CHAPTER 3:
BEYOND WILLS AND TRUSTS – OTHER ESTATE PLANNING TOOLS
Wills and Trusts are the best-known estate planning tools, but there are a couple of others you should also know about. Planning for physical or mental incapacity – as well as critical or end of life medical decisions – are concerns for all of us.
Durable Power of Attorney
This document provides great bang for the buck!
A Durable Power of Attorney (DPOA) is a document in which you, the Principal, authorize an “Attorney-in-Fact” to act on your behalf in business and financial matters. (We’ll look at healthcare matters later.) The Attorney-in-Fact does not have to be an actual lawyer. But they are legally empowered to act as your “Agent.” So that term is commonly used to refer to this person.
Using a DPOA to name an Agent is a powerful tool to help you deal with unfortunate scenarios in life. (Keep in mind that the Executor of your Will has no authority at all while you’re alive, although your Executor can be named as your Agent as well – that is, wear two “hats.”)
The scope of the power granted to your Agent under the DPOA is entirely up to you. But in most estate planning scenarios in my experience, that power is nearly boundless. After all, the whole point of a DPOA is (usually) to allow your Agent to do anything you yourself could do if you were able to do it – including managing your money. (Sometimes, however, people might give an Agent authority simply to handle a single real estate transaction, for example.)
A comprehensive, attorney-prepared DPOA is very important to cover all your bases – a multitude of financial or business situations might have to be addressed at a time when you are not fit to handle them yourself.
(Unfortunately, however, Social Security does not honor powers of attorney for managing Social Security benefits. Instead, they can appoint a “representative payee” to manage benefits for those who cannot manage their accounts themselves. Ask about Form SSA-1696.)
The least desirable – but nearly unavoidable – alternative to naming an Agent in a DPOA is a court-appointed Guardian or Conservator. (A Conservator only has control over your finances – not personal matters.)
The relationship of the Guardian to the person in their care – that would be you, the ward – is much like that of parent to child. The law rightly considers it a very big deal to strip an adult of their independence and impose that relationship.
Hopefully, the person who seeks court appointment as your Guardian is a loved one, genuinely concerned about your well-being. But the process still involves considerable time and money. Professional medical and mental acuity evaluations must be performed and then presented to a judge or even a jury.
The possibility of mental and physical incapacity is a fact of life, especially as we get older. Make sure you have a DPOA because Guardianship court proceedings are the mother of all big hassles!
But in all states, any Power of Attorney ends when you die, and so does your Agent’s or Guardian’s authority. Your Will takes over at that point.
As with your Executor or Trustee, your Agent has a fiduciary duty under the law to act only in your best interests. But as with these other fiduciaries, your Agent should be absolutely trustworthy in the first place – and willing to seek good advice if necessary.
I strongly suggest naming only one Agent, with one or two alternates. Some people, however, don’t want to offend one of their two adult children, for example, so they insist on naming both as Co-Agents.
That’s perfectly legal, but in my opinion – and that of many others – it’s usually a bad idea. Why? What if the two don’t agree? What if one is unavailable when something needs to be done quickly? (Many states, however, allow either Co-Agent to act independently, unless you say otherwise.)
But what if one lacks good judgment or is subject to influence by someone else with bad judgment or ill intentions (e.g., a meddling spouse)? I ask my clients whom they’d prefer, then think with them how to justify the choice to anyone else who might have hurt feelings.
To be useful in a wide variety of unknown future scenarios, a DPOA must be extensive. It should recite a laundry list of specific business, financial and real estate powers pertaining to any and all situations your Agent might face on your behalf. We’ll look at a few later.
Because it covers so many authorities, a DPOA is a pretty complex document. Even though the popular do-it-yourself online document creation services can be quite adequate for your DPOA, you might very well need a lawyer to ensure you understand all the options and questions presented to you. Are you sure what you want? Are you sure you’re taking “everything” into account?
For example, you might be asked online whether you want one or two Agents. As mentioned, Co-Agents are arguably (almost always, in my opinion) a bad idea. But it’s your choice, and the online services don’t provide you with advice.
