July 17, 2024

Estate Planning Basics

Getting Down to the Basics of Estate Planning…

In General
By definition, an estate plan is an arrangement for your assets and debts upon your incapacity and death. The law has a default estate plan for us all called Intestacy. This default arrangement is often more costly than the plan you would make and it will never take into account your personal preferences. In fact, in North Carolina, most of the decisions will be made by the Clerk of Superior Court or one of her agents using the law of Intestacy as well as any relevant local rules. Although the Clerk will do her best to oversee the administration of your estate – along with the other thousands of estates for which she is responsible – this procedure will most often not reflect the choices you would have made for yourself had you used the opportunity you had during your life and good health to put your own preferences in writing.

If you create an estate plan before you die or become incapacitated, it will take into account at minimum your ABCs. That is, your Assets, Bills, and Children. And a complete estate plan will also cover your health care during your life. If you take the time to prepare an estate plan, before you pass away, it will always more preferable and less expensive than the alternative default arrangement the law has in place for you. These estate planning basics will help guide you through the beginning stages of the process and hopefully help set your mind at ease.

The typical tools used by an estate planning attorney are: Wills, Financial Powers of Attorney, Health Care Powers of Attorney, Living Wills, and Trusts.

We have all heard of Wills. A Will is a legal instrument allowing a person (the “testator”) to safeguard his right to control how his estate will be administered, within the bounds of the law, after his death. A Will is a formal writing in which you describe your assets (your “estate”), the people you choose to receive property you specify (the “legatees” and “devisees” or collectively “beneficiaries”), the person you choose to handle your estate (the “Executor” or “Executrix), and they allow parents to nominate a guardian to continue the raising and care of minor children. A Will is only effective at the point of your death. Until then, it can be modified or revoked by you during your life as long as your mental faculties have not been impaired. Upon your death, your Will must be submitted for probate.

Because of their importance, there are many requirements North Carolina places on the fitness of your Will for probate. Wills must be carefully drafted, executed, and maintained so as to meet the probate requirements of North Carolina law. The circumstances surrounding the drafting of your Will must be free of evidence which negates a finding that your “free will” dictated its drafting. Factors such as the Undue Influence of others, Fraud, Duress, Mistake, or Incapacity can be the basis of a Will Contest. If your Will fails to meet the probate requirements of North Carolina, it will be set aside as a non-will document and the Clerk will determine that you died Intestate.

Financial Powers of Attorney
In it simplest form, a Power of Attorney is a document you would sign in which you give another person the legal authority to represent you and act on your behalf. A Financial Power of Attorney is necessary in those circumstances in which a third party such as a bank, mortgage company, insurance company, etc. requires written proof of legal authority before they will even talk to your representative or Attorney in Fact. Powers of Attorney are only effective until the moment of death.

The secret to having an effective estate plan is to have it all drafted up and ready BEFORE you need it. As much as I hate it, sometimes I have to turn away people who seek my services for their relatives who may already have some sort of cognitive impairment. It is usually, the child, spouse, sibling, or friend of the person who needs the document who is then seeking my services as an attorney. Unfortunately, most of the time, it is already too late for this. Their relative’s dementia, Alzheimer’s, or mental illness precludes their having the legal capacity to sign these documents as required by law. And no attorney will touch this engagement. This is a tragedy.

Most of the time this only hurts the caregiver. They may be in a situation where they have been paying all of the bills for their sick relative and are now at the point where they need their relative to chip in for some of the expense for their care and food and housing. But the caregiver does not have the authority to access the sick relative’s funds. Unfortunately, if the caregiver is coming to me, I know: 1) there is no power of attorney in place, 2) their relative is either too sick or often too stubborn to sign any legal documents, and 3) the situation is getting desperate and complicated. At this point, there is nothing in the planning stage I can do and the only legal option I can recommend is a guardianship.

Guardianships are another default arrangement provided under the laws of North Carolina for those who do not plan their estates properly. The Guardianship process is an expensive court process in which a person is subjected to extensive intrusion into their privacy, hygiene habits, medical condition, home life situation, etc. It is something to avoid at all costs, if possible. In North Carolina, because of their complexity and demanding requirements, many attorneys would not consider undertaking the Guardianship process with less than a $3,000 retainer fee – just to get started. By contrast, a Durable Financial Power of Attorney costs nearly one-tenth of this amount.

