This month I will continue our discussion addressing some of the biggest problems we see as estate planning attorneys and how to fix them (or avoid them altogether). In this newsletter I will discuss who is in charge, both during your incapacity and after your death. The question of who is in charge is incredibly important because whomever you entrust with this monumental task will be responsible for being your advocate and executing your last wishes when you pass away.
Who Is in Charge?
All adults should plan for their incapacity, even though an incapacity scenario is less likely than death. If you follow the “do nothing” path, like almost half of the adults in the United States, then the court or state law will decide who is in charge. Unfortunately, when the court or the state decides who is in charge, it’s unlikely your wishes will be properly carried out.
Incapacity decisions fall into two categories: who is in charge for financial decisions and who is in charge for health care decisions. The most common assumption I see in my practice is thinking you don’t need to name someone to make decisions during your incapacity because you are married. People often believe their spouse can automatically make all decisions on their behalf. Unfortunately, being married to someone does not automatically give them the authority to make financial decisions on your behalf. For example, often a spouse’s financial authority has more to do with how your financial accounts and assets are titled than whether you are married. Your spouse can make financial decisions on jointly held accounts, but this is also true if the joint owner of the account is not your spouse. Some financial institutions require the signature/authorization of both account owners on certain transactions. If the account is in your name alone, then neither your spouse, nor anyone else, is able to make decisions unless someone initiates a court conservatorship or you previously created a durable power of attorney.
A court conservatorship is where a person petitions the circuit court to be given authority over your financial assets because you cannot handle your own affairs. After the petition is filed with the court, a hearing is held where evidence regarding your incapacity is presented. There is no requirement for the conservatorship petitioner to be a family member or spouse; thus, any person may file a petition alleging incapacity. During this process, a separate guardian ad litem will be appointed by the court. The guardian ad litem is an attorney who speaks on behalf of and represents the best interests of the incapacitated person who conceivably cannot understand the court proceeding or may not be able to voice their opinions. The court conservatorship process can easily cost thousands of dollars before someone is officially named the conservator. Once the conservator has been granted authority, it is their legal responsibility to use and manage the assets for the sole benefit of the incapacitated individual. The conservator is required to keep meticulous records and submit an accounting to the commissioner of accounts on an annual basis. The accounting encompasses a complete financial disclosure of any income/assets received as well as all expenses spent on behalf of the incapacitated individual. The conservatorship will last until the funds are depleted, the incapacitated individual regains capacity, or they die.
SOLUTIONS FOR INCAPACITY: FINANCIAL DECISIONS
Create a Durable Financial Power of Attorney
A very simple solution to avoid a conservatorship is to create a durable financial power of attorney. In this document, you identify the people or entity you want making financial decisions during your incapacity. With a power of attorney, your agent is able to make decisions without any court oversight. A durable power of attorney should not be confused with a limited specific power of attorney which is typically used for very specific legal situations. (For example, a limited power of attorney could grant your spouse the authority to sign on your behalf for a real estate closing if you were unable to attend the meeting.) A limited specific power of attorney is not applicable for incapacity situations.
Although a financial power of attorney does not expire due to age, financial institutions are more reluctant to accept older powers of attorney. For this reason, a durable financial power of attorney should be updated about every five years. Power of attorney documents can also fail when they are too generic and vague in stating the powers of the agent. A power of attorney should identify every conceivable situation and give authority for an agent to successfully make decisions on behalf of an incapacitated individual. Simply put, if the power of attorney is not accepted, the likely resolution will be a court conservatorship.
Name an Agent
A very common question I receive from my clients is: “Who should I name as my agent?” This can be a difficult decision depending on your personal circumstances. Many of my clients who are married choose to name their spouse. However, over the years, I have had a few clients look at their spouse sitting next to them in the estate planning meeting and ask what other options they have. In all seriousness, if someone is not a good financial decisionmaker for themselves, it is unlikely they will miraculously obtain financial savviness when making decisions for you. Naming your spouse as your financial agent may not be a good choice if you have a blended family and you feel your spouse may have difficulty navigating conflicts between their own interests and those of your children.
