Estate Planning 101: The Basics

Maybe it’s the career change I made last year, or the fear that arises from a global pandemic. Or maybe it’s that we have finally been given a chance to slow down and assess what’s important and not simply urgent. Whatever the case may be, I’ve received a lot of questions recently related to estate planning, wills, trusts, etc. “What do we need and when do we need them?” Here is a quick overview of the core estate planning documents.  

Executive Summary / Table of Contents:

• Power of Attorney for Finances: Also called a “Durable Power of Attorney”, this person can make financial decisions for me.  
• Power of Attorney for Health Care: This person makes health care decisions for me if I can’t myself (e.g., I’m in a coma).
• Declaration to Physicians: Also called a “Living Will”, this document directs healthcare providers (in advance) whether I want to be kept alive on life support if I’m brain-dead and can’t recover.
• Marital Property Agreement: This officially names certain assets as marital property to avoid probate and receive tax advantages at death. This is only for taxes and estate planning and has no effect on splitting assets in divorce.
• Last Will and Testament: This names (1) who will raise my kids when I’m gone, (2) who gets my stuff when I’m gone, and (3) who is responsible for distributing my stuff when I’m gone.
• Living Trust: Distributing my assets to a trust also allows me to avoid probate court which can be slow, costly, and would make distribution of my estate a matter of public record. A trust also gives me power to control my assets from the grave so I can protect my heirs from losing it via divorce, lawsuit, or bankruptcy, and from spending it all at once. 

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If there is one thing I’ve learned in the past year, it is that planning ahead is an incredible gift to your family. The last thing any of us want to do is leave an additional burden to our loved ones in a time of crisis. What follows is an overview of the key documents many families use in their estate planning. Since most of my friends, family, and clients reside in Wisconsin, this has been targeted to them. Those that live in other states will have modest differences based upon the laws of those states.

This article will generally start with the simple and progress towards the more complicated and/or costly. The cheapest and easiest to put in place are the two Power of Attorney documents and the Declaration to Physicians (“Living Will”) document. Most states provide free forms available online and I have included links to the State of Wisconsin Department of Health Services forms below. When hiring an attorney to draft Wills or Trusts, they will often customize these forms to provide your family more flexibility for a modest fee. Attorneys will also frequently combine the Healthcare Power of Attorney and Declaration to Physicians into a single document.

POWER OF ATTORNEY FOR FINANCES (DURABLE POWER OF ATTORNEY) https://www.dhs.wisconsin.gov/forms/advdirectives/f00036.pdf

A Power of Attorney for Finances is a document that permits you to name someone (referred to as your “attorney-in-fact” or your “agent”) to make decisions or elections relating to your finances and property for you in the event that you are personally unable to make your own decisions. In your Power of Attorney for Finances you should also name a successor attorney-in-fact, who can act on your behalf in the event that your first nominated attorney-in-fact is unable to act. Most Power of Attorney for Finances are “durable” meaning it does not terminate upon your incapacity unless you specifically state otherwise. This is why these forms are also commonly referred to as a Durable Power of Attorney.

This power may be effective immediately or may be “springing” (i.e., after an event that you define has occurred). It is common to name your spouse as agent, with at least one (preferably two) successor agents. At some point, it may make sense to have one or more children appointed as agents or successor agents based upon their maturity and location. This power ends either (1) when you revoke it or (2) upon your death. When it is revoked due to your death, these powers effectively transfer to the person named as the Personal Representative in your Will or the Trustee of your trust (see below). Also, if you name your spouse or partner as your agent and the marriage or partnership is terminated (annulment or divorce), this document automatically becomes invalid and terminates those powers unless the document specifically states that it should not. Executing a new Power of Attorney for Finances does not automatically revoke a prior document.

In the event that you do not execute a Power of Attorney for Finances, a court-appointed guardian would carry out these responsibilities for you; however, the court may not appoint the person who you would have personally selected had you made that appointment yourself. Also, it is generally more costly and time consuming to have the court system involved. Spouses commonly name each other as attorney-in-fact and name a trustworthy adult child, relative, or close friend as a successor. Adult children typically name parents until they have a spouse to name instead.

First: __________________________________

Second: __________________________________

Third:    __________________________________

POWER OF ATTORNEY FOR HEALTH CARE https://www.dhs.wisconsin.gov/forms/advdirectives/f00085.pdf

A Power of Attorney for Health Care (also referred to as a Medical Power of Attorney) names someone to make medical decisions for you (your “health care agent”) in the event that you are personally unable to make those decisions for yourself. You may also grant or deny your health care agent the ability to admit you to a nursing home or community-based residential facility for anything other than short-term recuperative care. This document also formalizes your desires to be an organ donor or to make an anatomical gift (i.e., donate to science).

