Estate Planning Handbook

What is it that clients generally hope to achieve through an estate plan?

• To maintain control of their assets as long as reasonably possible;
• To create a plan to manage their assets and protect themselves and their loved ones if incapacity strikes;
• To leave their assets to whom they want, when they want and in the manner they want;
• And to avoid estate taxes, and allow their estate to be administered efficiently, and at reasonable cost. 
• (Some clients, and especially those who have had to settle the estate of a parent or loved one who did not have a plan, say all this rather simply.   They say they don’t want to leave a mess for someone else to clean up at their death, and if they become incapable of managing things themselves before death.) 

What do we at Andrews & Young, PC do when working with a client in these areas?

We help clients of greatly differing circumstances and means.    Some are young. Many are older.  

Some have advanced graduate degrees.  Some may not have completed high school.  

Older clients face the challenges of aging, which can bring physical and cognitive impairment.    We have worked with a number of persons and their families who have been stricken with Alzheimer’s at an early age, which is more common than we once thought.   

While many of our clients are married, or in committed relationships, some have never married, and some are single due to the loss of a spouse or long term partner. 

Some of our clients have achieved significant financial success and others are of quite modest means.   Many clients are concerned that the costs of long term care in a nursing home might eat up all of the assets they have struggled to save during their lives.   Some couples come to us having been married thirty, forty, fifty or more years, and share children to whom then intend to leave their assets at death.

Some couples are in a second or third marriages or relationships, and each member of the couple has their own and separate beneficiaries they wish to benefit.    In these circumstances often each member of the couple wants to provide for the well being of the other after the death of the first of them, but also want to know that at the death of the spouse or partner, the remaining assets of the first spouse / partner to die, will go to their own intended beneficiaries.  For example, each member of the couple may have children from a prior relationship, and want to know for sure, that at the death of the surviving spouse / partner, remaining assets will go to (for example) the children of the first person to die. So in such a case at the death of the first person perhaps the assets of the first person to die are held in trust for the benefit of the surviving spouse or partner, and not simply left outright to the survivor of the couple.  

This issue also can also arise even for a couple married a very long time.  This is a delicate issue. Most clients have plans where at the death of the first spouse, all is left to the survivor.   This plan has obvious pitfalls for a second marriage where each person has children from a prior relationship. But even where a couple has been married a long time and has shared children the issue can arise in the form of, as we say, “Gigi” or maybe “Fabio”, appearing after the death of the first spouse, and the surviving spouse decides to leave all assets to that person, as opposed to the shared children.    And this issue can also arise where an older person who may become dependent and vulnerable, is taken advantage of by …….well……those who take advantage financially of the elderly are not easily categorized. We are all increasingly becoming aware of the financial abuse of the elderly, and sometimes the abusers are family members. 

Some clients have a special needs child, and for a number of reasons do not want to leave an inheritance outright to that child, perhaps because that child has become eligible for benefits that would be lost if the person inherited assets directly.      

And some clients have a descendant who they want to benefit, but know the person is unable to manage an inheritance, for any number of possible reasons.

Some clients are in committed relationships but are not married.   Some of these persons may be in same sex relationships. Some may be older and have lost a spouse or long term partner, and want to live with someone they care for deeply but do not want the legal entanglements of a marriage later in life, and see little to be gained from it.   

So when we work with clients, it is very important to us that we come to a full understanding of that client’s concerns and goals, so we can orient our discussion to best effect and value to that client, and try to inform the client about the different issues we see, and possible ways of approaching those issues.

Some of the things we do with clients are far from any rocket science, and are very practical in nature.   For example, we strongly advise clients to use a mechanism to pass critical information on to the people who would take over your affairs at your incapacity or death, since if those persons are not informed about your assets, and income, and expenses, and health insurance, and a myriad of other things, their jobs become much more complicated, and delays ensue, and the costs of carrying out their tasks becomes much greater.     

