Bryant - Course 6. Estate Planning. 7. Estate Planning Documents Flashcards
Module Introduction
Let’s assume that Michael and Cherry are married, and they draft their wills. Michael’s will leaves all of his assets to Cherry and Cherry leaves all of her assets to Michael. These wills are known as “simple” or “I Love You” wills. This is just one of the many kinds of wills that you will learn about in this module.
The Estate Planning Documents module, which should take approximately four and a half hours to complete, will cover all of the documents which are an integral part of the estate planning process. This will include documents that are the most basic, which is the will, to trusts, to those documents which ensure, during periods of incapacity, that the client’s lifetime property and health care wishes are carried out.
Upon completion of this module, you should be able to:
* Define a will,
* Describe a codicil,
* List the typical execution requirements of a will,
* Differentiate between the most common types of wills,
* Describe why a living will is not actually a will,
* Describe what a will contest is and how it can be avoided,
* Define incapacity and disability,
* Describe the responsibilities of guardians and conservators,
* Explain provisions of disability insurance policies,
* Define eligibility requirements for Social Security Disability benefits,
* List advantages and disadvantages of a power of attorney,
* Differentiate between power of attorney over assets and health care power of attorney,
* Identify long-term care options including Medicaid planning and LTC insurance,
* Describe the purpose of viatical settlements,
* Describe the different purposes for which trusts can be used,
* Compare and contrast revocable and irrevocable trusts, and
* Distinguish between marital and non-marital trusts.
Module Overview
The first lesson defines a will and the relevant terms associated with it.
The second lesson describes the will execution process.
Keep in mind that the laws of each individual state govern the validity of will provisions, execution formalities, and other requirements.
The final lesson highlights the types and kinds of powers of attorney, which are important in an estate plan. The two types of powers of attorney discussed in this lesson are the power of attorney over assets and the health care power of attorney, also known as a health care proxy.
Trusts may be used to satisfy a number of estate planning objectives, ranging from assisting in the management of assets to estate tax reduction. The most common types of trusts used in estate planning are living, or inter vivos, trusts, and testamentary trusts.
To ensure that you have a thorough understanding of all of the important Estate Planning Documents, the following lessons will be covered in this module:
* Wills
* Will Execution
* Incapacity Planning
* Trust Arrangements
Section 1 - Wills
A will is the most basic legal document that allows individuals to determine who will receive their property after their death. Property left to a beneficiary under the provisions of a will is known as a bequest. Because a will is a legal document, a number of execution requirements need to be satisfied in order to ensure its validity.
A will is a revocable instrument. This means that it is possible to revise a will a number of times prior to the testator’s (the person who has executed the will) death. A will may be revised by the use of a codicil, which is an instrument that must be executed with the same execution requirements as a will.
To ensure that you have a thorough understanding of wills, the following topic will be covered in this lesson:
* Defining a Will
Upon completion of this lesson, you should be able to:
* Define a will,
* Define a beneficiary,
* Recall what is meant by a bequest,
* Recall what is meant by execution requirements,
* Define a testator, and
* Describe a codicil.
Define a Will
A will is a legal document that expresses an individual’s wishes as to the disposition of his or her property after death. A will is revocable during an individual’s lifetime. As a result, the provisions of a will do not become operative until the individual has died.
Although a will is the most basic estate-planning document (it serves the purpose of identifying the decedent’s heirs and which heirs will receive the decedent’s property), a will does not transfer all of the decedent’s assets.
A will only transfers assets, which were separately owned by the decedent at the time of death.
What is a pour-over will?
A pour-over will is a will that has a previously established trust as its primary beneficiary and is funded through the probate process.
* Therefore, assets transferring from the pour-over will into the trust are subject to probate.
What are Will Clauses & Statutes?
What kind of language should not be used?
There are standard clauses in all wills that enable the testator to transfer property to others, such as tangible and intangible personal property clauses and real property clauses. Clauses should be written as directives or commands, not as precatory language.
Precatory language uses terms such as “hope, wish or desire” that property be distributed in a particular way, which may not be enforceable by the probate courts.
What is a residuary clause?
A residuary clause directs the testator’s property that was not disposed of through other will clauses, to pass outright to others or to an existing trust. Property acquired after the will was executed is subject to intestacy if not disposed of through a residuary clause.
* Therefore, residuary clauses prevent partial intestacy of property after payment of debts, taxes, expenses, and specific bequests are addressed.
What is a dispositive clause?
A dispositive clause may name a class of beneficiaries to receive property, such as the testator’s “descendants” or “issue” who are lineal family members.
* Property that is given to his or her issue “per capita” means that all living family members would receive an equal share of the property at the testator’s death.
* For example, a father has three children A, B, and C, and child C has two children D and E. Distributions made “per capita” means that all five family members would receive equal shares.