As with a Power of Attorney for Finances, you should select a successor health care agent who would act for you in the event your first named choice is unable to act. In the event that you do not execute a Power of Attorney for Healthcare, a court-appointed guardian would carry out these responsibilities for you; however, the court may not appoint the person who you would have personally selected had you made that appointment yourself. It is common for spouses to name each other as health care agent and name an adult child or relative as a successor. 

Also, upon reaching age 18 adult children should have a Power of Attorney for Health Care. For those individuals, it is common to name a parent until it becomes appropriate to name his/her spouse.

First: __________________________________

Second: __________________________________

Third:    __________________________________

DECLARATION TO PHYSICIANS (“LIVING WILL”) https://www.dhs.wisconsin.gov/forms/advdirectives/f00060.pdf

Living Wills direct physicians regarding your desires for life-sustaining measures and certain medical procedures if you are diagnosed as having a terminal condition or being in a persistent vegetative state. You indicate under which circumstances your health care providers may not administer a feeding tube or perform life-sustaining measures, provided that doing so will not cause you discomfort. Under a diagnosis from which you will not recover, these life-sustaining procedures would only serve to prolong the dying process but not avert death. They include assistance in respiration, artificial maintenance of blood pressure and heart rate, blood transfusion, kidney dialysis, and other similar procedures. You may still receive pain relief through medication or by performing a medical procedure, and you may still be provided nutrition or hydration unless otherwise directed. 

These documents become effective only if (1) you are incapacitated and (2) you are diagnosed as having a terminal condition or being in a persistent vegetative state. The Living Will is completed when you sign the document and is not pre-populated with your desires. 

If you have both a Living Will and a Power of Attorney for Health Care, the provisions of a valid Power of Attorney for Health Care override any directly conflicting provisions of a valid Living Will. Many attorneys will draft a combined document whereas the free state forms are separate.

MARITAL PROPERTY AGREEMENT

You may know Wisconsin is a “community property” state; this is why that is important. Wisconsin’s Marital Property Act of 1986 governs property rights over assets owned by spouses who are residents of Wisconsin and effectively treats those assets as owned 50% by each spouse unless the couple agrees otherwise (e.g., in a pre- or post-nuptial agreement). A Marital Property Agreement is an agreement between spouses that clarifies how they want their assets classified for purposes of the marital property rules. Interestingly, this only applies in the case of marital property for tax and estate settlement issues. Many Marital Property Agreements explicitly state that in the event a couple’s marriage is dissolved (by divorce, annulment, etc.), the agreement does not affect how a court will divide the assets. 

The benefits to “opting-in” to the Wisconsin Marital Property Act include the ability to: (1) eliminate probate at both of your deaths and (2) reduce capital gains taxes which may be owed because of the “double step-up” in basis attributable to assets classified as marital property. Remember, probate is the court-supervised procedure for transferring ownership of a deceased person’s assets. Issues that go to probate are matters of public record for all to see. As a result, most Wisconsin couples enter into a Marital Property Agreement that opts-in. In such an agreement, spouses generally agree to classify all property which they now own or may acquire in the future as marital property. However, the agreement also specifically carves out retirement plans and insurance policies as individual property for tax and estate planning purposes (these are not easily divisible as marital property and bad tax outcomes could result). The Agreement also classifies any joint property currently owned as survivorship marital property under the Act.  

Wisconsin statute provides that married persons may agree that upon the death of either spouse, property may be transferred without probate. Wisconsin is unique in that it permits a living trust to be funded after the Grantor’s death while still avoiding probate. The language used to direct assets to a living trust upon death is often referred to as the “Washington Will” provisions (because the concept originated in the State of Washington). As a result, a Marital Property Agreement with Washington Will provisions can protect physical assets and property located in Wisconsin from probate. If you own property outside of Wisconsin, your attorney can provide additional guidance and strategies.  

As you may know, assets in a decedent’s estate receive a step-up in tax cost basis typically to their fair market value on the date of death. However, for marital property in a community property state like Wisconsin, the decedent’s one-half interest in the property and the one-half interest owned by the surviving spouse both receive a step-up in basis – not solely the half considered owned by the deceased. Classifying assets as marital property is particularly advantageous if you have assets with low cost basis as the step-up may eliminate any potential taxable gain.  

You should note that by entering into a marital property agreement, you need not change the manner in which you manage your property. The spouse in whose name the property is titled retains the right to manage and control the property during lifetime.  

LAST WILL AND TESTAMENT

A Will is the legal document used to (1) appoint a Personal Representative (i.e., the “Executor” of your estate); (2) nominate Guardians for your children; and (3) direct a deceased person’s property and possessions to his or her intended beneficiaries. 

