This article is intended to be a source of general information about estate planning and the various documents commonly used. It is not to be considered individual legal advice; while I would be happy to represent you in creating your estate plan, we first must form an attorney-client relationship and sign a fee agreement before I can give individualized advice. I also encourage clients to consult with their accountants with regard to detailed tax advice, as I am not a CPA.
What Happens If I don’t have any estate planning documents?
Upon death, your property is distributed according to the intestate statute of Washington- essentially, community property (property acquired during marriage) goes to your spouse, and separate property (property acquired prior to marriage or by gift or inheritance) is divided between your spouse and children. If you have children under the age of 18, the Court will determine who the appropriate guardian would be (after an investigation by a court-appointed guardian ad litem). Children gain control of their inheritance at age 18. If you are alive but unable to make decisions for yourself due to illness or disability, your next of kin (spouse or children) can make medical decisions for you, but you would need a guardian appointed by the court to manage your finances. The guardian would likely be a family member or friend, but the process takes at least 60 days and is expensive, as there are legal requirements for an investigation into whether a guardian is necessary and who that guardian should be. Once a guardianship is in place, the guardian must account to the court for all actions, which also takes time and money.
What is Probate?
Probate is a court proceeding where a personal representative is appointed to pay creditors of the dead person, distribute their remaining assets, and to appoint a guardian for any minor children. If there is a will, then the personal representative (“PR”) and guardian nominated by the will are usually confirmed by the court, and the assets are distributed according to the will. If there is no will, then the court appoints the PR and guardian (beneficiaries have the opportunity to object and/or request specific people to serve) and the assets are distributed according to the intestate statute. In many states, the goal of estate planning is to avoid probate because in those states it is very expensive, complicated and time consuming. Washington is not one of those states – our probate is very simple, and usually cheaper than setting up and managing a trust for the remainder of your life. Washington law DOES NOT set attorneys’ fees to be a percentage of the value of your estate, as California and Oregon do. If there are no minor kids and no outstanding creditors and the estate is valued at less than $100,000.00, there is a procedure to distribute the estate by “affidavit” and avoid probate altogether.
COMMON ESTATE PLANNING DOCUMENTS:
Durable Powers of Attorney
Durable Powers of Attorney are legal documents which allow you to name a “proxy” decision-maker (called an attorney in fact) to manage your affairs while you are incapacitated but still alive. Usually the attorney in fact is a trusted friend or family member. The “Durable” part means that the document remains in effect even if you are ill or disabled. Most DPOAs are “springing” which means that they only come into effect when certain conditions (disability) occur. They can also be immediate – if the signer wants to appoint an attorney in fact to start acting immediately without the need for disability. Having a DPOA usually works to avoid an expensive and time consuming guardianship, and in my opinion, DPOAs are the most important estate planning documents to have in place.
Financial A financial DPOA names an attorney in fact to make financial and legal decisions on your behalf and to manage your finances.
Health Care A health care DPOA names an attorney in fact to make medical decisions on your behalf.
Advance Health Care Directive
Allows you to tell your health care attorney in fact what kind of end-of-life care you want, including whether you want life support withdrawn in certain situations, or what level of care you want in different situations. This document only comes into effect when you are no longer able to articulate your desires and are incompetent to give consent for medical care. An excellent article about the importance of this article can be found here.
A Will is a written document which allows you to direct how you want your assets distributed upon your death, and to nominate guardians for minor children, trustees to manage inheritance for minor children, and to nominate the personal representative (executor) you want to wind up your estate.
Testamentary Trusts Unless other provisions are made in a will, a minor child will gain control of their inheritance at age 18- which most parents want to avoid. By setting up a trust within the will, parents can direct that inheritance be managed on behalf of the child by a trustee (usually a trusted family member or friend) and used for education, support, weddings, home purchases, etc., and that the child will only gain control over the money at an age that the parent chooses – commonly 30.
Disclaimer Trusts Estate tax law has seen some major changes in the recent past, and we never truly know what tax schemes will be in place at the time of our deaths. Married couples can pass unlimited assets to each other at death without incurring estate taxes. However, this means that the tax exemption for the first spouse to die goes unused, making the second spouse’s estate potentially liable for more taxes. When a married couple’s assets are near the current taxable threshold, or are likely to grow above the threshold, it is a good idea to talk about including a disclaimer trust in their wills – the disclaimer trust is included in the will, and comes into being at death. The trust is funded by the surviving spouse choosing to “disclaim” or renounce certain parts of their inheritance from the deceased spouse, and those disclaimed inheritances go into the trust. In this way, a couple can have maximum flexibility in planning for estate taxes because they can use the trust to “use up” the deceased spouse’s estate tax exemption and keep those assets out of the taxable estate of the surviving spouse. The trust is generally held for the benefit of the surviving spouse and children. The beauty of this structure is that if the couple does not have assets near the estate tax threshold at the time of the first death, the trust does not need to be funded, and the surviving spouse need not be burdened with an unnecessary trust.
Community Property Agreement
A community property agreement is a written document which converts all property owned by the couple to community property, and states that upon the death of the first spouse, all community property will automatically be owned by the surviving spouse. It can be used to avoid probate upon the death of the first spouse. However, there are some tax and sometimes Medicaid implications to this gift, and the document needs to be carefully drafted to avoid unintended consequences if there is a later divorce. Finally, for some couples, it’s not a good idea to avoid probate at the death of the first spouse – probate allows you to cut off claims from certain creditors, to avoid them from coming after the surviving spouse years later. Business owners and professionals like doctors and attorneys usually need to have a probate upon their death to protect their spouses from any malpractice claims later.
Revocable Living Trust
A Revocable Living Trust is a trust established during the life of the “Trustor”. The Trustor transfers all property into the trust so that when they die, the assets of the trust are divided up and transferred according to the terms of the trust, rather than through a will and probate. The Trustor serves as the Trustee (person managing the trust) during life, but when the Trustor becomes incapacitated or dies, a back-up Trustee takes over. In order to be an effective way to avoid probate, all assets of the Trustor must be owned by the trust, or a probate will have to be started to distribute any property not in the trust. Revocable Living Trusts have no effect on estate tax planning.
Revocable Living Trusts are not the favored estate plan in Washington state because our probate process is simple enough that probate often costs less and is easier than maintaining a trust for the remainder of life. In certain situations, a trust is helpful – where the couple has significant separate property that they want to keep separate, and where the Trustor owns land or real property in another state. In that situation, creating a trust just to hold that out of state land allows that land to pass to beneficiaries of the trust without having to go through a second probate in that state.
This website and its contents do not constitute legal advice. No attorney-client relationship can be formed until the attorney and client meet, discuss the client’s case, and sign a written fee agreement. Michelle is not a tax expert, and nothing in this website can be construed as tax advice. If you’d like to hire Michelle, please contact the office at 206-522-4638. Thank you! © Michelle Farris 2015