* Property that is given to a class of beneficiaries “per stirpes” or “by representation” means that property is distributed differently if one or more of the testator’s children have died. In the previous example if child C died, then A and B will each receive 1/3 of their father’s property, and grandchildren D and E will receive their parent’s (C’s) 1/3 share of property so that D and E will each receive 1/6.
What is a fiduciary appointment clause?
A fiduciary appointment clause in a will appoints primary and contingent executors, guardians, and trustees for testamentary trusts.
What is a tax apportionment clause?
A tax apportionment clause designates the source for payment of death taxes. Some states have tax apportionment statutes that direct that taxes will be paid from specific portions of the estate in an established order unless otherwise stated in the will.
What is a simultaneous death statute?
A simultaneous death statute is adopted in some form by all states to determine the order of death if it cannot be determined which spouse actually survived the other.
* The testator can direct in his will that some or all beneficiaries will survive the testator by a certain period of time.
* This avoids having two probate processes and death taxes levied on the same property, if the other spouse does not live long enough to enjoy the property.
What is a divorce or annulment statute?
A divorce or annulment statute addresses how property in the will should be handled if it was bequeathed to a spouse, but the couple is no longer married at the time of an ex-spouse’s death.
It is important to note that provisions in wills cannot change the terms of trusts.
Trust documents must be amended to achieve this purpose.
Describe Laws of Intestacy
- In the absence of a will, it is the laws of intestacy in the decedent’s state of domicile that will determine how and to whom separately owned assets would transfer.
- Real property is distributed according to the laws of the state where the land is located, which is known as its situs, and personal property is distributed according to the laws of the state of the decedent’s domicile.
- A person may have several residences, but only one domicile.
- Additionally, in the absence of a will, the probate or surrogate court will determine who the administrator for the estate will be.
Describe how an estate may be distributed under a state’s law of intestacy
If deceased is survived by, Distribution:
* Spouse and one child or issue of deceased child: 1/2 to spouse; balance to child or issue of child by representations
* Spouse and 2 or more children: 1/2 to spouse; balance to children or their issue by representation
* Parents only, no spouse or children: All to surviving parent or parents
* Spouse only, no parents or issue: Everything to spouse
* Spouse, both parents, no issue: Everything to spouse
* Spouse, one parent, no issue: Everything to spouse
* Issue, no spouse: Whole to the issue by representation
* Brothers and Sisters or their issue, no spouse, issue or parent: Whole to the issue of the parents by representation
* Grandparents only (no spouse, issue, parents, brother or sister): 1/2 to surviving paternal grandparent or grandparents or their issue by representations, 1/2 to surviving maternal grandparent, or their issue, by representation limited to first cousins
* Issue of grandparents(no issue, surviving spouse, parents, brothers, or sisters or their issue, or grandparents): Limited to great-grandchildren of the grandparents (second cousins) per capita. If there are no heirs within this degree, then the estate escheats to the State
What are a will’s Execution Requirements?
- In most states, there is a requirement that the will be in writing.
- Oral wills (known as nuncupative wills) are generally not permitted.
- Some states accept holographic wills that may be entirely handwritten and need not be witnessed.
- In addition to being in writing, there are also other requirements for a valid will.
Requirements determined by state law that control whether or not a particular will is valid are called execution requirements.
Failure to comply with the execution requirements of a will may cause the document to be treated as invalid.
As a result, the laws of intestacy would apply.
Identify the execution requirements of a will that apply, regardless of state of residence. (Select all that apply)
* Testator must be at least 18 years of age.
* The testator must have mental capacity.
* The will must be signed by the testator and witnessed by at least two witnesses.
Testator must be at least 18 years of age.
The testator must have mental capacity.
The will must be signed by the testator and witnessed by at least two witnesses.
* Each of these requirements apply to execute a will, regardless of state of residence.
What is a testamentary trust?
A will can set out the terms of a trust in which the named trustee can manage assets on behalf of the beneficiaries for many years after the death of the testator. This may be especially appropriate in order to manage assets for the benefit of the testator’s minor children. Such a trust is referred to as a testamentary trust since it is created through the decedent’s last will and testament and comes into being at the probate of the will.
The terms of a testamentary trust are important. Sometimes people have such trusts terminate when a child reaches age 18 or 21. Such an early distribution, at a time before the child has had the experience of handling large sums of money, often results in the child’s not going to college and also losing all of the inheritance.
What happens if a will is revoked?
A will is a revocable instrument. Therefore, it can be amended, altered, or revoked a number of times prior to the testator’s death.
* The testator may revoke a will either by destroying the document or defacing the document with intent to revoke.
* If the testator has revoked the will in either of these ways and has not executed a new will, then the state’s laws of intestacy will determine how the separately owned assets will transfer after death.
What is a Codicil and it’s advantages?
