Estate Planning Basics


Exactly what is estate planning?  In simple terms estate planning involves both planning for the possibility of mental incapacity and planning for certain death. 

Estate Planning for Mental Incapacity

If you become mentally disabled, then you'll need to have a two part estate plan in place – one that will take care of your personal decisions and one that will take care of your financial decisions. Otherwise, you and your assets could very likely end up in a court-supervised guardianship or conservatorship. 

Advance Medical Directive - The legal document necessary to delegate your personal decisions is called an Advance Medical Directive, also called a Medical Power of Attorney or Designation of Health Care Surrogate in some states. It will allow you to give to the person of your choice the right to take care of your personal needs and make your medical decisions if you're temporarily or permanently unable to do so for yourself. 

Financial Power of Attorney - The legal document necessary to delegate your financial decisions is called a Financial Power of Attorney. It will allow you to choose someone to manage your assets on your behalf if you're unable to do so for yourself. If the Power of Attorney is a "durable" one, then this means that the person you choose will have the immediate ability to take care of your property and will continue to be able to take care of it even if you're determined to be mentally incapacitated. If the Power of Attorney is a "springing" one, this means that the person you choose won't be able to manage your assets until after you've been determined to be mentally incompetent.










Estate Planning for Death

Upon your death, you'll also need to have a two part estate plan in place – one that will insure all of your debts will be paid and one that will determine who will receive the balance of your assets.Last Will and Testament - The basic legal document that addresses planning for death is called a Last Will and Testament. A will contains a written set of instructions to your loved ones as to how you want your estate to be handled after your death.  One of the biggest drawbacks of using a will to dictate the distribution of your assets is that the property must go through probate before your family will be able to take legal control of it.Probate – Probate is the court-supervised process of inventorying all of your assets after your death, paying your final bills, and then distributing what's left to your loved ones. The key here is that probate is “court-supervised.” In other words, probate is dictated by the probate laws of the state where you live at the time of your death and can tie up your property for months or even years before your family will have access to it.

Revocable Living Trusts - Estate Planning for Mental Incapacity/Death and Avoiding Probate

Aside from the legal estate planning documents described above, a Revocable Living Trust can be used to plan for both mental disability and death in one document. This type of trust will allow you to control your property while you're alive and well, designate the person of your choice to manage you and your finances if you become mentally disabled, and then list your instructions to your loved ones as to what to do with your assets after you die. Another benefit of using a Revocable Living Trust as part of your estate plan is that your family will be able to gain virtually immediate access to your assets after your death since property held in the trust will avoid court-supervised probate.

What Happens Without a Last Will and Testament?

What happens if you fail to make a Last Will and Testament before you die? Then the state that you live in at the time of your death, as well as any other state where you own real estate at the time of your death, will provide a Last Will and Testament for you under the state's intestacy laws. These laws vary greatly from state to state and can cause different people to inherit your property if you own real estate in more than one state.The only way to insure that your property will go the beneficiaries that you choose, as opposed to the beneficiaries that your state of residence or the state where you own real estate chooses for you, is to make a valid Last Will and Testament.

Trust Basics

A trust is a legal agreement that has three parties:

Trustmaker - The person who creates the trust agreement, also commonly referred to as the Grantor, Trustor or Settlor.

Trustee - The person or entity responsible for managing the property that the Trustmaker decides to title in the name of the trust.

Beneficiary - The person or entity who is to receive the benefits of the property that is titled in the name of the trust.Under this type of legal arrangement, the Trustmaker will transfer ownership of certain assets to the Trustee who will manage the assets for the benefit of the Beneficiary.

estate planning

Do I Really Need an Estate Plan?


Because of the complexity of the U.S. Tax Code, it can be unclear whether a person or family should, or is required, to engage in basic estate planning.  Although many people assume that estate planning is just for the wealthy, the benefits an estate plan can offer to the average person are significant.   Some of the question I am often asked as a tax attorney fall along the lines of:  “Do I need to even prepare an estate plan if I’m under the estate tax exemption?”  "How do I know if I need a trust instead of a will?"  “If I have to go on Medicaid, how will that affect my property?” or “At what age should I begin thinking about an estate plan?”  In order to begin addressing these, and many other questions, I am going to begin this discussion with the basics.

To Schedule an Estate Planning Meeting

If you need a new estate plan or need revisions to your old one; or, if you are uncertain about what your estate needs are, we encourage you to contact us and schedule an initial consultation. There is no charge for the initial session and we will evaluate your facts and circumstances and make recommendations based on your case. Call us today at (601) 965-6155 (Jackson/Vicksburg); or (228) 867-1594 (Gulfport/Biloxi).

James G. "Jimmy" McGee, Attorney

Admitted: U.S. Tax Court; All Mississippi Chancery Courts

Wills vs. Trusts

Planning for Mental Disability

Regardless of your net worth, and particularly if any of your assets are titled in your sole name, then you should consider a Revocable Living Trust for mental disability planning. But beware, because not all Revocable Living Trusts are created equally. A well drafted Revocable Living Trust should contain provisions for determining your mental capabilities outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. This will literally save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship or conservatorship.

Estate Planning for Minor Beneficiaries

Often when I meet with young parents their largest asset is either a life insurance policy or retirement plan. This becomes a problem if the parents later divorce or if one parent dies and the children are still minors when the other parent dies. What will happen to the life insurance or retirement account? These funds will be placed in a court-supervised guardianship or conservatorhip for the benefit of the minor until age 18 or 21. Thus, in these situations, I recommend that the parents establish a Revocable Living Trust to be the primary or contingent beneficiary of the life insurance or retirement account. That way the successor Trustee will have the legal authority to accept the funds instead of a court-supervised guardian.

