1. What is an estate plan?

In its simplest terms an estate plan is a set of legal documents that (a) describe who gets what when you die, (b) names the person who is in charge of making sure it happens, and (c) names the person who will make financial and health care decisions for you if you are unable to do so because of illness, disease, or injury.

2.    What documents are included in an estate plan?

Typically, an estate plan includes the following documents:

• A Will which is a document that states who gets what when you die and names the person who is in charge of making sure this happens. The reason you should have a Will is because it allows you to choose who gets what when you die. For the most part, you can give your estate to whomever you choose. The only exception is that you cannot completely disinherit a spouse. Here is an example:  If you die without having a Will, your estate will be distributed to your heirs at law. In many cases this may correspond with what you want, but often it does not. You are taking a chance that it will work out as you want. For example, if you die survived by a spouse and children of your marriage, your spouse receives the first $100,000.00 of your probate estate and ½ of the balance and your children divide the other ½ of the balance. Is that really what you want?
• A Durable Power of Attorney Instrument is a document that designates one or more individuals to make financial decisions for you if you are unable to do so because of illness, disease or injury. Another way to designate someone to make these decisions for you if you are incapacitated is to ask the Probate Court to appoint a conservator. In most cases, a power of attorney instrument is preferable because it is private and less expensive. Sometimes, however, the protection afforded by Probate Court scrutiny and supervision is advantageous. A power of attorney instrument is a separate document.
• Health Care Instructions designate one or more individuals to make health care decisions for you if you are unable to do so because of illness, disease or injury. The health care decision making includes end of life decisions such as terminating mechanical devices if you are in a persistent vegetative state or the final stages of a terminal illness.
• Beneficiary Designation Statements are required to assure that life insurance proceeds, annuities, and retirement accounts are distributed in a manner that is consistent with the terms of your Will (discussed in greater detail in question # 6).
• A Revocable Inter-Vivos Trust (“Revocable Trust”) sometimes is an appropriate part of the estate plan (discussed in greater detail in question # 8). Another name sometimes used for a Revocable Trust is a “living trust”.  

 

3.    How is my estate plan formulated?  

In most instances, it begins with an initial meeting with an attorney of your choosing. You will talk about your family, your dispositive wishes, your views about incapacity planning and end of life decision making, your income, and your assets. If there is a federal or state estate tax planning issue that needs to be addressed, it generally will come up at that meeting. In most instances, there also will be a discussion about the pros and cons of using a Revocable Trust as part of the estate plan. As the estate plan is formulated and evolves, the attorney also may involve your accountant, financial planner/adviser, and/or life insurance agent in the planning process.

 

4.    What are the common choices people make about who gets what?

 

• Everything to my spouse. In most cases this works just fine, but not always. Is this a second marriage? If so, what about your children from the first marriage? Do you have a pre-nuptial agreement? Is the spouse physically or emotionally incapacitated in any way? Is the spouse in a nursing home or likely to go to one?  Are there tax planning considerations? If so, special provisions will be required.
• If my spouse has died before me, everything to my children. In most cases, this works just fine, but not always. Is the division among children equal, or does one get more than the other? Is a child physically or emotionally incapacitated in any way? Is a child in financial distress? Is a child too young to invest and spend assets wisely? Has a child received assistance from a governmental agency in the past or is the child likely to need such assistance in the future? If so, special provisions will be required.
• If I have no spouse and no children. You can name any individual or charity or combination of them that you choose.

5.    What if a child dies before me?

 This is not supposed to happen, but we all know that sometimes things happen in ways we do not want. If your child has children (your grandchildren) typically your estate plan will provide that the deceased child’s share passes to his or her children. If there are no grandchildren, the deceased child’s share will pass to your other children.