We are fans of the “Before I Go You Should Know” booklet, available from the Funeral Consumer Alliance of Connecticut or ct.funerals.org for a modest price.   

Introduction.

In this handbook we set forth  general manner some of the questions, tools and techniques that may be of interest to you if you are considering preparing a plan for incapacity or death, or possibly considering if the plan you now have is adequate.  We welcome any comments and questions you may have. Feel free to call us or email us at any time.

For more information about our firm visit www.andrewsandyoung.com. 

By way of disclaimer, the laws change all of the time, new approaches to old problems arise, and everyone’s situation is unique, so do not rely on this handbook as legal advice, and make sure you consult with a qualified attorney. In compliance with regulations issued by the Internal Revenue Service, we inform you that any Federal tax advice contained in this communication, was not written to be used and may not be used by any person to avoid any penalties under the Internal Revenue Code.

OWNERSHIP ISSUES

The manner in which you own your assets has a huge effect on your estate plan. Regardless of the design of your estate plan, asset ownership is an essential part of the plan.

• Neither your Will nor (if you choose to use one) your trust will control assets owned in a manner that will cause them to pass directly to a co-owner or beneficiary at the time of your death.  For example, property owned jointly with rights of survivorship, whether it be your house or your bank account, will automatically pass to the surviving owner at your death, regardless of any contrary provisions in your Will or trust.  The same is true for any asset that has a named beneficiary, such as insurance policies and retirement accounts. It sometimes makes sense to own property in this manner, but it is essential to consider the effects of such ownership on your overall plan.  Too often a client will establish a Will or trust which gives property equally to children, and then adds one child’s name to his or her bank accounts. The result of that is that one child gets all of the bank accounts, and then will take a pro rata share of what is governed by a Will or Trust.
• If you establish a living trust, in most cases the trust should own your assets prior to your death and should be named as beneficiary of your life insurance.  If assets are not owned in this manner, they will be subject to probate, or even worse pass directly to beneficiaries in a manner that upsets the intent of your plan.  However, this issue is complicated and the advice of your attorney as to whether specific assets should be owned by your trust should be requested. If your estate is large enough to be subject to estate taxes, you should consider establishing an irrevocable life insurance trust to own your life insurance, and focus much of your attention on how to minimize or eliminate estate taxes.   That said, under the current high estate tax exemptions, fewer and fewer of us will be subject to estate taxes, and for many estate taxes are no longer a concern. Planners now focus more on steps that can be taken to reduce income taxes than was the case some years ago.
• It is important to have a named beneficiary for retirement assets.  There are income tax advantages that are not available to your loved ones unless they are named as beneficiaries of your IRA, 401(k) and other retirement accounts.  Generally, these accounts should never pass to your probate estate, which is what will happen if you do not name a beneficiary. Sometimes it makes sense to name your trust as beneficiary, but it usually makes sense to name a beneficiary directly rather than naming the trust.  Again, the advice of your attorney on this issue is essential. These areas of planning can become rather complex. NOTE. We are hearing about the possible passage of the SECURE ACT, which would dramatically change the rules that apply to how non spouse beneficiaries must take distributions from retirement plans including IRAs, and while we don’t know if this will become law, the gurus are indicating it very well may, so be on the lookout for it.  

DECISIONS YOU NEED TO MAKE:

In order to establish an appropriate plan for you, you must decide a number of issues.

