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Parents often call me and say, "Mark, I need a special needs trust." I tell them that although the special needs trust is vital, it is only one piece of a comprehensive estate plan. This article discusses the common documents in your estate plan.
Your estate plan is designed to protect your family if you become incapacitated and after you die. Your estate plan is like a jigsaw puzzle – all the pieces must fit together. For example, when you die, your will or living trust instructs the executor of your will or the successor trustee of your living trust to transfer a percentage of your estate to your child’s special needs trust. Similarly, if you have a living trust, and if you were to become incapacitated, there should be an “incapacity provision” in your living trust authorizing the successor trustee to be able to make distributions for the benefit of your child with a disability subject to the terms of the special needs trust.
Joint Living Trust
Let’s imagine Mr. and Mrs. Smith have three children, one with a disability. They jointly own a home and other assets, each with retirement accounts and some company life insurance.
To explain the joint living trust, let’s consider a counterfactual: Mr. and Mrs. Smith do not have a joint living trust. They only have wills. Mr. and Mrs. Smith own all their assets jointly with the right of survivorship or their retirement accounts and life insurance name their spouse as their primary beneficiary.
If Mr. Smith dies first, Mrs. Smith becomes the sole owner of all the jointly held assets. Right? And because Mrs. Smith is named as the primary beneficiary of Mr. Smith’s retirement account and life insurance, Mrs. Smith also becomes the sole owner of those assets. Mrs. Smith becomes the sole owner of everything seamlessly.
However, things get more complicated when Mrs. Smith dies. For example, let’s look at what happens to their home. When Mrs. Smith dies, her will says her estate shall be distributed equally to her children equally, with the share for her child with a disability to be distributed to a third-party special needs trust. After Mrs. Smith dies, who can transfer the home (or the sale proceeds thereof) to the children and the special needs trust? No one has the immediate legal authority to transfer the home to children and the special needs trust. Mrs. Smith was the home's last owner, and now she has died.
The home is what’s called a "probate asset." The executor named in Mrs. Smith's will will have to open a probate estate in court. The executor named in Mrs. Smith’s will will have to abide by the statutory hoops and hurdles of the probate rules before eventually having the legal authority to transfer the home (or the sale proceeds) to the children and the special needs trust. This probate process often lasts a year or more.
Advantage One
Now, back to the joint living trust option. Suppose Mr. and Mrs. Smith had their attorney draft a joint family trust named “The Smith Family Trust.” Mr. and Mrs. Smith are the creators of the trust, the trustees, and the current beneficiaries of the trust. They have complete control over the assets in the trust. They title their joint assets, including their home, into the name of their trust (Robert Smith and Mary Smith, as trustees of the Smith Family Trust dated ______). When Mr. Smith dies, Mrs. Smith becomes the sole trustee and fully controls the trust assets. When Mrs. Smith dies, the successor trustee of the Smith Family Trust will have the legal authority to transfer the trust assets (their home and joint assets) to the children and the special needs trust – avoiding the cost and delay of probate. In summary, the first benefit of a joint family trust is the trust assets avoid probate.
Note: While Mr. and Mrs. Smith are living, even though the home is titled in the name of the Smith Family Trust, Mr. and Mrs. Smith still own the home. They can sell the home. Similarly, if one dies, the surviving spouse has control and ownership of all the trust assets, including the home.
Advantage Two
The second advantage of a joint living family trust is if Mr. and Mrs. Smith were to become incapacitated, the successor trustee can manage the assets in the trust for the benefit of the Smith family. Again, to explain this benefit, let’s assume a counterfactual – Mr. and Mrs. Smith have only wills. They own their home and other investment assets jointly. They get into a car accident and get hit on their heads. They become mentally incapacitated. Who can manage their home and the other joint assets for the benefit of Mr. and Mrs. Smith and their children?