Personal Representative – the person responsible for administering and coordinating a deceased person’s estate, which may include paying final medical expenses, taxes, and other costs, expenses, and obligations; submitting final tax filings; making distributions to estate beneficiaries; coordinating any probate proceeding; and paying for the deceased person’s funeral. It is quite common for spouses to name each other as Personal Representative and name an adult child or relative as an alternate. It is recommended that at least one alternate Personal Representative be named in the event the primary named individual is unable to act.

First: __________________________________

Second: __________________________________

Third:    __________________________________

Guardians – the individuals responsible for raising your children (if they are minors or disabled adults). Guardians are not responsible for the assets you leave your children unless they are also named Trustee of a Trust for your children or Custodian of assets left outside of a trust. It is recommended that at least one alternate Guardian be named in the event the primary named individual is unable to act. It is also advisable not to name couples as Guardians due to the risk of death or divorce within that couple. Instead, other stipulations can be included when naming Guardians (e.g., sibling if married, grandparents if both are alive and in good health, etc.). 

First: __________________________________

Second: __________________________________

Third:    __________________________________

Distribution of Estate – The Will directs distributions of a deceased person’s property and possessions to his or her intended beneficiaries. This usually includes real estate, tangible property (e.g., collectibles, furniture, jewelry, etc.), and any other assets owned by the deceased that are not governed by a separate beneficiary designation. It is important to understand that distributions directed by the Will may be subject to probate, the court-supervised procedure for transferring ownership of a deceased person’s assets. If there is no Will (the legal term for this is “intestate succession”), state statute will dictate the distribution of assets within probate. In either case, issues that go to probate are matters of public record for all to see. Also, state statute may not distribute your assets how you would–especially in situations such as a second marriage with children from a previous marriage.

In most situations, it is recommended the Will be drafted with “pour over” language that directs all assets be distributed to a Revocable Living Trust (see below). However, even with pour-over language, many financial institutions (e.g., banks or brokerages) will require a legal affidavit or court order to release assets so it is still important to properly title accounts and name beneficiaries.  

REVOCABLE LIVING TRUST

A Living Trust is really the key document in your estate plan as it sets forth all of the provisions which govern your assets after your death. A Living Trust is revocable, meaning it can be changed at any time while you are living. (Note: An irrevocable trust, which is not discussed here, is not changeable.) You may transfer any or all of your assets to a Living Trust during your lifetime. Any assets held in a Living Trust during your lifetime will be administered as you direct for your benefit. If you choose not to place your assets in trust during your lifetime (i.e., to fund your trust), your Will can direct those assets to your Living Trust after your death. 

There are several advantages to an estate plan that utilizes a Living Trust to complement a Will. A Living Trust that is properly funded (whether during life or upon death) can avoid the headaches and expenses of probate. A Living Trust’s provisions and finances remain private, rather than a matter of public record. Most importantly, after both you and your spouse have passed the trust becomes irrevocable and the assets held in trust for your heirs receive protection from divorce, lawsuits, and claims of creditors/bankruptcy. 

Distribution of Trust – Any assets held in a Living Trust during your lifetime will be administered as you direct for your benefit. In most cases, upon the death of the first spouse to die (the “deceased spouse”) the Living Trust will continue for the benefit of the surviving spouse with no significant changes. Sometimes, the trust will be split into two trusts: one revocable Living Trust for the surviving spouse and another trust for the children. This scenario is growing increasingly popular to ensure the children of the deceased spouse receive some inheritance. If only Cinderella’s parents had employed this strategy…

In rare cases (i.e., for families with estate tax exposure), it may be beneficial to divide the Living Trust’s assets into separate trusts to take advantage of the decedent’s estate tax exclusion. In these rare cases, the Living Trust typically splits into two or more trusts under which one trust holds assets that can be transferred free of estate taxes and a second trust holds the remaining assets. 

Most trusts drafted today are flexible in nature and allow for strategic planning to be implemented after the death of the first spouse. This flexibility allows the trust to be responsive to ever-changing estate tax laws without having to re-do the trust document. If you’re not sure whether or when that may apply to you, keep in mind this little history lesson: 

• From 1987-1997, each person could exclude up to $600,000 of their estate from tax (use it or lose it).
• In 2005, the estate tax exclusion was $1,500,000 per person (still use it or lose it).
• In 2011, the estate tax exclusion was $5,000,000 per person and could now be shared between spouses. (The industry term for this sharing is “portability.” Essentially, the unused portion of the deceased spouse’s estate tax exemption can be used later by the surviving spouse, if properly elected.)
• In 2020, the estate tax exclusion was $11,580,000 per person and remains portable so a married couple can have an estate of over $23 million before any Federal estate tax needs to be paid.
• In 2026, the estate tax exclusion is scheduled to revert to the 2017 level of $5,000,000 per person adjusted for inflation.