ALL CLIENTS: Some issues are applicable to everyone:

1. Who do you want to act as your fiduciaries and successor fiduciaries (executor, trustee, attorney-in-fact, health care representative, guardian of minor children)? 
2. What instructions do you want to give to your health care agent (or representative)?   You have the right to make health care decisions for yourself, and to appoint a person to make them for you if you are unable to do so.   You can give that person instructions as to when you do, or don’t, want to be kept alive on life support mechanisms, and most planners feel it is important that you do so.
3. Who do you want to benefit in your Will or trust?  What do you want to give to each beneficiary, specific items or amounts or a percentage of your estate?
4. Do you want to give assets outright to beneficiaries, or in a way that will help protect the assets from unwise decisions of beneficiaries, and claims of creditors of beneficiaries, and people who might take advantage of or prey upon a beneficiary.   (See discussion about “Clients Who Establish Trusts”, below).
5. Do you also want to make charitable gifts?  If so, which charities and how much?
6. If you give a specific item and do not own that item at death, should the beneficiary of that item get anything?
7. If a beneficiary fails to survive you, should his share pass to his children?
8. Who (or what charity) do you want to receive your estate if your primary beneficiaries die before you?  
9. Do you want to allow your representatives to make anatomical gifts if medically appropriate?

CLIENTS WHO ESTABLISH TRUSTS: In addition to the decisions listed above, you may also want to establish a trust for your beneficiaries.  Some reasons to establish a trust include: 

• You have children or other beneficiaries who cannot wisely manage their money (even if they are old enough to legally manage it) 
• You have a disabled beneficiary 
• Your estate is large enough to require tax planning
• You own out-of-state real estate and want to eliminate ancillary probate proceedings 
• You want to leave your assets in a way that will protect them from the claims of creditors of your beneficiaries or people who may prey upon your beneficiaries
• You want to leave assets to a beneficiary for life, but want to ensure that the remaining balance will ultimately pass to other beneficiaries.   (For example, you and your spouse have children from prior relationships, and want to care for each other for life, but ultimately for your assets to go to your children.)
• You want a mechanism to manage your property should you become disabled
• You want to insure privacy of your affairs after your death

Living Trust (i.e, a trust established while you are alive) versus Testamentary Trust (i.e., a trust that is included in your Will)

Advantages to a living trust:

1. The trust is not filed with the probate court, and therefore the provisions of the trust remain private.

2. The trust is not subject to probate court jurisdiction.  In Connecticut avoidance of probate does not reduce probate court fees in connection with the administration of a decedent’s estate, but it may reduce attorney fees and other administration expenses connected with the preparation of formal accounts and other probate documents, provided that the trust is fully funded prior to your death.  It also will reduce the ongoing probate fees and administration costs for the administration of the trust if the trust is expected to continue after the settlement of the decedent’s estate.  It may also speed up the administration process.

3. If you own out-of-state real estate, that property can be transferred to the trust, and thereby possibly avoid probate proceedings in those states (known as “ancillary probate”).

4. A trust can be used to administer your property while you are alive, but incapable, thus avoiding the need for a costly and unpleasant conservatorship proceeding.  

5. If insurance proceeds are payable to the trust and/or other assets are owned by the trust, cash will be available almost immediately for the benefit of your family.

6. It is highly recommended that in most cases, the trust is fully funded (although careful consideration needs to be given to beneficiary designations for retirement assets such as 401(k) plans and IRAs).

In spite of the benefits of a revocable trust, in many situations it is better to use a testamentary trust.

Advantages of a trust included in your Will (known as a testamentary trust):

1. If you are concerned that your funds will be exhausted on convalescent care for yourself or your spouse and want to be able to qualify for Medicaid (Title 19) assistance, only a testamentary trust will give some protection for your assets against the claims of the State.   

2. It generally is somewhat less expensive at the planning stage to create a trust in your Will because when you establish a living trust you still need to have a Will and a living trust is more complicated and longer than a testamentary trust, and time is spent on re-titling or otherwise positioning assets to work best with the trust.

3. If you do not expect the trust to ever be used, it may not be worth the cost of establishing a separate trust.  For instance, if trust provisions are being included in the will only to provide a mechanism for handling funds for young children if both spouses should die, the likelihood is that the trust will never be used, since it is unusual for both parents to die while the children are young.

4. If you are concerned that your chosen trustee may need some oversight, a testamentary trust is a better choice, since the Probate Court will retain jurisdiction over the trust until its termination.  (Although that said, some revocable living trusts, which become irrevocable at your death, name a family member to serve as a co trustee with a professional trustee.)