Possibly no one. Mr. and Mrs. Smith may have powers of attorney for property (see below). However, from my experience, financial institutions are less likely to honor a power of attorney for property than a trust. They should, but they often don't. Suppose the financial institution does not honor a power of attorney for property. In that case, some relative or friend of Mr. and Mrs. Smith may have to petition the court for guardianship of the estate to gain legal control over their assets. As you may recall from an earlier chapter, you usually want to avoid guardianship of the estate because court oversight may be time-consuming and expensive.
On the other hand, If Mr. and Mrs. Smith have a joint living trust and become incapacitated, then the successor trustee will be able to manage the assets in the trust for Mr. and Mrs. Smith and their children. By doing so, the Smiths can avoid the need for guardianship of the estate.
Advantage Three
The third advantage of the family trust is Mr. and Mrs. Smith can easily name the family trust as a beneficiary on their retirement accounts or life insurance. Before creating their estate plan, Mr. and Mrs. Smith had a beneficiary problem – a secondary beneficiary problem. Although they named one another the primary beneficiary, who could they name as the secondary beneficiary? They certainly shouldn’t name their child with a disability.
Now that Mr. and Mrs. have the Smith Family Trust, they can name the Smith Family Trust as the secondary beneficiary. On the survivor’s death, the retirement account, life insurance, or IRA is distributed to the Smith Family Trust. The terms of the Smith Family Trust instruct the trustee to distribute the assets to their children and the special needs trust.
In summary, the joint family trust provides three benefits:
Whether or not your attorney will recommend a joint family trust or just wills without a family trust depends on state law and how attorneys in your state commonly draft estate planning documents. Although joint living trusts are very common across the country, there are some states where attorneys rely less on the joint family trust and more on just wills and powers of attorney for property. Also, your attorney may not recommend the living trust if you own very few assets.
Separate Living Trusts
Mr. and Mrs. Smith could structure their estate plan so each of them has separate living trusts. The various reasons for choosing separate trusts can be complicated. You may choose to have separate trusts for several reasons:
With a joint family trust, titling assets is simple. There is only one “bucket.” Any assets you own jointly with your spouse can be titled into the name of the joint family trust. On the other hand, if you and your spouse have separate trusts, titling your assets into each of your separate trusts is arguably more complicated. For example, how should you title your jointly-owned home? Do you title a one-half interest in the home into each of your trusts? Or do you title the home in one trust and not the other? It depends on many issues: estate tax issues, second marriage issues, inheritance issues, and who owns the asset currently. Your estate planning attorney will advise you.
Whether you and your spouse have a joint family trust or separate trusts, either structure will work just fine. With either a joint family trust or separate trusts, the end result is usually the same: When the first spouse dies, the assets are for the benefit of the surviving spouse; when the surviving spouse dies, the assets are for the benefit of the children subject to any trusts for them.
Power of Attorney for Healthcare
Who do you want to make your healthcare decisions if you cannot make them yourself? This same person will also be responsible for end-of-life decisions.
As discussed in Part I, your adult child with a disability may also have a power of attorney for healthcare.
Power of Attorney for Property
Who do you want to be able to represent you legally? In other words, who do you want to bring onto your “legal team” so they can represent you, particularly if you become mentally incapacitated?
In a power of attorney for property, you, as the principal, are giving someone you trust, the agent, a broad range of powers. For example, a power of attorney for property gives your agent the power to transact business for you. Your agent would typically have the power to file your income taxes, sell your car if you can no longer drive, manage your IRA investments, sign a severance contract, or make a retirement plan election for you. Or, imagine you were incapacitated, and your spouse decided to sell your jointly owned home, to downsize. To sell your home, your spouse would need a power of attorney to sign on your behalf.
As discussed in Part I, your adult child with a disability may also have a power of attorney.
