This post is Part 3 of our 3-part series in which we answer the question: What is an “Estate Plan”? From Part 1 of this series [1], I gave you the general definition of an estate plan and listed the two primary types of estate plans:
- An Estate Plan that is built around a Last Will & Testament (LW&T); or
- An Estate Plan that is built around a Revocable Living Trust (RLT).
From Part 2 of this series [2], I listed and explained the documents that typically make up an estate plan built around a Last Will & Testament. In this post, I have listed and explained the documents that typically make up an estate plan that is built around a Revocable Living Trust.
As I’ve indicated in the previous posts of this series, there are pros and cons to each of these types of estate plans. However, the important thing to remember is that—so long as you have your wits about you (i.e., so long as your retain your mental capacity)—you can always make changes to any of the documents that make up your estate plan whenever you wish (e.g., if your own circumstances or estate planning preferences change). Nevertheless, it is vitally important that you get an estate plan in place now because you don’t know when you will lose your mental capacity or die. Any estate plan that is built around a Revocable Living Trust (RLT) should—at a minimum—include the following documents:
- A document that establishes and governs your Revocable Living Trust (RLT). Usually this document is referred to as either a Declaration of Trust or a Trust Agreement. As the person who establishes the RLT, you are referred to as the Settlor, or Trustor, of the RLT. Most of the time the Settlor will also be the Trustee of the RLT, at least at the beginning. The terms of the document governing the RLT provide for the management and administration of those items of real and personal property that are held in the RLT BOTH during your lifetime (thus enabling you and your estate to avoid a conservatorship if you become incapacitated later in life) AND after your death (thus enabling your estate to avoid a probate—at least with regard to the property that is held in the RLT at the time of your death).
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A Last Will & Testament (LW&T), which is a document that you sign in your capacity as the “Testator.” In an estate plan built around a RLT, the LW&T is often referred to as a “Pour Over Will.” The terms of your Pour Over Will do not become effective until your death. This means that you can change your Pour Over Will as often as you want during your lifetime. A key part of any well drafted Pour Over Will is the nomination—by you, the Testator—of the person or persons you want to serve as the Executor of your estate. The Executor of your estate is the person who will “be in charge” of the administration of your estate after your death. The Executor’s primary tasks include (1) making an inventory of the property in your estate; (2) getting control of that property (to protect it from waste or neglect); (3) paying your outstanding debts and taxes (that you owe at the time of your death); and then (4) distributing the property that remains to your loved ones, according to the terms of your Pour Over Will. However, in the estate plan that is built around a Revocable Living Trust, the Executor distributes any property that would make up your probate estate to the Successor Trustee of your RLT—rather than directly to your loved ones—because the document governing your RLT already provides for the distribution of your property to your beneficiaries. This is the reason that this kind of Last Will & Testament is often referred to as a “Pour Over Will,” because any property that is controlled by your Last Will & Testament (remember that this is property that was held in your name alone—in your individual capacity—at the time of your death) is transferred (i.e., is “poured over“) to the Trustee of your Revocable Living Trust.
- A Durable Power of Attorney for Property Management (DPAPM), which is a document you sign in your capacity as the “Principal” and by which document you appoint an Agent to manage and protect—on your behalf—any items of your real and personal property (e.g., including your home, your financial accounts and investments, including your retirement plans, annuities, life insurance policies, etc.) that are held outside of your Revocable Living Trust. An Agent under your DPAPM can also act for you regarding other financial or personal matters involving you personally (e.g., health insurance, income taxes, etc.). Importantly, your Agent generally has the power to transfer into your Revocable Living Trust most items of your real and personal property that are not already held in your RLT so that such property will avoid a probate upon your death. This is an important reason to have a DPAPM as part of an estate plan built around a RLT— to enable you to avoid a conservatorship if you become incapacitated later in life and to enable your estate to avoid a probate—at least with regard to the property that is held in the RLT at the time of your death. Usually, your DPAPM remains in effect until your death (unless you revoke it).
- An Advance Health Care Directive (AHCD), which is a document you sign in your capacity as the “Principal” and by which document you appoint a Health Care Agent to act on your behalf to make medical decisions for you if you become unable to make these decisions for yourself (i.e., if you become incapacitated). Your AHCDremains in effect until your death (unless you revoke it). This often overlooked document—so simple to put into place—is critical to any estate plan, regardless of how complex or simple the estate plan. Even if you do nothing else, please sign an Advance Health Care Directive so that—if you ever become unable to make your own medical decisions—a trusted family member, friend, or advisor (someone who knows you and understands your values) will be able to make those critical decisions for you.