A will is revocable and it is possible to revise it a number of times prior to the testator’s death. Many wills are revised by the use of a codicil.
A codicil is a legal instrument that allows the testator to revoke and/or change all or part of an existing will. As a result, in order for a codicil to be valid, it must be executed with the same execution requirements as a will.
Advantages of a Codicil:
* Convenient
* Simple
* Inexpensive
For these reasons, codicils are frequently used to make minor changes to a will at a lower cost.
Section 1 - Wills Summary
A will, which is validly executed, is a document, which disposes of an individual’s (testator’s) property upon death. A will leaves the testator’s property to specifically named individuals or entities, known as beneficiaries.
Although a will is written during the testator’s lifetime, it is testamentary by nature. That is, it takes effect only upon the death of the testator.
In this lesson, we have covered the following:
* A bequest is the property transferred pursuant to the terms of the will.
* Laws of intestacy are laws of the state which determine how a decedent’s property is to be distributed in the absence of a will.
- Execution requirements are requirements determined by state law that control whether or not a will is valid.
- The testator is the person who creates the will.
- A codicil is an instrument that allows the testator to make changes to an existing will but must be executed using the same execution requirements as the will.
-
Advantages of a codicil It is a convenient method of revising a will.
Codicils are relatively simple since they may change only portions of an existing will. A codicil to a will may be less expensive than drafting a new will.
Thomas was a rich landowner. Upon his death, Thomas’s will failed to comply with all of the state’s execution requirements. What will happen to the assets owned by Thomas at his death?
* The refusal must be in writing.
* The property will be distributed among the immediate surviving family members.
* The property will be distributed according to the laws of intestate succession.
* The property is claimed by the state.
The property will be distributed according to the laws of intestate succession.
* Failure to comply with all of the execution requirements causes the will to be treated as an invalid instrument. Therefore, the property distributions contained within the will are null and void. As a result, the state’s laws of intestacy will determine how and to whom Thomas’s property will be distributed.
A codicil is used to revoke all or a portion of a will. State true or false.
* False
* True
True
* A will is a revocable instrument. Therefore, it can be amended, altered, or revoked a number of times prior to the testator’s death. Many wills are revised by using codicils, which may make changes to all or a portion of the existing will.
Match the following terms with the correct descriptions.
Execution requirements
Revocable
Laws of intestacy
A codicil
The testator
* Is the property owner who drafts the will.
* Is something which can be amended, altered, or revoked a number of times prior to the maker’s death.
* Are those state laws which determine how a decedent’s property is distributed in the absence of a will.
* Are requirements determined by state law which control whether a will is valid.
* Is a legal instrument which makes changes to all or a portion of an existing will and must be executed with the same execution formalities as a will.
- The testator - Is the property owner who drafts the will.
- Revocable - Is something which can be amended, altered, or revoked a number of times prior to the maker’s death.
- Laws of intestacy - Are those state laws which determine how a decedent’s property is distributed in the absence of a will.
- Execution requirements - Are requirements determined by state law which control whether a will is valid.
- A codicil - Is a legal instrument which makes changes to all or a portion of an existing will and must be executed with the same execution formalities as a will.
Section 2 - Will Execution
The law of each state governs the validity of will provisions, execution formalities, and other requirements. Wills are categorized according to the various characteristics they possess. The most common types of wills are holographic wills, joint wills, simple wills, pour-over wills, and tax-effective wills.
To ensure that you have a thorough understanding of will execution, the following topics will be covered in this lesson:
* Typical Requirements
* Types of Wills
* Will Contests
After completing this lesson, you should be able to:
* List the typical execution requirements of a valid will,
* Differentiate between the most common types of wills, and
* Describe a will contest and how it can be avoided.
What are a will’s Typical Requirements?
The law of each state governs the validity of will provisions, execution formalities, and other requirements.
* The requirements for one state may not be identical to those of another state.
* But as a general rule, there are some typical execution requirements for a valid will.
* In many states, if a will were found by a court to be invalid the state law of intestacy would govern the distribution of the decedent’s estate.
What 3 things must Witnesses do?
The witnesses must:
* Sign the will at the request of the testator,
* Sign in the presence of the testator, and
* Sign as a witness in the presence of the other witness(es).
Some states may have a minimum age requirement for a person serving as a witness. For example, some states require that an individual must be at least 16 years old in order to serve as a competent witness. States that have recognized holographic wills as valid may not have a witness requirement.
Practitioner Advice: State law will also determine the minimum number of witnesses that are needed for the valid execution of a will.
* Many states have a two-witness requirement however, some states require three.
How are Wills categorized?
Wills are categorized according to the distinguishing features they possess.
The respective features of the following wills are covered next:
* Holographic wills
* Joint wills
* Simple wills
* Pour-over wills
* Tax-effective wills
What is a Simple Will?
