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DRAFTING CONSIDERATIONS IN ESTATE PLANNING DOCUMENTS

by: Begley Law Group

by Thomas D. Begley, Jr., CELA

[Article originally published in Straight Word] The basic Estate Planning package includes a Will, Living Will, and Powers of Attorney.  In some instances, a Living Trust is also included.  

Will

The purpose of the Will is to transfer property on death through the probate process.  The Will appoints an Executor who is tasked with administering the estate. 

Wills generally provide for spouses, children and grandchildren.  Wills frequently include various forms of Trust.  The Will should appoint an Executor, a Trustee for any Trust established under the Will, a Funeral Representative, and a Guardian, when appropriate.  Many clients have life insurance, retirement accounts and annuities.  They often do not understand that these assets pass outside the Will by beneficiary designation.  These assets must be reviewed with the client and the beneficiary designations should be reviewed to conform to the client’s overall estate plan.  Bank tellers and financial advisors frequently advise their clients to establish accounts either under a “payable on death” (POD) or “transfer of death” (TOD) or joint ownership.  These designations are designed to avoid probate and make assets available immediately upon the client’s death.  The downside is that very frequently the POD, TOD or join ownership designations conflict with the client’s plan for disposition of assets on death.  As a general rule, clients should be instructed to cancel any POD or TOD arrangements and to carefully review any joint ownership accounts.

Living Trust

Living Trusts can also be useful to avoid probate.  However, in New Jersey probate is relatively simple and inexpensive, so as a general rule Living Trusts are only used where the client owns real estate outside of New Jersey.  The out-of-state real estate is transferred to the Living Trust, and probate in the foreign jurisdiction is avoided.  It should be noted, however, that in Florida a modified less involved and less expensive probate procedure is still required.  Where a Living Trust includes bank accounts, Federal Deposit Insurance Corporation (FDIC) insurance can be an issue.  Under current FDIC rules, provide for $250,000 insurance coverage for each unique beneficiary.  Advantages of Revocable Living Trusts are:

  • Avoids Probate.  In New Jersey, probate is simple and inexpensive that this is not a significant advantage.
  • Saves Executor’s Commissions.  Executor’s commissions are often based on a percentage of probate assets.  To the extent that assets have been transferred to a Living Trust during lifetime, Executor’s commissions will be reduced.
  • Privacy.  However, if litigation ensues, then an inventory of assets and copies of documents can be easily obtained through discovery.
  • Disability Protection.  If the grantor becomes disabled, then the successor trustee can manage the assets without the necessity of seeking appointment of a guardian or conservator.
  • Asset Management.  The grantor can establish a Living Trust with a professional money manager, if the client wants expert money management.
  • Instant Access to Funds on Death.  The successor trustee can access funds in the Living Trust immediately upon death of the grantor.
  • Attorneys’ Fees.  There’s a general perception that the use of a Living Trust avoids or reduces attorneys’ fees.  To a certain extent this may be true, however, assets still need to be valued and retitled, tax returns may still need to be prepared and filed, including federal or state estate tax, New Jersey inheritance tax, or estate income tax, accountings need to be prepared, releases need to be obtained, and legal advice is often required in the area of trust administration.  Any saving is usually minimal.

            One of the disadvantages of a Living Trust is that assets have to be retitled to the trust during the lifetime of the grantor in order to be effective on death.

Living Will 

            The Living Will, which can be a combination of an Advance Directive and Medical Power of Attorney, sets forth the client’s wishes with respect to medical decision-making, including end-of-life decision-making, and appoints a Health Care Representative to make those decisions if the client is unable to do so.  The Living Will could be divided into two sections.  Section one would authorize the Health Care Representative to make routine medical decisions for the client, if the client is unable to do so.  Section two should be an Advance Directive spelling out the client’s wishes if there is no medical hope for the client’s recovery or regaining a meaningful quality of life.  Would the client want life to be terminated or would the client want to continue to be treated aggressively?  The document should spell out what types of life-sustaining treatment the client does and does not want.  These might include:  cardiac resuscitation, mechanical respiration, blood and blood products, any form of surgery or invasive diagnostic tests, kidney dialysis, antibiotics, chemotherapy, and fluids and nutrition by feeding tube or intravenous infusion.  Most clients do want pain relief.  The document should also address whether or not the client wishes to make organ donations, whether the client wants to make anatomical gift for medical research, and whether a female client wants to be kept alive long enough to deliver a baby if she is pregnant.

            Consideration should be given to including a clause as to what happens if there is a conflict between the physicians and family members.  Typically, if the Advance Directive states that the client wishes to terminate life, then clients want the Health Care Representative to be able to override the doctor and continue life as long as there is a disagreement.  However, if the client wants to be treated aggressively no matter how hopeless the situation, then the document should specifically state that the document overrides both the physician and the Health Care Representative.

            The Living Will should also include a Health Insurance Portability and Accountability Act of 1996 (HIPAA) Authorization.

Psychiatric Advance Directives

            A Psychiatric Advance Directive (PAD) is a legal document, similar to an Advance Directive, given in connection with end-of-life decision-making.  However, PADs are used to give instructions with respect to preferences for future mental health care treatment.  They can also be used to designate a proxy decision-maker.  To be effective, a PAD must be irrevocable.  The purpose of the PAD is to request or refuse specific treatment such as any types of medication and other mental health interventions.  PADs can also address use of physical and chemical restraints, release of information for treatment, participation in clinical trials or experimental treatments, hospital selection, and other directions to manage the person’s routine responsibilities.  Use of PADs may lead to a reduction in adversarial court proceedings involving involuntary psychiatric treatment.  The principal must be competent at the time the PAD is executed, and must be incompetent to make those decisions at the time the document is utilized.  It is often difficult to get mentally ill clients to sign these documents, but they definitely should be considered. 

Power of Attorney

            The Financial Power of Attorney appoints an Agent to make financial decisions for the client.  The Financial Power of Attorney can be effective immediately or the effective date can be deferred until the client is no longer able to make financial decisions for himself/herself.  The Power of Attorney document should be very detailed, so that it will be accepted by financial institutions and others.  Because financial institutions do not like to read a long document, consideration should be given to breaking out separate short Powers of Attorney for banking, real estate and securities.  Items that should be included in a Financial Power of Attorney, but frequently are not, include:

  • Banking.  Reference should be made to the New Jersey Banking Power of Attorney Act.  If this reference is included, all banks must accept the Power of Attorney.  Absent that statutory reference, banks may use their discretion.  The language is as follows:  “Agent has the authority to conduct banking transactions as set forth in Section 2 of N.J.S.A. 46:2B-11.”
  • Real Estate.  Some title companies will not accept a Power of Attorney with respect to real estate unless it includes the street address or tax block and lot of the property in question.  While most title companies will accept a Power of Attorney without including this reference, it is important to note that the buyer picks the title company, not the seller.  If the buyer’s title company refuses to accept the incomplete Power of Attorney, the seller can offer to find another title company that will, but the buyer may use that as leverage to pressure the seller into making repairs to the property that the seller was otherwise unwilling to make.
  • Gifting.  The Power of Attorney in New Jersey cannot be used to make gifts, unless the authority is specifically spelled out in the document.  Good practice dictates that consideration be given to including the potential donees, restrictions on the amount of gifts, such as the Annual Gift Tax Exclusion, and purposes of the gift (such as education or qualification of the principal for public benefits).

            Frequently, Co-Agents are appointed.  For example, a parent may appoint two children.  In that situation, it should be clearly spelled out whether the Co-Agents must act together or can act independently.