With a Revocable Living Trust, your family could have to have access to your assets immediately.
- You want to minimize the burden and costs of estate administration on your loved ones. The court process that takes place after someone passes away can be lengthy, burdensome, and costly. Sidestepping court involvement with a Revocable Living Trust can make the processes easier on your loved ones.
- You want to create a flexible plan for your incapacity. While incapacity planning for your finances can often be adequately addressed with a Power of Attorney, a Revocable Living Trust can allow you to build more flexibility into your plan. For instance, a Revocable Living Trust can provide more specific conditions under which funds can be used and provide greater protections against elder abuse.
A Testamentary Trust provides you with greater control over what happens to your assets after you have passed away. This type of trust is particularly helpful in the following situations:
You plan to leave assets to a minor. Children under the age of 18 are not legally capable of managing their own assets, so any money left to them must be overseen by a court until the child turns 18. These reports can be burdensome and expensive to file, and they become a part of the public record. Leaving assets to a trust for the benefit of the child, instead of leaving the assets to the child outright, avoids court involvement and keeps information private.
Leaving assets to a trust also allows you to specify the age at which the child would have unrestricted access to the funds. In the absence of a trust, the child would have an unlimited ability to spend the money at a young age.
You want to protect assets from Creditors. Assets left to a testamentary trust are protected from your heirs' creditors, a substantial benefit in our litigious society. If your child became the subject of a lawsuit, any assets that you left to them could be wiped out. Assets left to a trust are not legally owned by the beneficiary of the trust, and therefore are not reachable by the beneficiary's creditors.
You want to ensure that assets left to your spouse will be preserved for your kids. When you leave assets to your spouse directly, you have no control over what happens to those assets after you pass away. Your spouse could remarry and even have children with a subsequent spouse, with a good chance that your assets could end up with someone other than your kids.
This could occur through no fault of your spouse. The second marriage could imbue the subsequent spouse to rights to the assets either in a divorce or upon the death of your spouse. Even if your spouse died with a will leaving everything to your kids, the subsequent spouse would have a claim to one-third of his or her estate unless they had signed a pre- or post-nuptial agreement.
By leaving assets to a trust for the benefit of your spouse and children, you can protect the assets from a remarriage, as well as from other creditors that might develop a claim to your spouse's assets.
You want to protect against New York Estate Taxes. (A/B or Disclaimer Trusts) Under the New York Estate Tax, the exemption available to one spouse cannot be used by the other spouse. This can result in a substantial tax penalty if you leave your assets to your spouse. Leaving the assets to a Testamentary Trust can effectively double the amount of exemption that is available to your family.
To illustrate, let's assume that Husband has a net worth of $6 million, Wife has a net worth of $3 million, and the New York Estate Tax has an exemption of $5.5 million. No estate tax applies to assets left to spouses, so Husband could leave all of his assets to Wife without any estate tax. When Wife dies, however, her estate is worth $9 million, resulting in a New York Estate Tax bill of nearly $900,000 payable by her kids.
This result can be avoided if Husband leaves $1 million directly to Wife and $5 million to a trust for the benefit of Wife and children. The $1 million is exempt from tax as a transfer to a spouse, and the remaining $5 falls below the $5.5 million exemption, so no estate tax is owed. When Wife passes away, leaving everything to their children, the value of her estate is $4 million, which is not subject to estate tax because it shorts of the New York Estate Tax exemption amount. By leaving assets to a Testamentary Trust for the benefit of his children and Wife, Husband saved his family $900,000!
Because tax-deferred retirement accounts have special tax attributes, they sometimes require specialized planning. Smart planning for these assets can provide substantial tax benefit to your heirs. On the other hand, poor planning can result in a large, unnecessary tax bill.
When the beneficiary of a retirement account inherits the asset, he or she can continue to benefit from the tax-deferral aspect of the account for many years, sometimes for decades.
In some cases, for example, when the beneficiary is a minor, it is preferable to leave the assets to a trust for the benefit of the beneficiary rather than to the beneficiary directly. Due to special tax rules, leaving tax-deferred accounts to a regular trust can eliminate the tax-deferral benefit of the account, resulting in a substantial increase in taxes on the money.
A specially-structured trust, sometimes called an IRA Trust, provides the protections of a trust while maintaining the tax-deferral benefits of the account. These types of trust are common where creditor protection is particularly important or where the beneficiary of the trust is a minor or a person with special needs.
An Irrevocable Trust is a trust that is created during your lifetime that cannot be changed or "revoked." This type of trust is the foundational tool for most estate tax strategies because assets held be the trust are generally not included in the value of your estate for estate tax purposes. The trusts listed under the Estate Tax Planning section of our website are all Irrevocable Trusts.
Irrevocable Trusts are also a powerful tool for protecting assets. An Irrevocable Trust protects assets from both your creditors and the creditors of the trust beneficiaries.