Most states have free, official, fill-in-blank DPOA forms. They are fine in many situations – far better than nothing. But they can be confusing to fill out appropriately for your needs – and they don’t come with advice. There are also some situations they do not deal with well.
A retirement plan administrator, for example, might balk at honoring such a document if it did not explicitly authorize the Agent’s request – say, a withdrawal. The administrator might fear liability for making an error in judgment.
All banks and financial institutions have their own DPOA forms available at no charge. If you use a bank’s own form, the people there are familiar with it and will honor it. Experience shows that if you have long-standing relationships with several financial institutions, it’s a good idea to sign several DPOAs – especially for retirement accounts.
For example, you could have one DPOA using the official form provided by the Big Bank and then another DPOA form provided by XYZ Brokerage. Often, even if you present a properly done, perfect attorney-drafted DPOA, the first person your Agent shows it to will need to get an “okay” from the legal department. But they ultimately should honor it.
Of course, signing individual bank DPOA forms involves more leg work initially than signing just one comprehensive document. But you might be making life easier for your Agent by doing so. The bank or brokerage keeps the form on file. So if your Agent needs to act, anyone at the institution will usually accept it with no need to call the legal department.
But you still should have a properly drafted, comprehensive DPOA to make sure your Agent is empowered to do “everything” that might be necessary. The goal is to have it honored everywhere. So I still recommend seeing an attorney. DPOA preparation is relatively inexpensive.
Be aware that one of the few authorizations a Principal cannot grant to an Agent with a DPOA is the power to make the Principal’s Will.
To make a Power of Attorney “durable” it must include a sentence similar to: “This Power of Attorney shall not be affected by my subsequent disability or incapacity, or by the passage of time.” – In other words, it takes effect immediately and continues until you revoke it or die.
Without such a clause, state law would render the power of attorney inoperative immediately upon your disability – precisely when it is most needed.
Many clients hesitate to give their Agent so much authority immediately – before there is any need (i.e., no disability yet). This hesitation is reasonable; To put it bluntly – it’s worth repeating – your Agent has the authority to rob you blind. Sadly, many police departments have even needed to form units focusing on the exploitation of the elderly – it’s a real problem.
Some clients ask for a power of attorney that springs into effect only when and if they become disabled. Most attorneys advise against using such a “springing” power of attorney because it can pose a big problem: You must set forth a formal procedure to establish your disability before that power of attorney can become operative.
That might involve evaluation by two doctors, for example. This involves delay and expense at best.
At worst, the Principal, the doctors and family might squabble over the extent of the disability. Doctors are reluctant to make any determination with legal consequences because they fear being drawn into a legal battle.
Until all this is resolved, no one will recognize the Agent’s authority to do anything. I have always been able to talk to people of the “springing” idea. I ask them, “If you can’t trust your Agent not to act improperly now – while you’re healthy – how do you expect them to act if you fall into a coma?! You’d better pick another Agent.”
Here are several useful but sometimes overlooked provisions and powers you’d be wise to consider giving to your Agent:
- The power to create a Trust for your benefit and transfer your assets to it
This allows flexibility in implementing an existing plan in the event of your incapacity. It is often useful for those who might need public assistance someday. (This useful provision is allowed by law. But remember, your DPOA cannot authorize your Agent to write or change your Will for you.)
- The power to handle tax matters and deal with the IRS.
In the past, the IRS insisted that its own power of attorney form (Form 2848) be used. Now, a specific clause in the taxpayer’s own document should be honored.
But as a practical matter, there’s a good chance your Agent will be required to submit a Form 2848 on your behalf. At least your Agent will eventually be able to handle your tax affairs, but it will be easier for your Agent if you submit the IRS’s Form 2848 at the time you are preparing your DPOA.
- The power to handle retirement accounts and investments
These assets are often substantial. Retirement plan custodians and administrators are appropriately cautious about letting anybody else play with your money. Therefore they, too, will probably require very specific authorization in your DPOA before allowing your Agent to act on your behalf.
