Category Archives: Estate Planning

Planning for Incompetence

One of the scariest scenarios we face is the prospect of no longer being able to make our own decisions and to think for ourselves.  Often this is a process of gradual decline, and either we, or those close to us, can see the changes and understand what is happening.  If you have not done advanced planning, that’s a good time to get moving.  There are some fairly straightforward documents that you can draft and execute which will allow those you love and trust to make important decisions. 

1.  Health Care Proxy:  this document names the person who can make medical decisions for you in the event that you are unable to make them yourself.  In Massachusetts, only one person can be named at a time, but you can have successor agents in case the first person is not available.  I recommend that everyone have a Health Care Proxy (including young adults so that doctors must listen to their parents, or to the person they have designated).

If you do not have a Health Care Proxy and there is a disagreement about your care, it is possible that a Guardian will have to be appointed by the probate court.  This is a process that can be time consuming, complex, and expensive.  In the end, the court decides who will make decisions about your care, not you.

2.  Durable Power of Attorney:  this document names a person who can sign documents on your behalf, and who can make financial and administrative decisions on your behalf.  This can be effective now, or it can come into effect upon your incapacity. 

Like a Health Care Proxy, if you do not have a Durable Power of Attorney, and become incompetent, a family member or caregiver will have to go to court to be named to represent you.  This person is called a Conservator, and this process, like naming a Guardian, requires court involvement and much expense.  It also means that the court makes the final decision about the person best suited to manage  your affairs.  Judges are wise and thoughtful, but they don’t know you or your family members the way that you do – don’t you think you’ll make a better decision?

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Digital Property

What happens to  your Facebook account, Paypal transactions, or Ebay account if you pass away or become incapacitated?  Who has access to that “bill pay” function?  You have beautiful photo albums that you keep and update on-line, will your children still be able to see them?  You do your business back ups to the cloud, can your business partners get to your documents?

There are practical answers and legal answers here.  The legal pieces are probably still a murky tangle.  Presumably title transfers as a type of intangible property in some cases, in others, the cash will flow through probate like other types of financial accounts.

However, some practical steps are necessary before you even get to that point.

  • Make a list of digital accounts and passwords
  • Store them somewhere non-digital (like your desk drawer)
  • Update them when you change your passwords or add accounts

 

In some ways this goes against the grain of keeping our information secure, but I think that it is far more likely that an account will be hacked than that someone will rifle through your desk drawer for the list of digital account information.  (Of course, if you have middle school children and you control the XBox Live account, this may not apply…)

Some financial and legal professionals offer services that store this type of information along with copies of your important documents. It’s a little like a digital safety deposit box, and you create a password and pin that would allow another to see the information in the event of a crisis. 

However you decide to keep track, this type of information gains in importance every day, make sure someone can get to it if they need to.

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Grandma’s Yellow Pie Plate

There’s a great book called “Who Gets Grandma’s Yellow Pie Plate” which is put out by the University of Minnesota Extension Service.  It’s a kind of how to guide for dividing personal property when someone passes away.  Often it is things with sentimental value that tear families apart after a death.  Did your family have a special tradition, your mother a favorite Christmas tree ornament, your father a pipe or carving that brings back fond memories?  How items like this are divided upon a person’s death can cement a family in fond memories, or re-ignite old scars and power struggles. 

There are different ways to approach dividing personal property – ask the people who are important to you what things they value.  You might be surprised by what they say.  You can give things away while you’re alive, or make a list of items and recipients.  Often such a list is mentioned in a will; it should be signed and dated.  After a person has died, the family may gather to divide things up; do this with a plan and some thought.  Who should be there, where should the conversations take place, when should this happen? 

And of course, don’t forget to have this conversation about your pets.  We joke in my family that the turtle will be going to the nursing home with me because it’s likely to live longer than I do…I hope it’s only a joke!

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But Doesn’t Everyone Need a Trust?

I recently had a client explain that they wanted a trust because Suze Orman said that everyone needed a trust.  Now, in general, trusts meet many needs, and are often a good idea.  Especially if there are minor children, adult children who might do better with structured payments, or long term care planning concerns, trusts can fill a valuable need.  However, just as not everyone NEEDS a prenuptial agreement, not everyone needs a trust. 

Trusts help  you avoid much of the probate process, but there are other ways to do this, too.  If your assets are jointly held with your spouse, and one of you dies, the assets will go “by operation of law” to your spouse without going through probate.  In a similar way, anything with a beneficiary designation (life insurance, annuities, most retirement accounts) will go to that beneficiary directly.  The probate court will oversee any assets that pass through your will, and sometimes this can be a good thing.  It does take time to probate an estate, but if the assets are fairly limited, the cost of setting up a trust may not be appropriate.

Regardless of whether you do or do not need a trust, please call an advisor you trust before you make important estate planning decisions, I know that you aren’t cookie cutter clients, why should you have a cookie cutter estate plan?