 Because grandchildren may not know how to invest or spend money until older, you will want to consider establishing a trust for young grandchildren. If you do, the trustee will make the investment and spending decisions for the grandchildren until they are old enough to make those decisions themselves. You establish the age at which that occurs and you name the trustee. The age can be any age you think appropriate. Twenty-five (25) is a popular choice, but there is no magic to that choice. Another option is to create a staged termination of the trust such as ½ at twenty-five (25) and the balance at thirty (30), for example.

 You will need to name a trustee of the trust for grandchildren. Ideally, you should have a first choice, a second choice, and a mechanism for selecting even additional successor trustees. Keep in mind that, depending on the age of your grandchildren, the trust may be in existence for many years after your death. Are you comfortable naming the deceased child’s spouse to act as the trustee for your grandchildren? What about one or more of your other children as an alternative?

6.    What about life insurance proceeds, annuities, retirement accounts, and joint accounts?

These are called “non probate assets”. They do not pass to the beneficiaries specified in your Will. Rather, joint accounts pass to the other joint owner. Life insurance proceeds, annuities, and retirement accounts pass to the designated primary or contingent beneficiary. These assets are called “non-probate” assets because they pass to the successor by operation of law and without the need for any Probate Court assistance to make the transfer. A very important part of estate planning is to assure that these “non-probate” assets pass in a manner that is consistent with your dispositive wishes. Here is an example:

Frank’s Will says that his entire estate passes, in equal shares, to his children, Judy, Mary and Sheldon. When Frank dies he owns his home, has a bank account jointly owned with Judy, an IRA account that names Judy and Mary as beneficiaries, and a life insurance policy that names his former wife as the beneficiary. This is how Frank’s estate will be distributed:

• The home will be distributed to Judy, Mary and Sheldon, as directed by Frank’s Will;
• The bank account will be distributed to Judy, only;
• The IRA account will be distributed to Judy and Mary, only;
• The life insurance proceeds will be distributed to Frank’s former wife.

 

7.    What about death taxes? 

The primary “death” tax is the federal estate tax, but for the single year of 2010 the federal estate tax is repealed completely. In 2011 the federal estate tax returns and, at that time, the exemption for assets passing to anyone but a citizen spouse is only $1,000,000.00. This, of course, is nonsensical and everyone expects the law to change some time in 2010, but no one knows how it will change. Please also note that Connecticut adopted a state estate tax for decedents dying after January 1, 2005. The Connecticut exemption amount is $3,500,000.00 for property passing to anyone but a spouse. Both the federal and Connecticut estate tax have an unlimited exemption for property passing to a citizen spouse.

 

8.    What is a “living trust” and do I need one?

The technical legal name for a “living trust” is a Revocable Inter-Vivos Trust (“Revocable Trust”). It frequently is advertised as a device that allows you to avoid probate and save on death taxes. These claims are only partially true. The primary advantages of a Revocable Trust are the following:

• Assets put into the Trust while you are alive (referred to as “funding” the trust) can be transferred to your beneficiaries after your death without assistance from the Probate Court.
• There is a greater degree of privacy because your dispositive wishes are stated in your Revocable Trust, not your Will, and, in most instances, your Revocable Trust is not filed with the Probate Court.
• If you become incapacitated, the successor Trustee can manage assets in your Revocable Trust for your benefit as you have directed in the Trust. Although the agent named in your Durable Power of Attorney Instrument can do the same thing, management by the successor Trustee must be consistent with the provisions you have stated in your Revocable Trust. That creates a degree of control over the management of those assets that is not present when assets are managed through a Durable Power of Attorney Instrument.

 

The Revocable Trust, however, has no impact whatever on death taxes or statutory probate fees as sometimes is claimed in advertisements for them. Keep in mind that many assets avoid probate in any event (see question #6) so you may not need a Revocable Trust to accomplish that purpose. Also keep in mind that the probate avoidance objective is achieved only if the trust is funded.

 

9.    Why is it important to fund the Revocable Trust?

Here are two examples that illustrate the reason why it is important to do so.