Guardianships are an on-going court supervised procedure. After a hearing where witnesses give their testimony about you, the court will make a determination and appoint someone she has selected to be in charge of your healthcare matters. This person will be the Guardian of the Person. If you do not have a pre-existing Durable Power of Attorney, you will have missed the opportunity to have a say in who the court may appoint in this very personal capacity. The court will have to just exercise her best judgment and pick someone.

The court will also appoint an attorney to be the Guardian of the Estate. This attorney will charge the incompetent person an hourly fee to handle his financial affairs. This includes an annual accounting. Attorneys charge anywhere from $200.00 to $400.00 per hour for these services. Thus, the sick person’s estate is severely diminished by, not only the expected costs for their care, but also by on-going court and attorney fees that could last until the death of the incompetent.

Back to Financial Powers of Attorney, these documents have many different variations which may or may not be appropriate for your circumstance: There are general, specific, special, limited, durable, shifting, and springing Financial Powers of Attorney. Some have to be recorded with the Register of Deeds to be effective, others do not. Just be careful in the version you and your attorney ultimately select.

Health Care Power of Attorney
A health care power of attorney allows you to name a person you trust to be your health care agent to see that doctors and other health care providers give you the type of care you would wish to receive if you could speak for yourself. For example, your health care Attorney in Fact would be consulted about your care regarding something like whether you would want a transfusion, a limb amputated to improve your changes of survival, etc., they would also share your medical issues with emergency room or surgical personnel.

In these documents you are essentially asking a trained medical professional to consider the opinion of your agent in your treatment who may not be a medical professional but a relative or friend. Because this has been the subject of litigation, North Carolina has enacted certain laws for more uniformity in this type of Power of Attorney. There is now a way to register them with the Secretary of State.

Living Wills
Living Wills are similar to Health Care Powers of Attorney but they govern your End of Life matters. Whether you would want to be artificially kept alive, to withdraw or not withdraw food or treatment. This document is helpful should you have an illness or injury from which a doctor believes you would not recover. This document, unlike the health care power of attorney, allows you to speak for yourself.

Trusts are the estate planning vehicle which allows a person to accomplish the most. They allow you to minimize taxes and estate fees (which can be exorbitant), they streamline and speed up the administration process, and they take your personal business out of the public realm. Trusts are effective and govern your affairs during and after your life.

A trust is a legal arrangement in which one person gives to another person – called a fiduciary – the responsibility of following instructions that benefit a third party – called a beneficiary. There are an infinite variety of trusts but the most common is the Living Trust or the Revocable Trust. With a trust you can avoid probate, you can dispose of your assets as you wish, you can arrange for your family members to receive a certain amount of money every month or every year, and you can make provision for your health care. These documents are very helpful and allow you to create a lasting legacy.

And the beauty of trust planning is that you don’t have to have this money sitting in the bank. Your trusts can be funded with your life insurance policy as long as you take appropriate steps before you pass away.

There are many types of trusts. The most commonly used are: Revocable, Irrevocable, Testamentary, Inter Vivos, Living Trusts, Family Trusts, Charitable, Grantor Retained, Insurance Trusts (or ILITs), Real Estate Trusts, and Special Needs Trusts. Each trust has its own particular purpose and can be skillfully drafted to meet a number of needs and goals.

Parents are particular fans of Trusts due to the control a Trust allows the parent to retain as to when their child receives money. Without a Trust, a child who is the beneficiary of their deceased parent’s life insurance policy, would receive a windfall of cash upon his 18th birthday. This can be rather destructive for the child. A trust allows a Testator to place conditions on receipt of money. This way a parent can sort of “be there” for their children, even after they have passed away. Because of their desire for “continued parenting” after death, one type of trust which is creating some excitement for parents who prepare is The Incentive Trust (see further discussion herein). Well there you have it, my guide to the help you with basics of estate planning. The next step is to start putting together a checklist and download my initial PDF questionnaire available in the sidebar on the top of the page.

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