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The Basics of Estate Planning

Estate planning can be defined as planning for the transfer of wealth (a large amount, a small amount, or something in between) at a person’s death, and the making of certain legal and related arrangements for events associated with the time shortly before and after death. In this article, we'll examine a few of the important considerations in estate planning.

Estate planning is admittedly not a cheerful subject, but it is obviously an important one and, like most financial subjects in today’s world, a complicated one. The purpose of this article is to outline just the basics of estate planning from the point of view of an average individual. Probably the easiest way to summarize the subject is in terms of four legal or semi-legal documents (items 1 through 4 below), and then to compare these documents with other legal consequences of a person’s death or impending death, primarily as they relate to property.

With regard to all of the following, especially the preparation and execution of a will, the services of an attorney should be used in all instances. Yes, it is possible to do these things without an attorney, following a commercial instruction book for example, but the risks of error are so great that they clearly outweigh the cost of legal services. Most important, once the individual in question has died or become legally incompetent, the errors can’t be corrected.

1. A Last Will and Testament

The property of a deceased person passes to other persons in one of two ways: (1) by operation of the applicable state law of intestate distribution, meaning that it passes to designated relatives if the deceased has not left a valid will (being intestate means not having a will, whereas having a will is being testate); or (2) under the terms of the deceased person’s validly executed last will and testament. “Last” will and testament refers to the fact that a person can make many different wills during a lifetime, but only the last one is effective.

In virtually every state, a will must be formally executed and witnessed. Because the requirements in this regard (number of witnesses, who can or should be a witness, etc.) are so technical and varied, and such a common cause of invalid wills, they will not be further discussed here, and the reader is referred to back to the second paragraph of this article.

A will is usually divided into specific bequests and a residuary clause. An example of a specific bequest would be: “I give and bequeath all of my household goods, personal effects, and automobiles to my wife, Sarah Smith.” Charitable donations in the will are other common examples of specific bequests. A residuary clause disposes of everything that is not given away in specific bequests, for example: “I give, bequeath and devise all the rest, residue and remainder of my estate, whether real or personal property, to my son, James Smith.”

The will should name a person or corporate fiduciary, such as a trust company, as executor (male/neuter version) or executrix (female version). This person or entity is in the category of personal representatives of the estate, which means that the property in the estate is collected, sold if necessary, and distributed according to the terms of the will by that person or entity as a fiduciary (very much like a trustee). Another kind of personal representative is an administrator (or administratrix), who administers the estate of an intestate person.

Both kinds of personal representative function under the supervision of a probate court, in which the will is filed, reviewed to make sure it is properly executed and otherwise appears to be acceptable, and made a public record. It is also the court where any persons who have an objection to the will can have their cases heard, and where the personal representative makes certain reports or “accountings.” For this reason, the court-supervised process of transferring property under a will is called probate, and the property passing under the will is called the probate estate.

2. A Letter of Instructions

A will, as noted above, has to be probated before it truly becomes legally effective to dispose of the deceased person’s assets. Beyond that, a person’s will is often kept in the family’s safe deposit box or, preferably, in the secure custody of the attorney who prepared it and supervised its execution. A Letter of Instructions or “Last Wishes” is not strictly speaking a legal document and is not in any way a substitute for a will, because it is not legally binding, but it is often used to convey the insured’s wishes regarding funeral arrangements, burial or cremation, religious services, and the like, to close family members. It should be kept by a responsible person in the family as a guide to be referred to immediately after the death occurs.

These matters can be addressed in the will, but it is almost a waste of the attorney-drafter’s time because (a) as noted already, most if not all of such matters are not legally binding even if they are in the will, (b) the actual “last” will and testament or a reliable copy may not be readily available, and (c) changes in the instructions will then require a new will, which will take time and almost certainly generate more legal expense.

A letter is preferable to oral instructions because the latter may be recalled differently by different family members, or simply not recalled, or misunderstood, or a combination of the foregoing may occur.

3. A Power of Attorney

A Power of Attorney is the archaic name for a document that names one or more persons as the agent of the person granting the power (the principal) to do certain things on the latter person’s behalf and in his or her name, as if they had been done personally. In essence, it allows a person’s personal and business affairs to be conducted by someone else, as a matter of convenience or necessity. The scope of a Power of Attorney is theoretically limited only by the law that governs what things can and cannot be done by a person through an agent. (For example, making a valid will or adopting a child cannot be done through an agent.)

It is called a “power” (“authorization” would be a better word) only because it creates, in the agent, what is technically called a power to enter into binding contractual and similar transactions. The term attorney is misleading because the person receiving the power (called the “attorney-in-fact”) may be, but does not have to be an attorney, and the power itself certainly doesn’t make what is usually called an attorney out of someone who is not already one. As a matter of terminology, one should recall that the document is called a Power of Attorney, but the person receiving it is said to have, not to “be,” the Power of Attorney (a very common mistake). The plural form is Powers of Attorney, not Power of Attorneys.

First of all, a Power of Attorney is absolutely not, to any extent, a substitute for a will because, just the opposite of a will, it ceases to be effective immediately upon the death of the principal. It also generally ceases to be effective if and when the principal is no longer legally competent (sometimes called “disability” in this context), which can be a very complicated and controversial issue in itself, but is definitely not limited to extreme states of incapacity such as unconsciousness or coma.

The exceptions are a “Durable Power of Attorney,” which continues in effect as long as the principal is alive, even though not legally competent, and a “Springing Power of Attorney,” which does not become effective until the principal is legally incompetent, then becomes effective (“springs” into effect) and remains effective as long as that condition continues or until the principal dies. These exceptions are relatively new inventions, and their use is ordinarily possible only if expressly authorized by state statutory law.