Example 1. Sally has two children, Mary and Sheldon. Sally wants her estate to be divided equally by her children. There is some tension between Mary and Sheldon. Mary lives locally and is more tuned in to taking care of business. Sheldon lives in California and might be considered somewhat of a flower child. Sally owns her home, and has a bank account jointly owned with her daughter, Mary. Sally has a Will and a Revocable Trust but Sally did not fund her Revocable Trust while she was alive. Sally’s Will says that on her death all of her probate assets pass to her Revocable Trust; her Revocable Trust says that on her death all of the Trust assets are to be divided equally by Mary and Sheldon. Mary is named as the executrix of the estate and the successor Trustee. This is how Sally’s estate will be distributed:

• Mary will need to open an estate in the Probate Court to obtain the authority to transfer the home from Sally’s estate to Sally’s Trust; once the home has been transferred to the Trust Mary can sign a Trustee’s Deed transferring it into the joint names of Mary and Sheldon;
• The bank account will be distributed to Mary, the surviving joint owner; will she share it with Sheldon as Sally intended? That will be Mary’s call.

 

Example 2. Everything is the same as in Example 1 except Sally fully funded the Trust when her estate planning documents were signed. This means she signed a Deed that retitled the way her home was owned by saying it is owned by Sally’s Trust and not by Sally, individually. She also changed the bank account from a jointly owned account to an account titled as owned by Sally’s Trust. This is how Sally’s estate will be distributed:

• Mary will file Sally’s Will with the Probate Court, but for information purposes only; she will not need to open a probate estate;
• As soon as all of Sally’s bills have been paid, Mary, as successor Trustee, can sign a Trustee’s Deed transferring the home into the joint names of Mary and Sheldon. She also can distribute the bank account, ½ to herself and ½ to Sheldon.

 

10. Can I do something that will allow me to avoid the Probate Court completely?

The short answer to this question is no. Connecticut law requires that a Connecticut Estate Tax Return be filed with the Probate Court for any decedent who has died after January 1, 2005. This is true even though no tax will need to be paid. So, although you can avoid the need to ask for Probate Court assistance to transfer assets after your death (by use of a Revocable Trust or other forms of non-probate disposition as described in Questions #6, #8, and #9), you still must file a Connecticut Estate Tax Return.

The Probate Court will assess a statutory probate fee based upon the value of the Gross Taxable Estate reported on the Return. As an example, if the Gross Taxable Estate is $500,000.00, the statutory probate fee will be $1,865.00. The marginal rate above $500,000.00 is .25% which means the statutory probate fee for a gross taxable estate of $750,000.00 is $2,490.00.

 

11. What are Advance Directives?

In general, the term “advance directives” refers to a set of legal documents that allows you to express your wishes about financial decision making and health care decision making when you are not able to express them. Typically, advance directives include a Durable Power of Attorney Instrument, a Living Will, the appointment of a Health Care Agent, and the designation of a Conservator in the event any request for such ever is filed with a Probate Court. Advance directives are not just for the elderly; all people who desire to direct the management of their financial affairs and their medical care in the future should have a comprehensive set of  advance directives.

12. What is a Durable Power of Attorney Instrument?

A Durable Power of Attorney Instrument is an essential part of a complete estate plan because it permits someone to handle your financial affairs if you become incapacitated.  The individual appointed is called your agent or attorney-in-fact and is authorized to step into your shoes in handling your financial affairs. The power given to the agent is different from that of a trustee because the agent does not take title to the principal’s property and is only authorized to act in place of the principal. 

 

13. What is the Durable Power of Attorney’s effectiveness during incapacity?

A Power of Attorney is “durable” if it remains effective after the principal becomes incapacitated.  In the past, a power of attorney could authorize the agent to do only what the principal could do, and therefore ceased to be effective as soon as the principal became incapable.  All states have now enacted statutes authorizing the creation of durable powers of attorney where a principal can create a power that continues to be effective notwithstanding his/her incapacity.