A simple will is a will in which the maker or testator leaves all separately owned assets outright to his or her heirs. Frequently, it is used by one spouse to leave all property to the surviving spouse. Between spouses, this type of will may be referred to as an “I Love You” will. An example of a reciprocal will is when the husband leaves his property to his wife in his will, and the wife, in turn, leaves her property to her husband in her will.
* A mutual will is a will made in agreement with another to dispose of property in a previously agreed-upon manner. A mutual will may also be considered a reciprocal will and may be enforceable after the first decedent dies.
Between spouses, a simple will leaves almost the entire value of the decedent’s separately owned assets to the surviving spouse. Many of your clients, regardless of the size of their estate, may have simple wills. Typically, when a young couple visits their attorney, a simple will is executed.
Although the young couple may not have significant assets, the will still allows the couple to select the executor of the estate as well as guardians for minor children.
What is a Joint Will?
A joint will is one document that serves as the last will and testament for two individuals.
* These are typically used by married couples.
Disadvantages of joint wills include which of the following?
I. Upon death of the first spouse, the survivor may not have the ability to change the terms of the will.
II. The first-to-die spouses property interests are commonly categorized as terminable interests and will not qualify for the marital deduction.
* I only
* II only
* Both I and II
* Neither I nor II
Both I and II
* Each of the statements point out important disadvantages associated with joint wills.
* Upon death of the first spouse, the survivor may not have the ability to change the terms of the will.
* The first-to-die spouses property interests are commonly categorized as terminable interests and will not qualify for the marital deduction.
What is a tax-effective will?
A tax-effective will is a will in which the estate tax exemption equivalent and/or the marital deduction and/or the charitable deduction are utilized.
* These techniques are incorporated within the will in order to minimize or eliminate the decedent’s estate tax liability.
What is a holographic will?
A holographic will is a will handwritten by the testator.
* A few states allow such documents to be admitted to probate, but most courts are very reluctant to accept them.
Describe Will Contests
People generally may dispose of their property on death as they see fit. Will contests are initiated by a disenchanted or disinherited beneficiary who seeks a greater portion of the decedent’s estate.
- In some states, an omitted child can obtain their intestate share of the testator’s property unless the omission was intentional, or the child is provided for outside of the will. A child or a spouse not named in a decedent’s will is referred to as a pretermitted heir.
- The law imposes certain limitations on the ability to disinherit a surviving spouse. In the past, the common law provided dower and curtesy to give adequate protection to widows and widowers respectively.
-
Most common law states now protect the spouse through “forced share” or “elective share” statutes. These statutes allow the surviving spouse to:
Take control of property per the testator’s will, or
Reject the provisions of the will and receive a share prescribed by statute.
This share is commonly either one-third to one-half of the estate, or the portion of the estate that would have passed to the spouse if the decedent had died intestate (without a will).
Describe the Uniform Probate Code (UPC) and Premarital or post-marital agreements
The Uniform Probate Code (UPC) approach awards the surviving spouse an increasing percentage of the estate based upon the number of years that the decedent and the surviving spouse were married to each other, up to a maximum of one-half of the estate for marriages lasting fifteen years or more.
* If the surviving spouse elects to take the forced share, the estate is not rendered intestate.
* The shares of property left to other heirs would be reduced, since the surviving spouse, by election, generally receives more than is provided in the will.
* An advantage is that the estate tax marital deduction is increased, which reduces dollar for dollar the estate taxes other beneficiaries may have to pay.
In states that have adopted the Uniform Probate Code, the spouse’s share is equal to a percentage of the augmented estate.
* The augmented estate includes probate property, the decedent’s share of JTWROS property held with a non-spouse, life insurance with a non-spouse beneficiary, plus property transferred into a revocable trust within two years of the decedent spouse’s death. The decedent spouse will receive a marital deduction for the amount awarded to the surviving spouse under the elective share statute.
Premarital or post-marital agreements that are validly executed can supersede state statutes.
* Therefore they supersede will provisions for property interests left to the surviving spouse.
* A surviving spouse with a pre or post-marital agreement cannot take an elective share in the property, since their property rights are subject to the provisions contained in the marital agreement.
What basis are will contests usually brought on?
Will contests are usually brought on the following basis:
* The testator of the will was not of sound mind at the time the will was executed.
* The testator was unduly influenced by another individual at the time the will was executed, and this undue influence had a direct impact on the distribution of the estate.
* The testator was fraudulently deceived, and as a result of the fraud, disinherited a person who ordinarily would have taken a greater share of the estate.
* The testator suffered from an insane delusion at the time the will was drafted.
What’s the difference between an insane delusion & unsound state of mind?
An insane delusion differs from an unsound state of mind.
* To be of unsound mind, the testator may not know who he or she is, the extent of his or her property ownership, who the natural objects of his or her affection are, or that he or she is making a will and giving away his or her property.
