Estate Planning. Do You Have More Questions?

In the first installment of this series, we focused on five basic estate planning questions: What? When? Why? Who? And how long? Perhaps these questions got you thinking that you really should focus on your own estate planning, but you aren’t ready to pick up the phone and call an attorney just yet because you need more information to be knowledgeable about this topic. You have more questions? Good! Let’s dig a little deeper into the topic…     

The Difference Between Revocable and Irrevocable Trusts

You may have heard people talk about revocable and irrevocable trusts, but you're not sure of the difference. A revocable trust can be changed – all or part of the trust can be revoked (partial or complete withdrawal of the assets) or amended (all or a portion of the document can be rewritten).

With a revocable trust, the grantor, or creator of the trust, retains control and may establish the trust for his/her own benefit. This type of trust can also stipulate how assets should be distributed upon the grantor's death and can protect his/her assets from probate, thereby reducing expenses, simplifying administration and maintaining privacy.

On the flip side, an irrevocable trust generally cannot be amended or terminated by the grantor. This type of trust is often created to benefit children or grandchildren, and since the grantor has given up control of the assets, the funds are usually removed from the grantor's taxable estate.

What You Need To Know About Trustees

How about a trustee? Who qualifies and what do his/her responsibilities involve? At some point, you may be asked to be a trustee of a friend or loved one’s trust, or you will need to make a decision about who to appoint as trustee(s) for trusts that you establish. Make this decision very carefully because the role of a trustee is complex and can be time-consuming. A trustee’s responsibilities include:

• Investing trust assets
• Protecting the assets
• Preparing tax returns
• Reporting regularly to beneficiaries
• Maintaining detailed recordkeeping
• Making income and/or principal distributions as permitted by the trust document

A trustee must be impartial and independent, accepting personal responsibility and legal liability. The role of fiduciary can be filled by one or more individuals or by a corporation with trustee powers – typically, referred to as sole trustee (one trustee) or co-trustees (two or more trustees). Keep in mind that serving as trustee requires a strong understanding of fiduciary law and oftentimes it can be difficult for a close friend or family member to act as an unbiased third party.

Estate Planning Documents

There are a number of important estate planning documents you should consider for your own purposes.

Every individual should have a properly executed will to handle issues upon his/her death. You may also have separate agreements for trusts established during your lifetime.

There are three documents you need to prepare for your possible incapacity:

• A durable power of attorney to appoint the person(s) who can transact financial and legal affairs on your behalf
• A living will which states your wishes regarding life support
• A healthcare proxy to appoint the person(s) to carry out those healthcare wishes

If you have life insurance or retirement assets, each account should have a properly executed beneficiary designation because these items do not pass according to your will. There are numerous other documents people may require, but these are the basics to get you started.

What’s Next?

In future articles, we'll discuss different types of trusts and appropriate circumstances under which to establish them. In the meantime, ask yourself if you’re adequately prepared for your own incapacity or death. I urge you to seek professional guidance as you work through these issues.