I consider it wise to individually name all retirement accounts and financial institutions that handle your investments – especially if you have not filled out their own forms. If an institutional representative sees its name on your DPOA, they will probably feel much more comfortable in accepting instructions from your Agent.
- The right to be paid
Pay attention to this issue. It could be a very big issue in your family. If your Agent is a family member rather than an unrelated professional, should he or she be paid?
If your Agent is likely to spend considerable time managing your affairs under authority of the DPOA, reasonable compensation is fair, but it should be specified to avoid family misunderstandings. In fact, some state laws require that if an Agent is to be paid, that must be specifically authorized in the DPOA. (Of course, compensation for any out-of-pocket expenses paid by the Agent is always allowed.)
- The power to make gifts
Perhaps you have been thinking about making gifts to loved ones or charity. You might or might not want to grant your Agent this power, especially regarding gifts to your Agent themself (your adult child, for example). Obviously, a gift-giving power is subject to abuse.
So many, if not all, states require that a DPOA specifically authorizes the right to make gifts if you wish your Agent to have this power.
- The power to manage your online affairs
This includes accessing your accounts with financial institutions, social media platforms, etc. Almost every state has enacted some form of The Revised Uniform Fiduciary Access to Digital Assets Act. The law automatically grants Executors, Trustees, and Agents named in a Power of Attorney the authority to access your online information.
But the exact wording differs among states. This authority is something to discuss with your attorney when they prepare your DPOA, especially if for some reason you do not want to give your Agent this power. Likewise, if you want to limit the law’s automatic powers in some way or maybe prefer to name a separate Agent for your online accounts and affairs.
As a practical matter, it’s hard to do anything today without online access. So if you trust your Agent enough to appoint them in the first place, it is probably wise to give them access to your online life.
Also be sure to leave a list of account numbers, user IDs and passwords someplace safe. And make sure your Agent knows where it is!
Living Wills and Other Advance Medical Directives (AMDs)
These are documents that address a variety of complicated medical, legal and ethical situations we may confront during serious illness, incapacity or near the very end of life. Every state recognizes a patient’s right to make fundamental choices as to the care and treatment they will or will not receive at such times.
These choices are addressed in documents that go by various names in different states, e.g., “Living Will,” “Health Care Power of Attorney,” etc. We refer to them collectively here as AMDs. Most or all 50 states have official forms on the books that you can copy and fill out for yourself.
Whether you have signed an AMD or not, your consent must be obtained for any medical treatment as long as you retain the capacity to express decisions for yourself.
This leaves you totally in control. If your doctors conclude that you are incapable of giving consent, however, only then does your AMD go into effect.
Many people have heard of a Living Will, but few realize it is often a very narrow form of advance medical directive.
In many states, a Living Will speaks only about life prolonging measures such as CPR and nutrition, and it applies only when death is imminent or when the patient is in a “persistent vegetative state” – one that will never end, absent a miracle.
A basic Living Will would often not apply, however, when the patient is not near death but is temporarily unable to give permission for a recommended treatment, for example. For this reason, you should consider an Advanced Medical Directive that is comprehensive in the situations it deals with.
The appropriate way to do this differs among states, but basically it involves a document naming someone to speak for you on these matters, only when you are unable to do so. That means naming a health care “Surrogate” or “Agent.”
In my state, we handle it all with one document called a Living Will Directive. In other states it’s called a Health Care Power of Attorney. With some pretty easy Internet research, you will be able to find the appropriate technique to use in your state. Hospitals and medical providers will also be able to help you.
The forms are easy to find, and this is something you can do without a lawyer. Just make sure that you carefully read whatever form you use and fill it out to accurately reflect your wishes. Also make sure your medical providers and health care Surrogate or Agent have a copy and have recorded your wishes correctly.
Imagine my surprise when a nurse told me 10 years ago that the hospital records had me marked, “DNR” – do not resuscitate. I have no idea how somebody got that idea from reading my Living Will Directive. Mistakes happen, so check.