When naming an agent, most of my clients choose spouses, children, friends, neighbors, attorneys, accountants, or financial institutions. All of these options have certain pros and cons associated with them. If your spouse is not the best option, or you are not married, many people choose their children. The great dilemma when naming children as agents is which child to choose. I typically recommend one agent working in the position at a time, but some parents don’t like this option because of the potential perception of favoritism. Problems can arise very quickly if you name multiple agents to work together and the documents require a unanimous decision. Provisions can be added to the documents to address voting parameters (majority vote or tie-breaking third parties), but this adds a level of complexity.
Naming professionals is always another option. A professional agent could be an attorney, accountant, or your financial institution. When you name a professional, your family will be best served when the professional is familiar with your personal circumstances and wishes. Since I have been involved in the discussion and drafting of the family estate plan, some of my clients have chosen to name my firm as their agent (or executor/trustee in other documents). Although many professionals can act as your agent, it is usually best to have a professional that works in the field of fiduciary services. Simply put, it may not be a good idea to name your real estate closing attorney as your agent if they have no experience in this field.
When you name family members and friends as your agent, they are probably not going to charge a fee for their service. When you name professional agents, they will almost always charge a fee. Professionals acting as your executor typically charge between three and five percent of the estate value, whereas professionals acting as your trustee typically charge one percent of the trust assets. The executor fee is higher than a trustee fee because more time and work is involved in probate administration. Sometimes the unbiased third-party nature of hiring a professional is also the right answer for your family dynamics. I have had countless clients over the years choose a professional agent because they simply do not want to burden their loved ones.
When you name a family member, attorney, or accountant as your agent, the assets/investments typically stay in the financial institutions and investment platforms of your choosing. If you name a specific financial institution as the direct trustee or executor, the assets are usually consolidated into accounts only at that financial institution. All of these options should be discussed with your estate planning attorney to evaluate the best solutions for you and your family.
Create a Revocable Living Trust
A third solution for addressing incapacity financial decisions is to create a revocable living trust (RLT) before becoming incapacitated. When an RLT is created, you name backup agents (like you named in your power of attorney), except they are called trustees of your trust. The same evaluation as to who, what order, and how many agents are necessary with a durable power of attorney is also applied to a trust plan. A significant difference between an RLT and a durable power of attorney is that RLTs are accepted more readily by financial institutions, regardless of the age of the document. Like a durable power of attorney, a properly executed RLT can also alleviate the need to have any court involvement, including conservatorship proceedings.
SOLUTIONS FOR INCAPACITY: HEALTH CARE DECISIONS
When it comes to health care agents, always create a plan where you choose the people you trust for overseeing your medical care. A properly drafted health care power of attorney (sometimes called an advanced directive) will identify agents tasked with making your health decisions and the order of those agents. This document appoints an agent to make decisions regarding life prolonging procedures (typically IV fluids, naso-gastric tube, CPR, and intubation). The health care power of attorney also allows your agent to make decisions like moving you from one hospital facility to another facility better suited for your care. Professionals (like accountants, attorneys, financial institutions, or your physician) will rarely act as your health care agent. Health care decisions are usually best left to family and friends unless you do not have anyone available to name as your agent. If you have failed to properly name your chosen agent, then the state will appoint one for you. In many states, the law directs that the spouse can act as the first agent, even though they have not been identified in a health care power of attorney document. If a spouse is unavailable, then children are typically the next in line as a class. All children must agree unanimously to make any decisions, otherwise the hospital will not take any action. Unfortunately, it is uncommon for all the children in a family to come together and unanimously agree on a decision. I personally have seen families torn apart and have long-lingering guilt because they could not come to a consensus on health care decisions of an aging parent. All too often we see pent-up feelings among siblings come to the surface in these most challenging times.
Who Is in Charge?
When you pass away, there are a two main options for the distribution of your assets: probate and trust administration. Probate is a court regulated process and differs significantly from state to state. The general idea of probate is to authorize someone (an executor or administrator) to pay any debts of the decedent and pass the remaining assets to the beneficiaries. This process is initiated with the clerk of the circuit court and then is transitioned over to the commissioner of accounts in the locality where the decedent last resided.