HIPAA Authorization
The “HIPAA Authorization” form permits people you trust to receive confidential medical information about you. For example, suppose you were to become incapacitated, and your successor trustee needed to take over as your successor trustee to manage the assets in your trust. In that case, financial institutions will often require your successor trustee to provide them with a letter from your doctor stating that you can no longer manage your financial affairs. Without this HIPAA authorization, the doctor cannot legally release your confidential medical information to the successor trustee to give to the financial institution.
Pour-Over Will
Although your joint family living trust will have all the key terms about who will inherit your estate and how they will inherit it, you will still have what's commonly called a "pour-over" will. It serves as a “backstop” to your living trust. For example, you die with a checking account of $10,000 in your name. The checking account is not titled in the name of your trust, and the checking account does not name a payable-on-death beneficiary. Technically, the checking account is a probate asset.
Your pour-over will essentially says "pour" any money you own individually (not titled in your trust and does not have a beneficiary designation) into your living trust. By doing so, none of your assets will accidentally be distributed outright to your child with a disability.
In many states, if the probate assets are not real estate and are valued under a certain amount (often $100,000), then the executor can fill out and sign a simple form called a Small Estate Affidavit and get the account titled into the trust without having to go through formal court-supervised probate proceedings.
Your will is also the document where you will designate guardians (if needed) for your children.
You May Need Other Documents to Protect Your Family
Parents often call me and say, "Mark, I need a special needs trust." I tell them that although the special needs trust is vital, it is only one piece of a comprehensive estate plan. This article discusses the common documents in your estate plan.
Your estate plan is designed to protect your family if you become incapacitated and after you die. Your estate plan is like a jigsaw puzzle – all the pieces must fit together. For example, when you die, your will or living trust instructs the executor of your will or the successor trustee of your living trust to transfer a percentage of your estate to your child’s special needs trust. Similarly, if you have a living trust, and if you were to become incapacitated, there should be an “incapacity provision” in your living trust authorizing the successor trustee to be able to make distributions for the benefit of your child with a disability subject to the terms of the special needs trust.
Joint Living Trust
Let’s imagine Mr. and Mrs. Smith have three children, one with a disability. They jointly own a home and other assets, each with retirement accounts and some company life insurance.
To explain the joint living trust, let’s consider a counterfactual: Mr. and Mrs. Smith do not have a joint living trust. They only have wills. Mr. and Mrs. Smith own all their assets jointly with the right of survivorship or their retirement accounts and life insurance name their spouse as their primary beneficiary.
If Mr. Smith dies first, Mrs. Smith becomes the sole owner of all the jointly held assets. Right? And because Mrs. Smith is named as the primary beneficiary of Mr. Smith’s retirement account and life insurance, Mrs. Smith also becomes the sole owner of those assets. Mrs. Smith becomes the sole owner of everything seamlessly.
However, things get more complicated when Mrs. Smith dies. For example, let’s look at what happens to their home. When Mrs. Smith dies, her will says her estate shall be distributed equally to her children equally, with the share for her child with a disability to be distributed to a third-party special needs trust. After Mrs. Smith dies, who can transfer the home (or the sale proceeds thereof) to the children and the special needs trust? No one has the immediate legal authority to transfer the home to children and the special needs trust. Mrs. Smith was the home's last owner, and now she has died.
The home is what’s called a "probate asset." The executor named in Mrs. Smith's will will have to open a probate estate in court. The executor named in Mrs. Smith’s will will have to abide by the statutory hoops and hurdles of the probate rules before eventually having the legal authority to transfer the home (or the sale proceeds) to the children and the special needs trust. This probate process often lasts a year or more.