We’ve all heard of the Health Insurance Portability and Accountability Act (HIPAA). Keep in mind that release of your medical information is prohibited under that federal law without your consent. So an AMD that fails to include a HIPAA-compliant release authorization will leave your health care Surrogate in the dark; Your doctors will not be authorized to give the Surrogate the information they would need to make good decisions.
Remember to include a HIPAA release in any AMD you prepare. Many official (downloadable) state forms include this, but some do not.
Also be aware that employees of your health care provider and your relatives are often not permitted to be witnesses. That means, as a practical matter, if you wait till you’re in the hospital to sign an AMD, it might require some planning to round up qualified witnesses or a notary to make it valid.
It’s important for those of you with children who haven’t given any thought to their Wills or “estate planning” to remind them they at least need to take care of this. Otherwise, if you have a kid in college, for example, you might have no more legal right to their medical information than I do!
One final point: People routinely fill out their forms stating their desire not to be given nutritional support or water. I suppose that nobody is hungry while in end-of-life unconsciousness. I have been told by clients, however, that withholding fluids did appear to cause suffering by loved ones near death. So in the Advance Medical Directives I draft, I no longer automatically authorize the withholding of fluids. It’s something to think about.
Prenuptial Agreements and Co-Habitation Agreements
People generally don’t associate prenuptial agreements with estate planning, so this topic does not fit neatly anywhere in this Crash Course. But estate planning issues are always involved when a married couple has such an agreement. It’s important to be aware of the law when creating both your prenup and your estate plan.
A typical prenuptial (“premarital”) agreement establishes the responsibility of the spouses for joint living expenses and other agreed upon outlays in the course of a marriage. The document might call for a 50-50 split of living expenses, for example, or it might stipulate that each spouse must deposit a certain amount of money per month in a joint checking account to pay the bills.
More importantly for our purposes here is what the prenup says about the distribution of property upon the end of the marriage, whether by death or divorce.
For partners of approximately equal means, a prenuptial agreement often states in essence that, “What’s mine is mine and what’s yours is yours.” By signing the prenup, each partner agrees that the other’s estate plan will be allowed to stand.
In other words, the spouses agree that upon divorce or the death of one of them, the prenup will overrule anything that state law might otherwise have provided as to property distribution.
But the validity of the agreement requires that each party must fully disclose all their financial assets and other information. Each partner must understand he or she has the right to the advice of a separate attorney.
Generally, the plan of each spouse upon the end of the marriage is to distribute their own estate (i.e., what they had prior to the marriage and perhaps their subsequent earnings) to their own children or others – not to the surviving spouse. (Many prenups do, however, provide some degree of support for the survivor.)
In a typical prenup agreement, therefore, both spouses give up their right under state law to renounce (reject) the Will of the deceased partner and give up the right to take the spousal “elective share” we have discussed previously.
A prenup is simply a contract. Generally, in contract law, the parties can agree to (almost) any terms they want. A deal is a deal, and the judge doesn’t care if you make a bad one. That’s your tough luck.
But this is not the case in prenuptial agreements. They are special.
Courts everywhere are interested in ensuring that the agreement is not “unconscionable.” That means – to use an extreme example – that the court will not allow either spouse to be left in dire financial straits while the other walks away with everything. Never mind who already had – or subsequently earned – the money.
You can’t leave your ex-spouse broke unless you yourself have very little money or earning power. You can’t leave him or her without a place to live. The court will not allow this if it is at all possible to avoid. Never mind what the prenup says.
A “co-habitation agreement” might serve the same purposes as a prenup for unmarried partners while they are living together. Unmarried partners generally do not have the same property rights as spouses upon a split-up or death of a partner, however. In most states, they have no property rights at all.
But if partners have co-mingled financial accounts and property over many years, the division of property when the relationship ends can be tricky and complicated. So it’s wise for the partners to agree on their financial relationship in advance. Put it in writing and stick to it.