When someone dies and has a valid will, the person nominated to go through probate is called the executor. If the people named in the will as executors are deceased or unable to act, the person who subsequently takes the position, but was not originally named in the will, is called the administrator c.t.a. When someone dies intestate (died without a valid will), the person who qualifies with the court is called the administrator. When no will has been created and someone dies, Virginia law dictates who manages and distributes the estate. Specifically, Virginia Code §64.2-502 identifies the hierarchical order among beneficiaries, family members, people, organizations, and/or creditors of the decedent’s estate. Priority diminishes among interested parties of the estate the more time passes from the decedent’s date of death. Probate in Virginia typically takes between nine months and two years once someone has initiated the process with the circuit court. It can be a significant undertaking to act as an administrator of an estate and some may wonder why someone other than a family member or beneficiary would take on this task. The simple answer is money. If someone qualifies as the administrator of your estate, regardless if they are a beneficiary, they are entitled to be paid between three and five percent of your estate value. This is a fee on top of court fees, bonding fees, and commissioner of account fees.
Will: Name Your Executor
A validly executed will identifies the people you trust to act as your executor and they are tasked with carrying out your wishes and distributions to your beneficiaries. When identifying an appropriate executor, you run though a similar evaluation as that of choosing a power of attorney agent. A good candidate will be financially prudent and willing to follow the direction of the will. The person chosen should also have good attention to detail and organization as they will be required to prepare and submit significant documentation regarding estate assets (called the inventory) and detail the distribution to beneficiaries and creditors with substantiating documentation (called the accounting). Most people choose a spouse initially (if available) and then children or professionals. Most people feel being named as the executor of an estate is an honor. Unfortunately, the feeling of honor for being named an executor is often short-lived once the executor is knee-deep in the probate process. For this reason, many executors engage an attorney to assist with the probate process or even decline to accept the nomination and appoint an attorney to qualify for them.
If the named executor is not a Virginia resident, they will likely have to be bonded with surety when they qualify with the clerk of the circuit court. This will be required by the court, even if the original will waived bond with surety. A bondsperson will be required to come to the qualification process at the courthouse to provide bond, which of course is an additional fee for the estate and a hassle for the executor. Please note that a more in-depth discussion of probate avoidance and the overall process will be provided in a later newsletter.
Trust: Name Your Trustee
Thankfully when you have a properly executed revocable living trust (RLT), your chosen decisionmaker (called the trustee) does not have to work with the commissioner of accounts or deal with the long, drawn-out process of probate. A trust can also opt-out of requiring a bond with surety for the trustee, regardless of where they live in the United States. When selecting a trustee, most people look for a financially savvy candidate or professional (similar to the analysis when choosing an executor or a power of attorney agent). Trust administration usually takes a few months to complete and assets are turned directly over to the beneficiaries’ control. In other instances, the assets will be retained in trust to be used for a beneficiary, but control is not turned over until the beneficiary reaches a certain age. For example, in my own personal trust, my children must be 35 before they take control and can make their own financial decisions. While my trust takes a bit of a conservative approach, I want my children protected. My young children have also proven themselves unfit at this moment to make their own decisions, as evidenced by their protests against cereal for breakfast, and instead lobbying that candy canes and ice cream meet appropriate nutritional requirements. In my trust, I have numerous trustees that I not only evaluated on their financial acumen but also on their age. Although someone who is 65 years old may be a great decisionmaker now, they may not be the right person to be making decisions in 35 years. The analysis of who should be the trustee of a trust is obviously something very personal to your circumstances and should be duly evaluated with the help of your estate planning attorney.
The key to success with estate planning is to actually have a plan, regardless if that plan involves wills or trusts. Once the plan is in place, make sure to discuss your thoughts and wishes with those you have placed in charge. Making these crucial decisions now not only protects you, but it makes things easier on your loved ones. The attorneys at Johnson, Gasink & Baxter, LLP look forward to helping you with these decisions, and we will be there to help your family in the future.
Our next installment will focus on Problem #3: Issues Surrounding Probate
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*Did you know that the attorneys at Johnson, Gasink and Baxter, LLP have built their practice by working with great clients like you? We are now offering small estate planning classes for clients and their friends. Class attendees will learn about their estate planning options, the dangers and expense of probate, and how to effectively utilize a Revocable Living Trust plan. The classes are offered at the following dates and locations:
- Mar. 21st at 2:00 at our Williamsburg office
- Mar. 25th at 2:00 near our Richmond office
- Apr. 9th at 2:00 and 7:00 at our Williamsburg office
- May 7th at 2:00 and 7:00 near our Richmond office
Don't let something happen to your friends and loved ones without proper estate planning in place! Please contact Brooke Heilesen at 1 877 790 4555 to reserve a spot in a class.