Estate Planning for Singles

Anyone who is single and has assets titled in their sole name should consider a Revocable Living Trust. The two main reasons are to keep you and your assets out of a court-supervised guardianship and to allow your beneficiaries to avoid the costs and hassles of probate. The minimum net worth necessary for a single person to consider using a Revocable Living Trust will vary from state to state. For instance, in Tennessee, estates valued at $25,000 or less are considered small enough to be administered through a simple probate procedure, while in Florida the amount is $75,000 or less. If the value of your assets is over the minimum threshold in your state, then a formal, time-consuming and costly probate administration will be required.

Estate Tax Planning for Married Couples

If you're married and the estates of you and your spouse exceed $5 million or your state's estate tax exemption, then you should consider establishing Revocable Living Trusts to take advantage of both spouses' exemptions from estate taxes. This is accomplished by setting up a certain types of trust(s) (commonly referred to as AB Trusts, Bypass, QTIP) and then dividing your assets roughly in equal shares between the two trusts. Note that while this type of estate tax planning can be done in your wills, you and your spouse will need to divide your assets into separate names, in which case the assets will need to be probated after each spouse dies. The use of Revocable Living Trusts insures that probate can be avoided after each spouse's death. I will discuss this in more detail later.

Estate Planning for Couples in Second or Later Marriages

If you are in a second or later marriage and you and your spouse will have different beneficiaries such as your own children or grandchildren, then you should consider establishing Revocable Living Trusts in order to insure that each spouse's estate will go where he or she wants it to go outside of the probate process.

Keeping Your Estate Plan Private

A last will and testament that is filed with the probate court becomes a public court record that anyone can read. Contrast this with a Revocable Living Trust, which is a private contract between you as the Trustmaker and you as the Trustee. Unless your beneficiaries have to go to court over something written in your Revocable Living Trust agreement, then the document should remain a private document that only the trustees and beneficiaries will be able to read after your incapacity or death.

Estate Planning for Real Estate Located Outside of Your State

If you own real estate in more than one state or outside of your home state, then you'll need to establish a Revocable Living Trust and deed the out of state property into the trust. Otherwise, your family may be faced with two separate probate estates - one in the state where you live, and a second in the state where your real estate is located.

Of course, if you find yourself in need of a Revocable Living Trust, then be sure to fund your assets into your trust and update your beneficiary designations, otherwise your trust won't be worth anywhere near the money you spent on it.

* Note that while the federal estate tax exemption is currently "portable" between married couples, this provision is set expire on January 1, 2013.

Selecting an Estate Plan

After determining that you need an estate plan, I will generally recommend either a will-based estate plan or a trust-based estate plan. Your Last Will and Testament, and any trusts, will take on significantly different roles depending upon the type of plan that I have recommended.

Will-Based Estate Plan

A Last Will and Testament is an important legal document that is the first building block to any good estate plan. With will-based estate plan, your Last Will and Testament will provide all of the essential details of who will inherit your property, when and how they will inherit it, and who will be put in charge of settling your final affairs. With a will-based estate plan, your Last Will and Testament will cover four important points:

Who will serve as the Personal Representative/Executor, meaning the person who will be in charge of settling your final affairs and insuring that your beneficiaries will receive their inheritance;
What powers your Personal Representative/Executor will have;
Who will inherit your property; and,
How and when your property will ultimately be transferred to your beneficiaries.

Note that if you have minor children, then your Last Will and Testament will also cover a fifth important point: Who will serve as the Guardian for your minor children until they become adults.

Trust-Based Estate Plan

With a trust-based estate plan, a trust(s) will generally be formed to cover the important points associated with a will-based estate plan, but the person in charge of settling your final affairs after you die will be called your Administrative or Successor Trustee instead of your Personal Representative or Executor.

Even with a trust-based plan, however, you will still need to have a Last Will and Testament. This is because you will need to fund your assets into your trust before you die so that your trust agreement can govern what will happen to the property titled in the name of the trust after you die. But if you fail to fund even one asset into your trust, then your Last Will and Testament will be necessary to "catch" the unfunded property and transfer it into your trust after you die. In this case the Last Will and Testament will simply function as a "Pour Over Will,".

Pour Over Will – A “Pour Over Will” means that the Last Will and Testament will provide for the unfunded asset(s) to pour over into your trust after your death through the probate process. The “Pour Ever Will” usually needs to cover two important points:

Who will be in charge of your assets that were not funded into your trust as the Personal Representative/Executor; and,

What powers your Personal Representative/Executor will have.

Note that if you have minor children, then your Pour Over Will will also cover a third important point: Who will serve as the Guardian for your minor children until they become adults.

Types of Trusts

Generally, there are four broad, overlapping classifications when referring to types of trusts: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts.

Living Trusts - When comparing living trusts with testamentary trusts, if the trust has been created to go into effect during the Trustmaker's lifetime, then it is referred to as an "inter vivos trust" or "living trust."

Testamentary Trusts - On the other hand, if the trust has been created to go into effect only after the Trustmaker dies, then it is referred to as a "testamentary trust." Also, if a trust is created under the terms of a Last Will and Testament, then it is a "testamentary trust" for sure.

Revocable Trusts - When comparing revocable and irrevocable trusts, if the trust is a revocable trust, then in most cases the Trustmaker, Trustee, and Beneficiary will be one in the same person. The two most common uses of a Revocable Living Trust are to plan for mental disability and to avoid probate of the assets that have been funded into the trust prior to the Trustmaker's death.

Irrevocable Trusts - If the trust is an irrevocable trust, such as an Irrevocable Life Insurance Trust, then in most cases the Trustmaker cannot be the Trustee and Beneficiary, otherwise the purpose of the irrevocable trust will be defeated. The most common use of an irrevocable trust is to move assets out of the Trustmaker’s name and down to the next generation for their use and enjoyment.