Trust Provisions

Regardless of whether you elect to have a living trust or testamentary trust (or irrevocable trust), you will need to consider the provisions to be included in those trusts.  Some issues to consider are:

1. Who do you want to act as trustee and who do you want to act as successor trustee if your first choice cannot serve?  

2. What will be the trust provisions for your beneficiaries?  Some examples follow:

a. Should one trust be established for all children until a certain age, at which time separate trusts are established or should separate trusts are established at outset?

b. Should provisions be included to charge certain distributions (such as graduate school) against the share that beneficiary will receive?

c. Should all income and principal be distributed to the beneficiaries at a specified age?

d. Should the trust continue for the life of the beneficiary with all distributions in the discretion of the trustee to achieve creditor protection and to protect against beneficiaries mistakes and unwise decisions, or should the beneficiary be given the right to demand distribution of the principal at specified ages? 

FAMILY MEMBERS WITH SPECIAL NEEDS:  If any of your beneficiaries are disabled due to either a physical or mental disability, you need to consider special provisions for them. If such beneficiaries receive or expect to receive government benefits that are asset or income sensitive, in general you should not give those beneficiaries their shares outright.  Rather, a special needs trust drafted to comply with government regulations should be utilized.

CLIENTS WITH ESTATES IN EXCESS OF ESTATE TAX EXEMPTIONS: If the combined estates of you and your spouse (including the face amount of any life insurance) and gifts you have made during life in excess of the annual exclusion amount) are in excess of the federal or state tax exemption for one person, you need to consider a more complex estate plan.  Federal taxes apply only to estates of an individual in excess of $11.58 million dollars 2020. In 2020 any amount over the exemption will be taxed at the rate of 40%, unless planning has been done to protect that amount. So, if at the death of the second of a married couple, that person may have a taxable estate over the applicable exemption for a single person, planning should be done to reduce or avoid the estate tax.   Generally, under current federal law, a couple could protect double the individual exemption, or 23.16 million dollars, with some rather straightforward planning done while both spouses are alive.   

Unless Congress takes steps in 2025 to make this very high level of estate tax exemption permanent, it will revert to much lower levels in 2026, so all planners need to be alert to what will happen, and whether these high levels will remain.  

Connecticut taxes apply to taxable estates over 5.1 million dollars in 2020.  The rate of tax is progressive.  

In addition to the exemption each person has, any amount passing to a spouse, no matter how large, passes free of both federal and Connecticut estate tax.  However, if all is left to a surviving spouse, a problem can arise on the second death, because at the death of your surviving spouse, he or she will have only her or his individual exemption.  

Under federal law, it is possible for the second spouse to die to utilize the unused exemption of the first spouse to die.  The problems with relying on this provision are (1) the estate of the first spouse to die must file a federal estate tax return when that might not be otherwise required, and (3) this provision is not included in Connecticut law.  (So the surviving spouse cannot use the excess unused exemption of the first spouse to die as regards Connecticut estate tax.)

Since these exemptions and laws often change, it is best to utilize a plan that will achieve your tax reduction goals no matter what the estate tax laws are.  Some possible approaches are described below. (Be warned, these examples are simplified for the purposes of this memorandum and any number of factors in real life situations might impact these scenarios in ways that materially change the suggestions made herein.   In particular, in many cases attention should be given to the long term income tax implications of strategies that are focused on reducing estate taxes, as in some cases it may be more important to focus on long term income tax outcomes, than estate taxes.)

Couples who may have estates of such size that they may be subject to the estate tax, at either the state or federal level, often utilize trusts in their plans, so that tax is avoided at the death of the first spouse, and perhaps also avoided at the death of the second spouse, or at least minimized.