* An insane delusion, on the other hand, may be a situation in which the testator knows his or her heirs or family members but disinherits them because he suffers from an insane delusion that they are trying to kill him.
Practitioner Advice:
Practitioner Advice: Since a will contest is initiated after the death of the testator, the testator cannot avoid such an event.
* However, if the planner is working with a client who is not interested in treating all of his or her legal heirs equally, the planner should realize that this may give rise to a will contest.
Including specific provisions within the will may therefore discourage such a contest.
* For example, the testator may include a will provision that stipulates, “in the event any heir contests the will, they are only entitled to receive the sum of $5.”
* This type of will provision may serve as a deterrent to a will contest by an heir who would otherwise be entitled to receive more of the testator’s estate assets.
Section 2 - Will Execution Summary
The typical execution requirements for the maker or testator of a will are that he or she must be of sound mind, must have reached the age of majority, must sign the will and must declare the will to be his or her last will and testament before the requisite number of witnesses.
In this lesson, we have covered the following:
The most common types of wills are:
* Simple wills,
* Holographic wills,
* Joint wills,
* Pour-over wills, and
* Tax-effective wills.
Will contests are usually based on one of the following grounds:
* The testator of the will is not of sound mind,
* Another has exerted undue influence over the Testator in the disposition of the estate assets,
* The testator was deceived by fraud, or
* The testator suffers from an insane delusion.
Matt suffers from schizophrenia and has been having invasive, paranoid thoughts about his wife, Dona. As a result, he bequeaths all property via his will to his two sons and a daughter, leaving very little to Dona. Dona wants to contest the will. Under what basis should she contest the will?
* That the maker of the will was not of sound mind at the time the will was drafted.
* That the maker suffered from an insane delusion at the time the will was drafted.
That the maker suffered from an insane delusion at the time the will was drafted.
- An insane delusion differs from an unsound state of mind. To be of unsound mind, the Testator (creator of a will) must not know who he or she is, the extent of his or her property ownership, who the natural objects of his or her affection are, or that he or she is making a will and giving away his or her property.
- In the case of Matt, he is fully aware of his identity that he is making a will, and giving away his property. He knows that Dona is his wife but disinherits her because he suffers from paranoid thoughts from his schizophrenia.
Match the correct description with it’s term.
Holographic will
Reciprocal will
Joint will
Noncupative will
* Is a will written in the handwriting of the maker.
* Is a verbal (oral) will that bequeaths the decedent’s personal property.
* Is one document that serves as the last will and testament for two individuals.
* Is a will executed by two people who agree to leave their property to each other.
- Holographic will - Is a will written in the handwriting of the maker.
- Noncupative will - Is a verbal (oral) will that bequeaths the decedent’s personal property.
- Joint will - Is one document that serves as the last will and testament for two individuals.
- Reciprocal will - Is a will executed by two people who agree to leave their property to each other.
Section 3 - Incapacity Planning
In the eyes of the law, an incapacitated person is unable to make or communicate responsible decisions regarding their health, medical or personal care, their property, or their legal and financial affairs. Some reasons for this lack of capacity may be due to advanced age, unconsciousness or coma, physical illness, mental deficiency, or mental illness. An incapacitated person cannot make legally binding contracts such as real estate purchases, sales, or refinances, cannot purchase consumer goods or use credit cards, cannot make investment decisions or banking transactions, and cannot make wills or personal health care decisions. Family life and business interests are severely affected when incapacity strikes.
To ensure that you have an understanding of incapacity planning, the following topics will be covered in this lesson:
* Care of Person and Property,
* Care of Dependants,
* Power of Attorney,
* Disability Income Insurance,
* Business Disability Insurance,
* Social Security Disability,
* Medicaid Planning,
* Long-term Care Insurance, and
* Viatical Settlements.
After completing this lesson, you should be able to:
* Define incapacity and disability,
* Describe methods of caring for incompetent individuals, their dependents, and their property,
* Distinguish between types of powers of attorney - durable, non-durable, springing and health care,
* Explain provisions of disability income insurance policies,
* Define eligibility requirements for Social Security Disability benefits,
* Describe the advantages of Special Needs Trusts and Standby Trusts,
* Identify long-term care options including Medicaid planning and LTC insurance, and
* Explain the purpose of Viatical settlements.
What are the Legal Aspects for Individuals who become incapacitated?
Individuals who become incapacitated need others to care for them in many ways. Very often family members want to become involved in making medical and personal care decisions for their loved ones, but they may not have the time or expertise to manage the incompetent person’s finances, property, business, or legal affairs.
An individual who has not previously planned for these circumstances will have the courts appoint guardians and conservators for them, with resulting costs, delays, and ongoing court supervision.
