iStock_000020686044_MediumTo protect your family and ensure your wishes are met.  No one likes to think about the possibility of their disability or death.  If you postpone planning for these events until it is too late, however, you run the risk that your needs will not be met or that your intended beneficiaries — those you love the most — may not receive what you would want them to receive.

This is why estate planning is so important.  It allows you, while you are still living, to ensure that your needs will be met and that your property will go to the people you want, in the way you want, and when you want. It permits you to save as much as possible on taxes and costs and it offers the comfort that your loved ones can mourn your loss without being simultaneously burdened.


What are some of the components of an Estate Plan?

They vary according to your needs but may include some or all of the following:


A will is a legal document containing your directions as to who will receive your property at your death. If you do not have a will, there is a law that determines how your property will be distributed. In your Will, you will appoint a legal representative, called an Executor, to manage your estate and carry out your wishes. A Will is especially important if you have minor children because it allows you to name a guardian for the children. The guardian is the person who will step into a parental role in the event that you and/or your spouse predecease them.  You will also name a Trustee to manage funds for minor children.

Minor children can own property, but they cannot control it until they reach at least age 18. Most parents, however, are of the opinion that even if you raise a very mature and level- headed child, it is probably not a good idea for them to have access to large sums of money at that age.  One way to avoid this issue to is to direct in the Will that money is to be held in trust for the benefit of the child.  This is called a Testamentary Trust. In a Testamentary Trust, you pick a specific age, 25 for instance, at which time the child’s interest in the estate would vest, entitling them to all of the proceeds of the estate.  Often parents stagger the ages at which the child may access principal of the monies held in trust.  An example would be language that would allow the child access to 5% of the principal at age 18, 10% of the principal at age 21 and the balance at age 25.

While the funds are held in trust, they are managed by the Trustee that you name.  The Trustee’s job is to protect the funds for the beneficiary and distribute it when needed according to a standard which is health, education, maintenance and support.  This is a broad standard that would cover most needs of the child. For example, if the child has a medical bill, tuition bill, car expense, or rent due, the Trustee has the ability to pay the expense directly without just giving the money to the child. The Trustee also has the ability to say “no” to the child if the request is unreasonable.  This is sometimes a key characteristic for a Trustee to have and should be considered in deciding who will hold this role.



Revocable Living Trust: This Trust enables you to avoid probate, maintain the privacy of your estate and save your heirs administrative time and expense upon your death. Similar to a Will, this type of trust directs how your assets will be distributed upon your death, who will serve in the role of Trustee and Guardian and what restrictions you may wish to place on the distributions. As above in the Testamentary Trust, you may direct that funds be held for the benefit of another for a period of time, including a lifetime, and at what age(s) funds may be dispersed.

As with all Trusts, it must be funded to properly function.  In a Revocable Living Trust, you transfer your “probate” assets into the Trust while you are alive. This would include assets such as real estate, stocks, bank accounts and personal property. While you are alive, you are the Trustee with full access to all of the assets. In the event of your incapacity, a back-up Trustee is named to manage the Trust. Upon your death, your Trustee will see that your wishes are followed, and your assets are distributed accordingly.  Because you have already transferred your probate assets to the Trust, there is no need for the probate process. Thus, your assets will be distributed more easily, faster and with less restriction than they would be within the probate process. As this Trust is “revocable” you may decide at any time to revoke it and remove your assets from it.

Asset Protection Trust: This is a Trust that is built to protect your assets from creditors as well as from Long Term Care costs such as nursing home expense. This trust is typically funded with assets that you specifically wish to protect to ensure that they will be preserved for your heirs. While this Trust is irrevocable and cannot be revoked and may only be amended under certain circumstances, you may still access any income that the trust assets produce.  Also, while you may not access the principal of the Trust directly, you may access it with the assistance of a trusted heir.

The restrictions on this type Trust are necessary for a number of reasons. One may be to become eligible for certain benefits such as Medicaid or Veteran’s benefit assistance to pay for long term care.  Another reason may be to protect assets from creditors, especially if you or a loved one is in a profession with a high risk of liability.

An Asset Protection Trust is often funded with assets such as real estate, gas and oil leases, brokerage accounts and cash.  You may function as your own Trustee while you are alive.  Upon your death, a successor Trustee steps in to assume management of the Trust and ensure ultimate distribution of assets according to your wishes.

Retirement Plan Trust or IRA Beneficiary Trust: This Trust enables you to transfer your retirement savings to your heirs while protecting the funds from threats in their lives such as bankruptcy and divorce.  It also enables your heirs to “stretch” the income taxes due on the funds over a period of time rather than all at once. Rather than the funds flowing directly to your heirs, they flow to a Trust for their benefit.  They are managed by a Trustee according to restrictions built to emphasize protection of the funds and maximization of tax savings.