But given the very high estate exemptions it is clear that the vast majority of persons can die and not pay any estate tax at either the federal or state level.  This does not mean we can ignore estate taxes as an issue, nor assume that these high levels will always be in effect, but these high exemption levels do feature largely in our work for most clients.  

We are available to meet with clients to review how the estate tax regime may impact their estates, and to review the types of steps that clients who are concerned about estate taxes can take to minimize or avoid estate taxes.    

TERMINOLOGY

People – Roles: 

Executor:  Your executor is the person (or entity) who is responsible for the administration of your probate estate after your death.  That is, he or she files your Will with the Probate Court, determines what assets were owned by you at the time of your death, files a list of those assets with the Probate Court, makes sure all creditors have been paid, files all appropriate tax returns, prepares an accounting of all assets received and all payments made, and distributes the remainder of the estate in accordance with your Will.  Although the executor is responsible for the administration, most individual executors work closely with an attorney. An executor has no power or authority prior to your death. The job of an executor involves a lot of responsibility and hard work. It is important to name someone who will see that the job gets done and who will seek help from professionals when appropriate.

Administrator:  An administrator does the same job as an executor in estates where an executor is not appointed in the Will or where there is no Will.

Trustee:  A trustee oversees the administration of any trusts you have established.  The trustee’s job is similar to the executor’s job. However, the trustee’s role continues until the trust is distributed, which can be a very long time.  In addition, the trustee usually is given more discretion than an executor as to when, to what extent and to whom distribution of income and principal are to be made.

Guardian:  A guardian takes care of personal and financial affairs of a minor child.  A parent is the child’s natural guardian. If no parent survives, the Court will appoint a guardian.  A guardian should be named in your Will if you have minor children to insure that your children will be cared for by the persons you want and to insure that no family battles over custody will take place after your death.  It is possible to appoint different people to act as the guardian of the persons and of the estates of your children. (A guardian also can be named for developmentally disabled adults. However, this is a separate provision with a different procedure.) 

Conservator:  A conservator does the same thing for an adult person who is unable to handle his own affairs due to disability or incompetence as a guardian does for a child.  In some states a conservator is also referred to as a guardian. 

Fiduciary:  This is a general term referring to anyone in a position of trust, including executors, administrators, trustees and guardians.

Grantor / Settlor / Trustor:  Any of these terms can be used to describe the person who established a living or irrevocable trust.

Estate Planning Documents:

Will (Also Known as Last Will and Testament): Your Will is your formal instruction to those who survive you as to how your assets should be administered and distributed.

Testamentary Trust: A testamentary trust is established in your Will to take affect after your death.  The trust allows property to be held for the benefit of a person (the beneficiary) while giving the control over investment and distribution to another person (the trustee) who in some cases can also be a beneficiary.  The provisions of the trust are set by you to conform to your desires as to how the property should be administered. The important thing to remember is that, with certain limitations, a trust can include any provisions you want.    

Living Trust (Also known as a Revocable Trust): This type of trust is established during your lifetime by a separate instrument.  The trust can be revoked (i.e. terminated) or amended at any time. It is possible to set up the trust but fund it with only a small amount of cash during your life.  A Will (known as a “pour-over Will”) is also written which provides that the any of your assets not transferred to the trust during your life will be transferred to the trust upon completion of the probate process.  Theses trusts can be useful to minimize probate costs and expenses, provide a way to manage your assets during your incapacity and as a means to leave your assets to your beneficiary other than through a Will and in a way that shields them from claims of creditors of your beneficiaries.

Irrevocable Trust: Like the revocable trust, an irrevocable trust is established during your lifetime.  Unlike the revocable trust, the irrevocable trust cannot be revoked or amended. An irrevocable trust can be used to make an immediate gift of property to a child or other person where you prefer that someone other than the beneficiary manage the property.

Health Care Directives: In 1993, the Connecticut legislature approved a form which combines all disability planning relating to health, including the Living Will, Appointment of Health Representative, Designation of Conservator of the person and Anatomical Gifts.  This is a useful approach since it allows health care providers to have all pertinent information in one document. This document does not take effect unless and until you are incapable of making your own health decisions.