- A Durable Power of Attorney for Property Management (DPAPM), which is a document you sign in your capacity as the “Principal” and by which document you appoint an Agent to manage and protect—on your behalf—any items of your real and personal property (e.g., including your home, your financial accounts and investments, including your retirement plans, annuities, life insurance policies, etc.) that are held outside of your Revocable Living Trust. An Agent under your DPAPM can also act for you regarding other financial or personal matters involving you personally (e.g., health insurance, income taxes, etc.). Importantly, your Agent generally has the power to transfer into your Revocable Living Trust most items of your real and personal property that are not already held in your RLT so that such property will avoid a probate upon your death. This is an important reason to have a DPAPM as part of an estate plan built around a RLT— to enable you to avoid a conservatorship if you become incapacitated later in life and to enable your estate to avoid a probate—at least with regard to the property that is held in the RLT at the time of your death. Usually, your DPAPM remains in effect until your death (unless you revoke it).
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Documents related to Funding your RLT with your real and personal property, which documents include the following:
- Trustee’s Certification and a Redacted copy of the Governing Trust Document, which documents are provided to financial institutions as part of the “trust funding” process (i.e., financial institutions will need documentation about your RLT before opening accounts that are formally held in the RLT);
- Trust Transfer Deed for each parcel of real property that you own, by which deed you transfer the legal title to each parcel of real property from yourself as an individual to yourself as Trustee of the RLT;
- Letters of Direction from You to Each Financial Institution with which you have cash and investments directing the financial institution to change the title to, or registration of, each cash or investment account from yourself as an individual to yourself as Trustee of the RLT so that the assets in the bank or investment account become part of the RLT; and
- Standardized or Institution-Specific Forms that are required by financial institutions in which cash or investments of the RLT will be held.
- Trustee’s Certification and a Redacted copy of the Governing Trust Document, which documents are provided to financial institutions as part of the “trust funding” process (i.e., financial institutions will need documentation about your RLT before opening accounts that are formally held in the RLT);
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Comparison of the Estate Plan built around a Revocable Living Trust with the Estate Plan built around a Last Will & Testament. There are advantages and disadvantages of each of these traditional estate plans when compared to each other. Among them are the legal fees and expenses to establish each plan and the ease of administration of each plan upon either your incapacity or death.
Legal Fees & Expenses. Generally, the estate plan that is built around an RLT is more expensive to establish than the estate plan built around a LW&T. Why is this so? One reason for the extra expense has to do with the fact that the document governing your RLT must include additional terms (in addition those that are normally included in a LW&T) that direct the Trustee regarding the management and administration of the trust property during your lifetime and not just after your death. Remember that your LW&T becomes effective only after your death; your RLT is effective on the date you sign the Trust Agreement or Declaration of Trust. Another reason for the extra expense of an estate plan built around an RLT relates to the costs involved in funding your RLT with your property (i.e., changing the legal title to, or registration of, the various items of property that are transferred into the RLT). There is no trust to fund in an estate built around a LW&T.
However, the estate plan built around an RLT is far less expensive to manage upon your incapacity or death than the plan built around a LW&T because the estate plan built around an RLT enables you to avoid a conservatorship if you become incapacitated and your estate to avoid a probate upon your death.
In other words, the “front-end” costs of an estate plan built around a LW&T are less than those of a plan built around an RLT but the “back end” costs of the estate plan built around a LW&T are usually much higher than those of the plan built around an RLT.
Ease of Administration Upon Your Incapacity or Death. Generally, the estate plan built around an RLT is easier to administer upon either your incapacity or death because of the centralized management provided by the RLT; most, if not all, of your property is held in the RLT and would be managed by the Successor Trustee (upon either your incapacity or death). Moreover, there is usually little or no need for intervention by a Court, which would likely be required upon either your incapacity or death if you had an estate plan built around a LW&T. With such an estate plan, if you lose your capacity, then a conservatorship of your estate may be needed to protect your property (if financial institutions refuse to honor the authority of your Agent under the Durable Power of Attorney). And, upon your death, a probate of your estate would be necessary (to pass your property to your intended beneficiaries).
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The type of estate plan you decide to establish will depend on (1) your overall estate planning objectives; (2) the type of the property you own; (3) the value of the property you own; and (4) your current personal and family circumstances. Moreover, one type of plan may suit you perfectly at this time and be not at all suitable for you in the future. That’s OK; you can always make changes later. Just get a plan in place NOW.
We hope this information has been of help in deciding which estate plan is best for you. If you wish to discuss in more detail the “pros” and “cons” of each type of plan, please let us know. Also, please leave a comment if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices