Overview
In these uncertain times, it is more important than ever to review your fundamental estate planning documents to ensure that they protect you and your family and carry out your wishes.
By “fundamental” estate planning documents, we are referring to your will, including a revocable living trust (revocable trust), which may be used as a “will substitute”, healthcare proxy, and durable power of attorney. You should also review your beneficiary designations for your life insurance policies and retirement plan benefits. These designations, which govern the disposition of assets passing outside of your will or revocable trust, should be coordinated with your overall estate plan.
In Depth
Standalone will versus pour-over will and revocable trust agreement
There are two basic testamentary approaches: a stand-alone will, or a pour-over will to a revocable trust.
It is generally a good practice to periodically review the provisions of your will (or revocable trust agreement) to be certain that they carry out your wishes in light of intervening changes in family circumstances and assets.
A stand-alone will was for many decades the dominant estate planning option in several states, including New York. A stand-alone will can include all of the terms of testamentary trusts which become operative upon a person’s death.
A stand-alone will can be the appropriate planning option, particularly if it is unlikely that any trusts will be funded upon your death.
However, in many instances, it is preferable to have a pour-over will to a revocable trust.
A pour-over will is a very basic will that appoints an executor and directs that all (or almost all) of your property is added to your revocable trust upon your death. In this approach, the major planning provisions are in the revocable trust agreement.
Typically, you would enter into the revocable trust agreement as grantor and as the initial trustee. During your lifetime, you would have complete control over the assets transferred into the revocable trust and can modify or revoke the revocable trust agreement at any time.
A primary reason for using a revocable trust is to provide for the continuous and active management of your assets during periods of disability and immediately following your death. Importantly, revocable trusts may be fully or partially funded during your lifetime. The advantages of doing this are twofold. First, to the extent funded, this will avoid delays associated with the probate of a will. Currently, there are long waits in probating a will and appointing an executor to manage a decedent’s assets. During these delays, a decedent’s assets are “frozen” and subject to market turbulence.
Revocable trusts can be used as will substitutes and provide continuous management of assets immediately following death, provided that they are funded during your lifetime. Your trustees will be able to immediately implement the terms of your estate plan, including making assets available to your heirs.
In effect, establishing and funding a revocable trust is front running the estate administration process. Upon your death, the assets in the revocable trust can be immediately managed by the trustees. If you were the sole trustee during your lifetime, a successor trustee would sign a very simple document to accept a nomination as successor trustee and could immediately begin serving thereafter.
Second, fully or partially funding a revocable trust provides a mechanism for management of assets during one’s lifetime should this be necessary, such as in the event of future incapacity. It avoids having to rely exclusively on a durable power of attorney.
As noted above, a will can set forth the terms of a trust, in the same way that a revocable trust agreement can set forth the terms of follow-on trusts which come into existence after your death. One very important difference between the two is the manner in which trustees are changed.
A testamentary trust is subject to the supervision of the surrogate’s court. Trusts increasingly exist for decades, and during that time, it is likely that the trustees of the trust will need to be changed for a host of reasons. It is very simple to change the trustee of a trust established under a revocable trust agreement. This can be accomplished in a matter of minutes pursuant to simple instruments that do not involve court approval.
In contrast, changing a trustee of a testamentary trust (one established under a will) is a different story. That requires filing a petition with the probate court explaining the desired change and notifying various interested parties, including individuals with fairly remote future interests. Even if the trustee change is uncontested, it may take several months for a court to approve a change of a trustee. We have seen multiple instances where it took over a year for a court to approve the change of a testamentary trustee in matters where there was no disagreement among the interested parties about the appropriateness of the petition.
This simplification of future administration is one of the key benefits of a revocable trust.
Healthcare proxies and powers of attorney
Healthcare proxies and powers of attorney are simple, yet critically important, documents.
A healthcare proxy appoints the individuals who can make medical decisions for you if you are incapacitated. This includes end-of-life decisions. It is important that you discuss your medical wishes with your named agents.
A power of attorney appoints a person to manage your assets on your behalf. Typically, the document is effective immediately, although it is intended to be used in the event of incapacity. A power of attorney can authorize an agent to make gifts, which can be very helpful, particularly in the case of long-term incapacity. It grants the agent very sweeping powers and should only be given to trusted individuals, or perhaps two individuals who are required to act jointly.