Living Will: A Living Will is a separate document from your Last Will and Testament.  A living Will is normally included as part of your Health Care Directives. As the name implies, a Living Will has effect only while you are alive.  The Living Will directs your doctors not to use life support systems if you are terminally ill or are in an irreversible coma and unable to make decisions at that time.  The statute that authorizes Living Wills provides protection for medical personnel and institutions that rely on the Living Will. You may appoint a health care representative who is given authority to see that the terms of your Living Will are followed.

Designation of Health Care Representative: This document also is normally included in your Health Care Directives.  It designates a person to act as your health representative to make health care decisions for you if you are not capable of making your own decisions.  Health powers are no longer included in Connecticut’s statutory short form power of attorney, so health powers included in short form powers of attorney signed after September 30, 2006 are not effective.  

A Designation of Health Representative covers many more situations than a Living Will.  For instance, a Living Will gives no guidance in the situation where you are terminally ill and develop an unrelated problem where surgery is normally recommended.  (For example, doctors might recommend heart bypass surgery for someone terminally ill with cancer.) Therefore it is important to designate a health representative in addition to signing a Living Will.  

Authorization to Release Medical Information (HIPAA Release):  Due to federal restrictions, medical providers cannot release your medical information without written authorization from you.  It is important to have the authorization in place so that your family and designated decision makers can get the information necessary to determine whether you are capable of handling your own affairs and to make medical decisions for you if you are no capable.  Unlike the Health Care Directives, this document takes effect immediately.

Financial Durable Power of Attorney:  (This document is sometimes referred to simply as a power of attorney.)  A power of attorney authorizes a person or persons to act in your behalf in connection with your financial affairs. The statutory short form power-of-attorney, which is the form most commonly used, is very broad in scope, giving your attorney-in-fact the power to do almost anything with your assets.  The power can be limited or expanded in scope if desired. The short form power-of-attorney has many limitations that a well-drafted power-of-attorney can help overcome. 

Springing Power of Attorney: As of October 1, 1993, it is possible to use a “springing power of attorney” in Connecticut.  A springing power of attorney is like any other power of attorney except that it specifies that it will not take effect until you are incapable of making your own decisions (or until the occurrence of some other specified event).  This provides some protection against your attorney-in-fact taking over your finances while you are still capable of managing your own affairs. The only evidence of your incapability that is required is an affidavit signed by a person you designate in the document.  The affidavit can be signed by the designated attorney-in-fact or any other persons you name, and may also require the written concurring opinion of your attending physician.

If you own assets located outside of Connecticut, the springing power should be used with caution since it may not be accepted in some other states.

Designation of Conservator: The Living Will, Health Power Of Attorney and regular Power of Attorney all help avoid the need for a conservatorship.  However, in some situations a conservatorship may still be required (especially if you choose not to utilize all of those documents).  You can gain some control over the conservatorship process by naming the person you would want to act as your conservator if it is ever needed.  

Designating a conservator can actually prevent the need for a conservatorship since it reduces the possibility of someone other than your designated attorney-in-fact from trying to take over your finances by having a conservatorship established.  

You can also waive bond for your conservator.  In other words you can direct the Probate Court not to require your conservator to purchase a probate surety bond.  A surety bond amounts to an insurance policy to cover errors and wrongful acts of the conservator. The cost depends on the value of your assets and must be paid every year.

Generally a designation of conservator of your estate (i.e., a person to handle your financial affairs) is included in our powers of attorney and a designation of conservator of your person (i.e., a person to make health and personal care decisions) is included in our health directives.

Hopefully this information will answer some questions and help you think about what other questions and concerns need to be discussed with us when formulating your estate plan. 

We again note this is intended for general information purposes, and not as legal advice for any specific situation.    We urge you to work with an experienced attorney in drafting your estate plan. 

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