The state laws governing the preparation and use of a regular, durable, and/or springing power of attorney are not uniform. Although there are many “standard” forms prescribed by different state statutes, usually the standard form is not the only acceptable form, and other powers of attorney in non-standard form may be equally valid. However, sometimes the standard form is especially effective (as a practical matter) because banks and similar institutions may be required to “honor” or accept it. Often the form must be witnessed or notarized in order to have this effect.

Many power-of-attorney laws involve a “checklist” of items representing different subject areas in which the principal wishes to give authority to the attorney-in-fact, such as the following list in the Illinois statute:

a. Real estate transactions
b. Financial institution transactions
c. Stock and bond transactions
d. Tangible personal property transactions
e. Safe deposit box transactions
f. Insurance and security transactions
g. Retirement plan transactions
h. Social Security, employment and military service benefits
i. Tax matters
j. Claims and litigation
k. Commodity and option transactions
l. Business operations
m. Borrowing transactions
n. Estate transactions (regarding someone else’s estate)
o. All other property powers and transactions

In signing the document, the principal must cross out any category as to which he or she does not want to grant authority to the attorney in fact. Each category is usually defined in considerable detail in the statute and in the Power of Attorney itself.

4. A “Living Will”

Many people believe that a “Living Will” (which is not even remotely a will in the technical legal sense) is, more or less, a document that gives them the right to “die with dignity.” That is, they want a living will to give instructions to doctors and hospitals, in advance of a terminal illness or injury, with regard to extent of treatment that is to be given to keep them alive. This may be the primary function of many living wills, but there is quite a bit more to the subject that needs to be examined and considered.

There are two basic kinds of living will, which are quite different in general concept:

A Durable Power of Attorney for Health Care Decisions (sometimes called a Health Care Proxy) names a person, usually a close relative, acting as an agent or attorney-in-fact, to make health care decisions for the principal at a time when, presumably, the principal is no longer able to make such decisions personally, at least not in a coherent or rational manner. Some states have enacted statutes governing these documents, including standard forms.

In other states, there is no standard document, and in some cases (as with Powers of Attorney generally) something other than the standard document can be valid and effective. What decisions can and cannot be made in a way that is binding on the treating health care providers varies from one state to another. To cite just one example, euthanasia and assisted suicide, and measures tantamount to either, are generally illegal in the United States.

A “regular” living will, under the laws of many states, allows the individual to give instructions directly under the terms of the document, without the use of an attorney-in-fact. In this case also, what treatments that can and cannot be given or withheld are matters that are restricted as a matter of state law.

5. Effects of Death upon Ownership of
Jointly-Owned Property

Jointly owned real and personal property is property (including investments and the like) that is owned by two persons, usually husband and wife, equally during their joint lifetimes, and then automatically owned solely by the surviving spouse upon the death of the first spouse to die. Sometimes this concept is reflected in archaic wording such as “joint tenants with right of survivorship,” which has nothing to do with being a tenant in the usual sense but means that the two persons own the property jointly, and then the survivor own it individually. Since the transfer is automatic, and the interest does not pass under a will or intestate law, the asset in question is not part of the deceased person’s estate and is called a “non-probate” asset.

This form of ownership can apply to real property, such as a house owned by both spouses (in which case it is usually called a “tenancy by the entireties,” which is approximately the same thing), or to personal property. (See the article on Federal Deposit Insurance regarding bank accounts held in joint names with right of survivorship, and accounts in the name of one person that are “Payable on Death” (POD) to another person.)

Joint ownership is, in a sense, one of the easiest estate planning tools because it requires no will or intestate proceedings to make the transfer effective upon death. In a sense, by owning property jointly with right of survivorship, each of the owners has already transferred his or her interest, effective upon his or her death before the death of the other owner. Joint ownership without right of survivorship, on the other hand, causes the partial interest of the deceased owner to pass under that person’s will or under the intestate law. Also, the interest can be transferred during life in appropriate circumstances, and in unfriendly circumstances one joint owner can bring an action in court to divide or “partition” the property, ending the joint ownership.

6. Life insurance

The death proceeds of life insurance (individual or group) belong to the beneficiary(ies) as a matter of contract law from the moment of death, and are not part of the probate estate. (This is one of the great advantages of life insurance, because funds are almost immediately available without extensive legal formalities.) Regardless of this fact, they may be part of the insured’s estate for estate tax purposes (see the article on Federal Estate and Gift Tax.) If, however, the proceeds are payable to the estate under the terms of the policy, as one might expect they are part of the probate estate.

7. Personal Property/Casualty Insurance

The ISO Homeowners policy, under the section of the Conditions entitled “Death,” provides that if the named insured or spouse dies, the policy automatically covers the personal representative “but only with respect to the premises and property of the deceased covered under the policy at the time of death.”

The Personal Auto Policy, under the section of the General Provisions called “Transfer of Your Interest in this Policy,” provides that if the named insured dies,

“ … coverage will be provided for:

1. The surviving spouse if resident in the same household at the time of death. Coverage applies to the spouse as if a named insured shown in the Declarations; and

2. The legal representative of the deceased person as if a named insured shown in the Declarations. This applies only with respect to the representative’s legal responsibility to maintain or use “your covered auto”.

The Personal Umbrella Policy contains provisions very similar to those above, limiting coverage for the personal representative to “autos” and premises.

8. Trusts

The important and complicated subject of trusts in estate planning is beyond the scope of this introductory article, but will be examined in a future article.

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