* Legal documents such as durable powers of attorney, health care powers of attorney, living wills, and standby revocable trusts are designed to give individuals control over their circumstances should incapacity occur, without the need for court involvement.
* These documents name the appropriate individuals who can make crucial health, financial and business-related decisions, and they define the scope and authority that these decision-makers have.
Without proper legal planning, who will appoint individuals to care for an incapacitated person and their property?
Many married couples believe that if one spouse becomes incapacitated, the other spouse will automatically care for them, and manage their property interests as well.
* This is a serious misconception since guardianship of person and property is determined by the probate courts.
* Without proper legal planning, the courts will appoint individuals to care for an incapacitated person and their property, who may or may not be their spouse, nor the person whom the incapacitated individual would have selected as guardian.
Legal documents such as a durable power of attorney and a health care power of attorney allow a person to choose an agent who will make medical and financial decisions for them, in the event of incapacity.
* The grantor of a funded revocable trust can also name a successor trustee to manage his property interests if he is unable to do so.
* Planning for incapacity with proper legal documents allows a person to have control over their personal, financial, and business affairs without any court interference.
Define guardianship and List the three types of guardianship.
A proactive approach to incapacity planning saves families significant time, expense and anguish, and avoids the need for a guardian or conservator. All states have a court-supervised arrangement to provide for an incompetent person’s personal care and to manage their property if the incompetent person made no previous plans to do so. States vary in the arrangements and terms they use, but guardianship is a general term used to protect a ward’s property interests, and oversee their personal care.
The three types of guardianship are:
* Guardianship of the person provides for the ward’s personal care.
* Guardianship or conservatorship of the estate manages the ward’s property and financial affairs.
* Plenary guardianship manages both the ward’s property and personal affairs.
Describe the Process of Becoming a Guardian or Conservatorship
The first step in the process of becoming a guardian or conservator begins when an individual files a petition with the court, indicating that a person has become incapacitated. The court hearing itself is a public hearing at which oral and written testimony is submitted concerning the individual’s physical and mental competency. During the court proceedings, a guardian is appointed to represent the ward and protect his or her rights. This person is referred to as a guardian ad litem.
At the close of the hearing, the court makes a determination regarding the individual’s competence. If the court declares the individual incompetent, the court may appoint a guardian or conservator and will continue to exercise ongoing supervision and control. This is known as living probate.
List the 5 Step Process of Becoming a Guardian or Conservator
- Petition Filed. A petition is filed with the court indicating that a person has become incompetent.
- Appointment of Guardian Ad Litem. A guardian ad litem is appointed to represent the ward during the court proceedings and to protect his or her rights.
- Submission of Testimony. During a public court hearing, oral and written testimony is submitted recounting the individual’s physical and mental competency.
- Court Appointment of Guardian. The court makes a determination of the individual’s competence. If the court declares the individual incompetent, a guardian or conservator may be appointed.
- Ongoing Supervision by Court. The court exercises ongoing supervision and control.
Practitioner Advice: This is a costly process with fees payable for the court proceedings, the cost of the bond posted for the conservator, and payment for the frequent reports the conservator must submit to the courts. Preplanning using Durable Powers of Attorney and funded revocable trusts will eliminate the need for these court-imposed arrangements.
Describe the Authority of Guardians and Conservators
A guardian and conservator’s source of authority is derived from the statutory laws of the state in which he or she serves. A guardian is a fiduciary, like a trustee, but unlike a trustee, a guardian does not have legal title to the property that is administered for the ward’s benefit. A guardian or conservator’s scope of authority can be defined as comprehensive or limited in the following manner:
* Guardians have the authority to provide the ward with comprehensive continuing care and supervision, similar to the rights a competent person has in managing his own care
* Limited guardianships can be awarded to manage only specific aspects of an incompetent person’s care, giving the individual some control over his circumstances.
* Conservators have the authority under the Uniform Probate Code to manage and distribute the ward’s property for the support, education, care, or benefit of the protected person and his dependents. Typically, the courts and state laws restrict a conservator to making only a limited number of conservative investments and require permission from the court to engage in most property transactions. Restrictions are also placed on the use of the ward’s assets, and the ability to make gifts of the ward’s property. Wills cannot be created for the incompetent individual.
* Limited conservatorships further restrict the management of property and the number of transactions a conservator can make on behalf of an incompetent individual.
How does an individual Care for Dependents?
Individuals who do not plan for their incapacity or death risk having the probate courts appoint guardians, conservators and executors for them. Typically when a parent dies, the surviving parent will become the sole guardian for the minor children. If this parent subsequently dies without a will, the probate courts will conduct a hearing to appoint a new guardian who is capable and willing to provide for the children’s financial and emotional support. The courts will also become involved in selecting a new guardian when deceased parents have named a guardian in their wills who is also deceased, or the named guardian is unwilling or unable to serve.