Advantage One
Now, back to the joint living trust option. Suppose Mr. and Mrs. Smith had their attorney draft a joint family trust named “The Smith Family Trust.” Mr. and Mrs. Smith are the creators of the trust, the trustees, and the current beneficiaries of the trust. They have complete control over the assets in the trust. They title their joint assets, including their home, into the name of their trust (Robert Smith and Mary Smith, as trustees of the Smith Family Trust dated ______). When Mr. Smith dies, Mrs. Smith becomes the sole trustee and fully controls the trust assets. When Mrs. Smith dies, the successor trustee of the Smith Family Trust will have the legal authority to transfer the trust assets (their home and joint assets) to the children and the special needs trust – avoiding the cost and delay of probate. In summary, the first benefit of a joint family trust is the trust assets avoid probate.
Note: While Mr. and Mrs. Smith are living, even though the home is titled in the name of the Smith Family Trust, Mr. and Mrs. Smith still own the home. They can sell the home. Similarly, if one dies, the surviving spouse has control and ownership of all the trust assets, including the home.
Advantage Two
The second advantage of a joint living family trust is if Mr. and Mrs. Smith were to become incapacitated, the successor trustee can manage the assets in the trust for the benefit of the Smith family. Again, to explain this benefit, let’s assume a counterfactual – Mr. and Mrs. Smith have only wills. They own their home and other investment assets jointly. They get into a car accident and get hit on their heads. They become mentally incapacitated. Who can manage their home and the other joint assets for the benefit of Mr. and Mrs. Smith and their children?
Possibly no one. Mr. and Mrs. Smith may have powers of attorney for property (see below). However, from my experience, financial institutions are less likely to honor a power of attorney for property than a trust. They should, but they often don't. Suppose the financial institution does not honor a power of attorney for property. In that case, some relative or friend of Mr. and Mrs. Smith may have to petition the court for guardianship of the estate to gain legal control over their assets. As you may recall from an earlier chapter, you usually want to avoid guardianship of the estate because court oversight may be time-consuming and expensive.
On the other hand, If Mr. and Mrs. Smith have a joint living trust and become incapacitated, then the successor trustee will be able to manage the assets in the trust for Mr. and Mrs. Smith and their children. By doing so, the Smiths can avoid the need for guardianship of the estate.
Advantage Three
The third advantage of the family trust is Mr. and Mrs. Smith can easily name the family trust as a beneficiary on their retirement accounts or life insurance. Before creating their estate plan, Mr. and Mrs. Smith had a beneficiary problem – a secondary beneficiary problem. Although they named one another the primary beneficiary, who could they name as the secondary beneficiary? They certainly shouldn’t name their child with a disability.
Now that Mr. and Mrs. have the Smith Family Trust, they can name the Smith Family Trust as the secondary beneficiary. On the survivor’s death, the retirement account, life insurance, or IRA is distributed to the Smith Family Trust. The terms of the Smith Family Trust instruct the trustee to distribute the assets to their children and the special needs trust.
In summary, the joint family trust provides three benefits:
- The assets in the trust avoid probate;
- If you become mentally incapacitated, the successor trustee can manage the assets for the family without court supervision; and
- You can name the joint family trust as a beneficiary on assets like insurance, retirement accounts, and IRAs. (Note: Discuss with your attorney the income-tax consequences of naming a trust as a beneficiary of a tax-deferred account.)
Whether or not your attorney will recommend a joint family trust or just wills without a family trust depends on state law and how attorneys in your state commonly draft estate planning documents. Although joint living trusts are very common across the country, there are some states where attorneys rely less on the joint family trust and more on just wills and powers of attorney for property. Also, your attorney may not recommend the living trust if you own very few assets.
Separate Living Trusts
Mr. and Mrs. Smith could structure their estate plan so each of them has separate living trusts. The various reasons for choosing separate trusts can be complicated. You may choose to have separate trusts for several reasons:
- Wealthy couples often choose separate trusts for estate tax reasons. For example, your state’s estate tax exemption is low. With so-called "credit-shelter trusts," you can shelter twice the amount from estate tax liability when the surviving spouse dies.
- You may want to choose to have your own separate trust if you are in a second marriage, particularly if you and your new spouse have children from a prior marriage.