After the death of the surviving spouse, the assets of the trust(s) are typically split into shares for your children or other beneficiaries. While the assets can be distributed outright to the beneficiaries, utilizing a separate trust for each one has more benefits and fewer risks. One benefit of continuing the trust and not distributing it outright is that the inheritance is protected from divorce, claims of creditors, lawsuits, and potential future estate taxes. The assets of the trusts are available for the children as needed and as long as the assets remain in a trust they are protected.  

Trusts established for the benefit of family members (e.g., children, grandchildren, or any further lineal decedents) are typically structured to allow distributions to the beneficiary for their health, education, maintenance, and support (the “HEMS” standard). This is a fairly broad standard that provides significant flexibly to distribute assets. However, you have the ability to provide more specific directives regarding permissible distributions if so desired.  

For parents of any age, this is how children can be protected from themselves. In that nightmare scenario where both parents pass before their children are mature adults, it is reassuring to know their inheritance is protected. There is no question a 6-year-old needs a Trustee to manage the assets and help guide her decisions. Oftentimes, a thirty-something year-old does as well. Knowing that a trusted friend or family member will provide the sage advice that a parent is not around to give is comforting. As a forty-something year old today, I personally would prefer to inherit assets in trust and not outright.  

Trustees - The Trustee is responsible for the management and investment of all Trust assets and is also responsible for determining the amount and frequency of distributions to the beneficiaries of the Trust. Individuals or institutions can serve as Trustee. Most families prefer to utilize individuals as trustees because they believe a trusted individual will better understand the unique needs of their family and they will receive more personalized service. 

It is important to understand that an individual serving as trustee can (and almost always does) hire professionals to assist them with investment management as well as tax return(s) and potential bookkeeping requirements. The single most important criteria when selecting a Trustee is to utilize someone you trust. It’s in the name. Family members, close personal friends, and trusted advisors are often selected to serve as Trustee. 

Many families choose to allow their heirs (children, grandchildren, etc.) to serve as sole Trustee of trusts established for their own benefit once they attain a certain age. Other families prefer that there always be at least one independent trustee and allow heirs to serve as co-trustee of the trusts established for their benefit once they attain a certain age. Some families don’t allow heirs to serve as trustee and instead choose to always utilize an independent trustee. Still others will allow heirs to be sole Trustee provided they have not had past issues with gambling or substance abuse. For trusts with more assets, it becomes increasingly more important to protect those assets for current and future beneficiaries, so the trust administration usually becomes more formal.

Some questions to consider when naming the initial Trustee(s) and Successor Trustee(s) include:

• If married, can one spouse serve as sole trustee upon the death or incapacity of the other spouse? If not, who do you want to serve as Successor Trustee(s) or Co-Trustee(s)?  
• Do you want to allow your children to become the sole trustee of any trust established exclusively for his or her benefit (typically the answer is yes)? If so, at what age? (We commonly see families use ages 30, 35, or 40.)
• If you do not want your children to be the sole trustee of a trust established exclusively for his or her benefit, do you want to allow them to become a co-trustee? Again, at what age? (In these situations, we commonly see a modestly younger age such as 25 or 30 so they can begin to learn under a more seasoned, responsible friend or family member. This way, the beneficiaries are better positioned to inherit family values in addition to things of value.)

First: __________________________________

Second: __________________________________

Third:    __________________________________

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In conclusion…

Wow! That was a lot to digest. Hopefully, it was simplified enough that you don’t need a law degree to understand it. Also, the examples used were for a typical family. If your situation is more complex, some of the strategies should be modified. Examples of more complex situations can vary from the commonplace (e.g., a second marriage, disproportionate income or assets between spouses, etc.) to the less common (e.g., children from a previous relationship, beneficiary with a history of gambling or substance abuse, children with special needs, etc.). Whether your family is typical or not, your estate plan should be customized to provide the best fit for you, your family, your goals, and your values, not a cookie-cutter template pulled off the shelf.  

Having someone you trust sitting beside you when you make these decisions is irreplaceable, especially when that someone is experienced in estate planning and knows not only what questions to ask and what options are available, but someone that knows you, your family, and what is most important to you. There’s a good chance you and I already know each other and our families. If you would like me to be the person to assist you, all you have to do is ask.

We must accept that death is one of life’s few certainties. None of us know precisely how or when we’re going to pass, but we do know it will happen to all us at some point in time. As I mentioned at the beginning, planning ahead for this type of event is an incredible gift to your family. The last thing any of us want to do is leave an additional burden to our loved ones in a time of crisis.  

The above information is strictly for informational purposes and should not be construed as legal or tax advice.