Financial Guardians: When parents die, their children may inherit substantial amounts of property from life insurance policies, IRAs, investments, and real property interests. The probate courts appoint financial guardians for children with expertise in financial management. Financial guardians may not be the same parental guardian selected by the court. Financial guardians are usually required to file a formal accounting with the court every one to two years, to file a bond, and to obtain permission from the court to engage in any substantial financial transactions.
Discretionary Trusts: Parents can eliminate potential court involvement and public scrutiny by creating testamentary or inter vivos trusts for their children. They can name institutional trustees and/or financially astute individuals to manage the trust assets for their children, and decide how long the trust should last. Parents can also give trustees discretionary sprinkle or spray powers to determine which beneficiaries will receive trust income and corpus, what amounts will be distributed, and when these distributions will occur. These trusts provide trustees with great flexibility in managing assets for children, in the event of one or both parent’s incapacity or death.
Practitioner Advice: It is of paramount importance that parents of minor children create individual wills, and choose primary and contingent guardians to avoid having courts select unintended parental guardians for their children.
What is a Power of Attorney?
A power of attorney is a written legal document in which a principal (the person creating the document) gives authority to another (the agent or attorney-in-fact) to undertake some specific action on the principal’s behalf.
The power of attorney assures the principal that, in the event of a serious illness or disability, the agent can conduct personal, business, and financial transactions on the principal’s behalf.
The two types of powers of attorney discussed in this lesson are power of attorney over property for asset management purposes, and the health care power of attorney, also known as a health care proxy.
We will also briefly discuss the living will, which states a person’s wishes concerning prolonging their life if they become terminally ill.
What are the 3 types of Powers of Attorney over assets?
Financial advisors need to be aware of what a power of attorney can accomplish, and what restrictions and limitations these documents have in their scope and in their use.
There are 3 types of Powers of Attorney over assets:
* Non-Durable POA: The agent’s authority is limited to terms dictated in the POA document and ceases when the principal becomes incapacitated or dies.
* Springing Durable POA: Agent has no authority to act on behalf of the principal until the principal becomes incompetent as certified by physicians. It stays in effect until it is revoked, or when the mentally incapacitated person dies.
* Durable POA: When the POA is created, the agent has the authority to represent the principal before and after incapacity occurs. Therefore, it is not revoked when the principal becomes incapacitated. Any degree of legal power may be transferred to the agent to make business, financial or legal decisions for the principal.
What are the advantages of the power of attorney?
The advantages of the power of attorney are as follows:
* Unlike a guardianship, which requires a court declaration that the disabled person is both legally and mentally incompetent, a durable power of attorney is a private document that becomes effective immediately, without the public stigma of a declaration of incompetence.
* The power of attorney is relatively inexpensive and simple to execute. The document can be revoked and amended by the principal, if desired.
* Generally, only one document needs to be drafted, and the agent may only exercise those powers expressly contained in the document.
* There are no implied powers that may be inferred from the fiduciary role that the agent undertakes. This can be an advantage for the disabled principal, since the agent cannot undertake additional powers without the consent of the principal. However, state law can expand or contract powers that are not clearly articulated or delineated within the power of attorney.
* If the power of attorney is durable, then the agent has the power to act if the principal becomes incapacitated. Therefore, the power is not revoked in the event the principal becomes incapacitated.
What are the disadvantages of the power of attorney?
The disadvantages of the power of attorney are as follows:
* An agent may undertake only those powers expressly conferred by the document. The lack of flexibility within the document may prevent the agent from exercising a power that needs to be exercised since it is not one of those powers contained within the document. For example, if the document is drafted so that the agent may enter into certain contracts relating only to personal property, but the needs of the disabled principal require that his real estate holdings be liquidated, the power of attorney may be of no benefit to the principal.
* In many states, the power of attorney is referred to as being durable, meaning that the document is binding at the time it is executed, even if the principal is not incapacitated at that time. The durable power of attorney will remain in effect in the event the principal were to become mentally incapacitated in the future, but a non-durable power will not.
* Many lending institutions will not accept a durable power of attorney. Furthermore, those institutions that do accept them may only do so if the power meets certain specific guidelines established by the institution itself.
* A bank or a brokerage firm may not accept a durable power of attorney because it is not current enough according to their standards. The principal should re-execute these powers periodically to keep them current while the principal is legally competent since the power is not effective if the person signing it is mentally incompetent.
* Durable powers of attorney cannot be used after death to dispose of property omitted from a will.
* An agent or attorney-in-fact has a fiduciary duty to act in the principal’s best interests but is not held to the same fiduciary standards as a trustee, since he or she does not hold legal title to the principal’s property. However, the agent can be held liable for using the powers contrary to the principal’s best interests.
When does a Durable Power of Attorney go into effect?
A durable power of attorney simply means that the power is NOT revoked even in the event the principal were to become mentally incapacitated.