- You may want to choose to have your own separate trust if you expect to inherit a lot of money. If you inherit money from your parents and commingle the inheritance in a joint family trust, if you were to later divorce, in many states, the assets in the joint family trust (including the inheritance) would be part of marital property.
- Both spouses have always kept their assets separate.
With a joint family trust, titling assets is simple. There is only one “bucket.” Any assets you own jointly with your spouse can be titled into the name of the joint family trust. On the other hand, if you and your spouse have separate trusts, titling your assets into each of your separate trusts is arguably more complicated. For example, how should you title your jointly-owned home? Do you title a one-half interest in the home into each of your trusts? Or do you title the home in one trust and not the other? It depends on many issues: estate tax issues, second marriage issues, inheritance issues, and who owns the asset currently. Your estate planning attorney will advise you.
Whether you and your spouse have a joint family trust or separate trusts, either structure will work just fine. With either a joint family trust or separate trusts, the end result is usually the same: When the first spouse dies, the assets are for the benefit of the surviving spouse; when the surviving spouse dies, the assets are for the benefit of the children subject to any trusts for them.
Power of Attorney for Healthcare
Who do you want to make your healthcare decisions if you cannot make them yourself? This same person will also be responsible for end-of-life decisions.
As discussed in Part I, your adult child with a disability may also have a power of attorney for healthcare.
Power of Attorney for Property
Who do you want to be able to represent you legally? In other words, who do you want to bring onto your “legal team” so they can represent you, particularly if you become mentally incapacitated?
In a power of attorney for property, you, as the principal, are giving someone you trust, the agent, a broad range of powers. For example, a power of attorney for property gives your agent the power to transact business for you. Your agent would typically have the power to file your income taxes, sell your car if you can no longer drive, manage your IRA investments, sign a severance contract, or make a retirement plan election for you. Or, imagine you were incapacitated, and your spouse decided to sell your jointly owned home, to downsize. To sell your home, your spouse would need a power of attorney to sign on your behalf.
As discussed in Part I, your adult child with a disability may also have a power of attorney.
HIPAA Authorization
The “HIPAA Authorization” form permits people you trust to receive confidential medical information about you. For example, suppose you were to become incapacitated, and your successor trustee needed to take over as your successor trustee to manage the assets in your trust. In that case, financial institutions will often require your successor trustee to provide them with a letter from your doctor stating that you can no longer manage your financial affairs. Without this HIPAA authorization, the doctor cannot legally release your confidential medical information to the successor trustee to give to the financial institution.
Pour-Over Will
Although your joint family living trust will have all the key terms about who will inherit your estate and how they will inherit it, you will still have what's commonly called a "pour-over" will. It serves as a “backstop” to your living trust. For example, you die with a checking account of $10,000 in your name. The checking account is not titled in the name of your trust, and the checking account does not name a payable-on-death beneficiary. Technically, the checking account is a probate asset.
Your pour-over will essentially says "pour" any money you own individually (not titled in your trust and does not have a beneficiary designation) into your living trust. By doing so, none of your assets will accidentally be distributed outright to your child with a disability.
In many states, if the probate assets are not real estate and are valued under a certain amount (often $100,000), then the executor can fill out and sign a simple form called a Small Estate Affidavit and get the account titled into the trust without having to go through formal court-supervised probate proceedings.
Your will is also the document where you will designate guardians (if needed) for your children.
You May Need Other Documents to Protect Your Family
- Trusts for your other children;
- Short-term guardian designation transferring your guardianship powers to a friend or relative if you go out of town or otherwise;
- Living will;
- Memo regarding how you want your personal and tangible property distributed on your death;
- Assignment of tangible property to your trust;
- Irrevocable life insurance trust;
- Standby Guardian Declaration naming successor guardians if you were to become incapacitated;
- Various powers of attorney for your adult children including powers of attorney for healthcare, property, education, and the Declaration for Mental Health Treatment.