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Getting organized…

I want to re-finance my house, consolidate all those little IRAs and 401k’s from old jobs, get a new passport, make a will…What’s the common denominator?  When you start on any of these tasks, you need to be able to put your hands on paperwork, sometimes LOTS of paperwork.  Do you know where your birth certificate, bank statements, investment statements for the last three months are?  And I mean you can hand them to someone easily, not that you’re sure that they are in the big pile over there.

Or, could you tell someone else where to find your life insurance policy, homeowner’s policy, or auto insurance policy if you were away on vacation and you needed to file a claim? 

Join us for a complimentary seminar on May 26th, 2011 at 5 pm at the Cape Ann Savings Bank in Gloucester.  Gail Ramos, Senior Trust Officer at the 
Cape Ann Savings Bank and I will talk about getting a grip on organizing some of that paperwork…Networking from 5 to 5:30 and the program will go from 5:30 – 6:30.

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Capacity–Can she really make that decision?

Capacity Requirements

Proper execution of a legal instrument requires that the person signing have sufficient mental "capacity" to understand the implications of the document. While most people speak of legal "capacity" or "competence" as a rigid black line–either the person has it or doesn’t–in fact it can be quite variable depending on the person’s abilities and the function for which capacity is required.

One side of the capacity equation involves the client’s abilities, which may change from day to day (or even during the day), depending on the course of the illness, fatigue and the effects of medication. On the other side, greater understanding is required for some legal activities than for others. For instance, you need to have a higher and clearer amount of “capacity” to enter a contract than to write a will. 

Capacity to make a will was summed up by the Massachusetts Supreme Judicial Court:

Testamentary capacity requires ability on the part of the testator to understand and carry in mind, in a general way, the nature and situation of his property and his relations to those persons who would naturally have some claim to his remembrance. It requires freedom from delusion which is the effect of disease or weakness and which might influence the disposition of his property. And it requires ability at the time of execution of the alleged will to understand the nature of the act of making a will.

This is a relatively "low threshold," meaning that signing a will does not require a great deal of capacity. The fact that the next day the testator does not remember the will signing and is not sufficiently "with it" to execute a will then does not invalidate the will if he understood it when he signed it.

The standards for entering into a contract are different because the individual must know not only the nature of her property and the person with whom she is dealing, but also the broader context of the market in which she is agreeing to buy or sell services or property.  This is a more long range kind of understanding, and requires a more complex ability.

While the standards may seem clear, applying them to particular clients may be difficult. The fact that a client does not know the year or the name of the President may mean she does not have capacity to enter into a contract, but not necessarily that she can’t execute a will or durable power of attorney. The determination mixes medical, psychological and legal judgments. It must be made by the attorney (or a judge, in the case of guardianship and conservatorship determinations) based on information gleaned by the attorney in interactions with the client, from other sources such as family members and social workers, and, if necessary, from medical personnel. Doctors and psychiatrists cannot themselves make a determination as to whether an individual has capacity to undertake a legal commitment. But they can provide a professional evaluation of the person that will help an attorney make this decision.

Because you need a third party to assess capacity and because you need to be certain that the formal legal requirements are followed, it can be risky to prepare and execute legal documents on your own without representation by an attorney.

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Tell me again why I should do my estate plan?

Everyone has a different reason for beginning, updating, or implementing an estate plan.  Usually one very specific reason.  For some, it’s the birth of a child and the need to secure their future.  For another it might be a divorce and the need to separate in life and in death.  For a third, it’s the death or illness of a loved one that makes a client realize that planning can make a death either easier, or much harder for their family members.

For others it’s a chance encounter or event.  I have some friends who were first time homebuyers, excited about a great home, and in a hurry to move in with their young family.  Sadly, the elderly owner of the home passed away two weeks before the closing.  This could have completely derailed this family’s plans, but the home was held in a trust.  The home did not need to go through probate since it was legally owned by the trustees.  Because of this, the closing could continue, and the heirs and the family were able to finish the transaction quickly and efficiently.  You can be sure that the young family was much more enthusiastic about good estate planning once they had seen it in action.

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Law meets Life–An occasional blog for North Shore Residents

Pet Round UP: Dogs on the Beach, Dogs in your Will.

The Manchester-by-the-Sea Town Meeting is April 4 and 5, 2011. One warrant item will be whether or not to further restrict dogs on Singing Beach. Did you know that if you vote on the issue that concerns you, and leave the meeting, that the warrant can later be amended and a vote re-taken? If there is a subject of interest to you on the warrant, be ready to stay for the entire meeting.

On another pet related note, Massachusetts just became the latest state to pass PET TRUST LEGISLATION. We now have a statute that allows you to leave a sum of money specifically for the care of your animal when you die. Thank you to Bruce Tarr for co-sponsoring this legislation. More info can be found here:  Pet Trust article

Do you have a great pet sitter, vet, groomer, or pet trainer that you’d like to recommend? Please send along their info, and I’ll do a listing in the next Pet Round UP.

P.S. Manchester residents: Dog licenses need to be obtained from Town Hall by March 31st.