These Trusts are helpful for a number of scenarios but here are a few where they can be particularly beneficial:

    1.  You are an excellent saver and have amassed a large sum in your 401K/IRA that you likely will not extinguish in your retirement. You have a loving spouse and/or child that you wish to provide for, but they do not have your financial acumen or responsibility.
    2. You are an excellent saver and have amassed a large sum in your 401K/IRA that you likely will not extinguish in your retirement. You have a loving child who:
      1. does not have a high paying job and you fear they will not be able to accumulate much of their own retirement funds.
      2. Has chosen a spouse that you do not approve of and you fear a divorce
      3. Is financially irresponsible and will spend any and all inheritance upon receipt.
      4. Is financially irresponsible and you fear a future bankruptcy.
      5. Is chronically ill or disabled and may now or in the future be receiving government benefits such as Social Security Disability or Medicaid.
      6. Is in a profession with a high risk of liability.

In all of the above scenarios, you fear and there is risk that your hard-earned funds may be squandered. With a Retirement Plan Trust you can have peace of mind that your assets will survive and provide security for the next generation.

Special Needs Trusts (SNT): These Trusts are created to protect assets that may be passing to a loved one with special needs who may be receiving necessary government benefits such as Social Security Disability (SSI), Medicaid or housing support (HUD). These types of benefits are needs based which means that the recipient only qualifies when they have very limited assets.  If such a person would receive an inheritance, it would disqualify them from continued receipt of the benefits.

Funds in a Special Needs Trust are managed by a Trustee to provide for the beneficiary. They are provided to supplement but not supplant any benefits already being received. These funds may pay for things such as an excess medical bill not paid by insurance, medical devices and comfort needs (a better mattress, clothing, a vacation).

There are basically two types of Special Needs Trust created by Elder Law Lawyers, 1st party and 3rd party. A 1st party SNT is created with the beneficiary’s own funds.  These funds may come from sources such as a law-suit settlement, a gift or an inheritance. They are held and managed by a Trustee as above but upon the death of the beneficiary, remaining funds must be paid back to the State of Pennsylvania as reimbursement for benefits received.

A 3rd party SNT is created with funds of someone other than the beneficiary. These Trusts are managed as above but the main difference between them and the 1st party SNT is that there is no need for pay-back provisions. Funds remaining upon the death of the beneficiary may be paid to whomever the creator of the Trust has directed.

Pet Trusts: These Trusts enable you to preserve assets to ensure the care of your pet. As with other Trusts, the funds left to a Pet Trust are managed by a Trustee for the benefit of your pet(s).  Our furry friends are quite special to us and some may not have available a proper caretaker when we die.  With a Pet Trust you may name not only the Trustee of the funds but also the guardian of the animal, whether a person or an organization.  If there are funds remaining upon the death of your pet, you may name the successor beneficiary.


Power of Attorney

A power of attorney allows a person you appoint, your agent or “attorney-in-fact”, to act in your place when you are unable. The agent you name has the authority to manage your financial affairs and property. There are two types of financial power of attorneys, Durable General and Springing.

A Durable General Power of Attorney is valid upon your signature and you do not have to be incapacitated for your agent to be able to act. This is often preferred as it is ready and waiting in the event that it is needed.

A Springing Power of Attorney is only valid when a physician certifies that you are incapacitated. This is less favored because of the extra bureaucracy involved but for certain client it may be necessary.

Without a Financial Power of Attorney, no one can manage your affairs without Court approval. The Court process, called a Guardianship proceeding, takes time, is expensive, and the Judge may not choose the person you would prefer. In addition, under a Guardianship your representative may have to seek court permission to take planning steps that they could implement immediately under a simple Durable Power of Attorney.


Living Wills and Health Care Power of Attorney

A Healthcare Power of Attorney allows you to designate someone of your choice to make health care decisions for you if you are unable to do so yourself.  It is specifically related to health care decisions and does not include any of the powers granted in a financial power of attorney.  Without a health care power of attorney, you may be subject to a Guardianship proceeding, which, as we discussed above, is not ideal

A living will or an Advanced Directive, instructs your health care providers what treatment you may want or not want when faced with an end of life situation. It is important to note the words “end of life” as this does not arise in every health care situation.  For example, if you are in a car accident and have life threatening injuries, you will receive all possible life sustaining care at the hospital if you are otherwise healthy.  If you are suffering from a terminal disease in this scenario and you have chosen not to have any life prolonging measure, you will not receive them.  End of life care is very personal with people often feeling strongly one way or another.  The important thing is to make your wishes known so as to avoid any potential conflicts that may arise among family members in the absence of the document.


Non-Probate Property

Non-probate property passes outside of the probate process and must be planned for separately. Jointly owned property, property in Trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and are not covered under your will.  In many instances, probate property and non-probate property pass to the same person or persons, but not always.  In the absence of a beneficiary, non-probate property is usually payable to your estate which can cause negative tax consequences as well as exposure to creditors.  Thus, it is very important that you keep your beneficiary designations current on things like IRA and Life Insurance policies.

Plan, Protect & Prosper

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