* In effect, it empowers someone to act as the principal’s legal representative at the time the power is executed. This means the agent has the power to act on the principal’s behalf while the principal is competent and if the principal becomes mentally incompetent in the future.
The principal can set up the power of attorney so that any degree of legal and financial power is transferred.
* For asset management purposes, an agent can be given powers over retirement plans to exercise options, borrow from the plan, and change beneficiary designations. Agents can also be given the authority to take actions that reduce the principal’s estate. Agents can make taxable and annual exclusion gifts to family members, transfer assets to spouses to equalize the estate, make disclaimers on the principal’s behalf, and utilize asset management powers that qualify the principal for Medicaid assistance.
Practitioner Advice: It is not wise to give an agent broad gifting powers, such as the ability to make unlimited gifts to oneself, since the IRS might construe the agent’s powers to be general powers of appointment over the principal’s property. Instead, the agent could be given the authority to make gifts to himself/herself that is subject to a limited power of appointment.
Each of the following elements should be included in the powers of attorney EXCEPT:
* An outline of the general aspects of the covered principal’s affairs.
* A provision authorizing the agent to make elections with respect to retirement plan assets.
* Verbiage dealing with gifting powers such as annual exclusions and/or lifetime gifts.
* Authority to transfer assets into a trust created by the principal.
An outline of the general aspects of the covered principal’s affairs.
- The powers of attorney should be very specific as to the aspects of the principal’s affairs that are covered.
What is a standby trust?
A standby trust is usually structured to take effect when the owner is no longer capable of managing his assets.
* Frequently, this occurs in situations where the grantor has become incapacitated or where the grantor has left the country for a period of time (for example, a three-year leave of absence to develop a business enterprise in a foreign country).
The standby trust is usually revocable in nature.
* In fact, most standby trusts are revocable inter-vivos trusts, in which the grantor is also the trustee and beneficiary.
* To plan for possible incapacity, the grantor names a successor trustee to manage his assets if he were to become incapacitated, while the grantor continues to be the beneficiary of the trust.
* If the trust is not funded when the grantor becomes incapacitated, then the agent of the grantor’s durable power of attorney could transfer assets into the trust for the successor trustee to manage.
* However, if the trust is already funded, this will avoid delays in locating, transferring, and managing the grantor’s assets at a critical point in his life.
REAL-LIFE EXAMPLE
Pat Flynn had a will, a health care proxy, a durable power of attorney naming her friend John as her agent, and an unfunded revocable trust. When Pat unexpectedly fell into a coma 8 months ago, John had to try and locate all of her mutual funds and money market and bank accounts to transfer them into her trust.
* This caused delays in having assets available to the trust, and there were also transfer costs involved.
* John was not successful in transferring all of her assets into the trust before Pat died;
* therefore the remaining assets were included in her probate estate.
Describe the Health Care Power of Attorney
The purpose of the health care power of attorney, also known as a health care proxy, is to grant an agent the power to make health care decisions for the principal in the event of incapacity.
In contrast to the living will, which simply indicates the creator’s intent with respect to utilizing heroic measures to be kept alive, the health care power of attorney allows the principal to more fully specify his or her health care wishes than a living will.
Health care agents can confer with medical professionals to make decisions concerning:
* Where an individual should be treated
* The extent of medical treatment that should be provided
* Whether surgery should be performed
* If medications should be administered
* The types of life support systems that should or should not be utilized
A principal can also limit the agent’s authority and can specify under what circumstances the agent can act on the individual’s behalf.
Practitioner Advice: All documents which are old need to be updated. A copy of the health care power of attorney should be given to the agent, while the original should be kept in a safe place to which the agent will have access.
Describe The Living Will
State statutes dictate provisions in living wills, and living wills are not recognized in all states.
* A disadvantage of a living will is that it is brief, and may contain vague language that is not written in medical terms.
* Consequently, it may not be detailed enough to provide sufficient medical directives in particular situations, and it may not address all treatment options available to the individual.
* This lack of information can result in differing interpretations of the individual’s wishes among family members and physicians.
Practitioner Advice:
Practitioner Advice: All documents which are old need to be updated. A copy of the health care power of attorney should be given to the agent, while the original should be kept in a safe place to which the agent will have access.
Practitioner Advice: It is very important that physicians and family members are informed in writing of the extent of medical treatment an individual desires before serious illness occurs.
Which Decision Making Powers can the following make?
Financial Decisions
Personal Care Decisions
* Durable Power of Attorney
* Plenary Guardian
* Health Care Power of Attorney
* Living Will
Durable Power of Attorney
* Financial Decisions
Plenary Guardian
* Financial Decisions
* Personal Care Decisions
Health Care Power of Attorney
* Personal Care Decisions
Living Will
* Personal Care Decisions