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Putting a residence into Trust

First, a trust is a form of ownership that separates legal title from beneficial ownership.  So something held in trust is “owned” by trustees for the benefit, according to the terms of the trust, of the beneficiaries.  A trustee is a fiduciary, and is required to follow the terms of the trust.  Trusts have been around for centuries, and are used to serve several different purposes.

You might consider putting your home in a trust so that when you pass away it will go directly to the beneficiaries, without going through probate.  You might also put a residence into trust so that you don’t technically own it anymore, but you can still benefit from it in some way (you might be able to continue living there, for example).  Assets held by trusts often provide protection from creditors.  If your son is a beneficiary of a trust, a creditor or divorcing spouse typically could not reach the principal of the trust, as he does not technically “own” the assets.  People also put homes into trusts for Medicaid planning, or for estate tax planning.  These types of trusts need to be irrevocable and carefully drafted. 

Trusts take on-going work and administration once they have been created.  Irrevocable trusts, in particular, require their own tax ID number, and tax returns must be filed annually.

When you put a residence into trust, you take the title of the property from your name, and put it in the name of the trustees.  This is accomplished by drafting and executing a deed which is then recorded in the local registry of deeds. 

Trusts can be confusing or relatively straightforward; they can provide asset protection, a way of planning your legacy, or a way of protecting your family from unexpected events.  They’re an outstanding way of creating structure for a family member who has special needs, or unpredictable spending habits.  If you decide to do trust planning, choose your attorney carefully, and be certain that your advisor has experience working with the type of trust you need.

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Estate Administration

Probate is the process by which a deceased person’s property, known as the "estate," is passed to his or her heirs and legatees (people named in the will). The entire process, supervised by the probate court, usually takes about a year. However, substantial distributions from the estate can be made in the interim.

The emotional trauma brought on by the death of a close family member often is accompanied by bewilderment about the financial and legal steps the survivors must take. The spouse who passed away may have handled all of the couple’s finances. Or perhaps a child must begin taking care of probating an estate about which he or she knows little. And this task may come on top of commitments to family and work that can’t be set aside. Finally, the estate itself may be in disarray or scattered among many accounts, which is not unusual with a generation that saw banks collapse during the Depression.

Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor or personal representative in the deceased family member’s will. Matters can be a bit more complicated in the absence of a will, because it may not be clear who has the responsibility of carrying out these steps.

First, secure the tangible property. This means anything you can touch, such as silverware, dishes, furniture, or artwork. You will need to determine accurate values of each piece of property, which may require appraisals, and then distribute the property as the deceased directed. If property is passed around to family members before you have the opportunity to take an inventory, this will become a difficult, if not impossible, task. Of course, this does not apply to gifts the deceased may have made during life, which will not be part of his or her estate.

Second, take your time. You do not need to take any other steps immediately. While bills do need to be paid, they can wait a month or two without adverse repercussions. It’s more important that you and your family have time to grieve. Financial matters can wait. (One exception: Social Security should be notified within a month of death. If checks are issued following death, you could be in for a battle. For more on Social Security’s death procedures, click on http://www.ssa.gov/pubs/deathbenefits.htm)

When you’re ready, but not a day sooner, meet with an attorney to review the steps necessary to administer the deceased’s estate. Bring as much information as possible about finances, taxes and debts. Don’t worry about putting the papers in order first; the lawyer will have experience in organizing and understanding confusing financial statements.

Below are some of the steps in probate:

1. Filing the will and petition at the probate court in order to be appointed executor or personal representative. In the absence of a will, heirs must petition the court to be appointed "administrator" of the estate.

2. Marshaling, or collecting, the assets. This means that you have to find out everything the deceased owned. You need to file a list, known as an "inventory," with the probate court. It’s generally best to consolidate all the estate funds to the extent possible. Bills and bequests should be paid from a single checking account, either one you establish or one set up by your attorney, so that you can keep track of all expenditures.

3. Paying bills and taxes. If an estate tax return is needed—generally if the estate exceeds $1 million in value—it must be filed within nine months of the date of death. If you miss this deadline and the estate is taxable, severe penalties and interest may apply. If you do not have all the information available in time, you can file for an extension and pay your best estimate of the tax due.

4. Filing tax returns. You must also file a final income tax return for the decedent and, if the estate holds any assets and earns interest or dividends, an income tax return for the estate. If the estate does earn income during the administration process, it will have to obtain its own tax identification number in order to keep track of such earnings.

5. Distributing property to the heirs and legatees. Generally, executors do not pay out all of the estate assets until the period runs out for creditors to make claims, which is a year after the date of death. But once the executor understands the estate and the likely claims, he or she can distribute most of the assets, retaining a reserve for unanticipated claims and the costs of closing out the estate.

6. Filing a final account. The executor must file an account with the probate court listing any income to the estate since the date of death and all expenses and estate distributions. Once the court approves this final account, the executor can distribute whatever is left in the closing reserve, and finish his or her work.

Some of these steps can be eliminated by avoiding probate through joint ownership or trusts. But whoever is left in charge still has to pay all debts, file tax returns, and distribute the property to the rightful heirs. You can make it easier for your heirs by keeping good records of your assets and liabilities. This will shorten the process and reduce the legal bill.

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