 

14. What is my agent authorized to do?

A Durable Power of Attorney can be used to handle the affairs of an incapable person without the necessity of a court appointed conservator of the person’s property. 

The power can be broad or narrow.  For instance, the power can authorize the agent to act in place of the principal with respect to only one type of transaction, such as banking transactions, or a power may authorize the agent to act for the principal in all financial transactions, including buying and selling real property, tangible personal property, stocks, bonds and other investments.  The power can also authorize the agent to act with respect to operating a business, handling insurance claims, litigation claims, retirement benefits and governmental claims, such as Medicare and Social Security, and filing tax returns. 

A broad statement authorizing an agent to act for a principal generally does not include the power to make gifts.  An agent can make gifts under a durable power of attorney only if the document expressly authorizes gifts.  Since gifts are a basic estate and Medicaid planning tool, it is useful for a durable power of attorney to authorize an agent to make gifts for estate and/or Medicaid planning purposes.   

 

15. How do I choose an attorney-in-fact?

An attorney-in-fact need not be an attorney or other professional.  Frequently the choice falls on a family member or friend.  The most important factors to consider are honesty and competence because an attorney-in-fact is not supervised by a court like a conservator would be. 

One means of dealing with concerns as to honesty and competence of the agent is to require the signatures of two individuals on the power of attorney. 

It is also important to consider whether other family members will have confidence in the agent.  If family relationships are strained, appointing one child as an agent may aggravate existing tensions. 

 

16. When does a Durable Power of Attorney take effect?

A power of attorney may authorize an agent to begin acting for the principal immediately, or it may become effective only upon the occurrence of some future event (a springing power).  The most common trigger for a springing power is the incapacity of the principal.  Such powers generally require some evidence of incapacity, such as documentation by one or more physicians of the principal’s incapacity.  

 

17. How do I revoke a Durable Power of Attorney?

The principal may revoke a power of attorney at any time by executing a written revocation (executed with the same formalities as the original power of attorney), or executing a new durable power of attorney instrument with language that expressly revokes any prior durable power of attorney.   The death of the principal revokes a durable power of attorney automatically. 

18. What is a Living Will?

A “Living Will” is a legal document that expresses your wishes concerning end of life decision making. In Connecticut, a Living Will is activated if the only way you are being kept alive is by some mechanical device, and, in addition to that, you either are in (a) a persistent vegetative state or (b) the final stages of a terminal illness. If you do not wish to have your life maintained in those circumstances, a Living Will authorizes your health care providers to discontinue the mechanical device(s) that are keeping you alive.

 

19. What is a Health Care Proxy?

A Health Care Proxy is a legal document that appoints one or more individuals (called “health care representatives” in Connecticut) to make health care decisions for you if you are unable to make or communicate such decisions on your own. The decision making includes the end of life decision making described in question 8 concerning a Living Will.   In this respect a health care representative is similar to an attorney-in-fact, established under a Durable Power of Attorney.  A health care proxy generally contains no specific instructions as to which health care measures should be provided or withheld.  The document simply authorizes the health care representative to make all necessary decisions in accordance with the wishes that the principal has communicated to the representative. 

Typically, the principal will elect their spouse to serve as their representative with one or more of the children serving as successors should the spouse be unable to serve in that capacity. If more than one representative is designated, the principal can decide whether each representative must act jointly (signatures are required from each representative) or severally (only one signature is required). 

20. What are Health Care Instructions?

Health Care Instructions refers to a Connecticut statutory provision that allows you to combine multiple advance directives into a single document. Health Care Instructions allow you to: (1) name a health care representative; (2) authorize your representative to make health care decisions for you; (3) express your wishes concerning end of life decision-making; (4) express your wishes about organ donation; and (5) tell the Probate Court who you want to serve as your conservator if anyone files an application to have a conservator appointed for you.