By Patricia M. Annino
Many of our clients rely on the common myth that "estate planning is only for people who are richer than we are" to prevent them from taking that first step towards planning. In fact, putting an estate plan in place is important no matter what your net worth.
Why is it that so many of us and our clients work our entire lives to make sure that we are secure and that our families are well provided for, yet put so little thought into what would happen if we become disabled or die? Even Houdini could not escape death.
It is normal to want to avoid dealing with the prospect of disability or death, but at the same time it is vital that we push forward and take the necessary steps to safeguard what we have accomplished during our lives.
Following are four reasons to encourage your clients — no matter how rich or how poor — to put their affairs in order now.
Reason 1: estate planning is not just to protect your family when you die; it is to protect you while you are alive
Estate planning today is far more than a will. It addresses what happens if you become disabled or incapacitated.
By showing you how to put appropriate legal documents, such as a durable power of attorney and a living trust, in place with necessary safeguards, the estate planning process enables you to select who should be in charge of your assets if you are alive but lose the ability to handle your own financial affairs.
Most couples' homes are their biggest asset, for example. Unfortunately, that asset will be frozen if one of the two becomes disabled or incapacitated. If a husband and wife own their home jointly with a right of survivorship at the death of the first spouse, the ownership of that home will pass to the surviving spouse.
If, instead, one becomes disabled or incapacitated and is unable to handle his or her financial affairs, then the house is frozen since both signatures are required to transfer, sell, mortgage or deed the home.
At death, a retirement planning asset is paid to the named beneficiary — normally the spouse. If, instead, the plan holder becomes disabled or incapacitated, that retirement plan is frozen, as only the plan holder has the ability, during his or her lifetime, to make decisions concerning investments, hardship withdrawals and emergency loans.
The same thing is true for a single person. If you become incapacitated and all of your assets are in your name alone, they will be frozen.
If, however, the couple had executed durable powers of attorney by which they gave each other the authority to handle those transactions, then should one spouse become disabled or incapacitated, the other spouse would have the legal authority to handle the transaction.
Reason 2: estate planning should begin when you are young
Once you reach the age of majority, even if you do not have any assets, you should execute a health care proxy or health care durable power of attorney. In that document you may designate one person (and successors) to make your medical care decisions if you are unable to do so. You can change the document any time during your lifetime.
No doubt Terry Schiavo had no idea that at her young age she would experience serious medical issues. Because she had not expressed her intent in writing, Florida law named her husband as her agent. Perhaps her parents would have had some comfort if they knew that she had selected him to make those decisions herself.
Designating a health care agent is equally critical in a second marriage situation. Otherwise, if, for example the wife gets sick, both the adult child and the new spouse might end up vying for the right to make health care decisions for her. It is not fair to put them in that position — forced to negotiate in the midst of a crisis. The person who should make that decision is you, and you should make it now.
If you are in a relationship with someone but you are not married, that person has no legal standing to make your medical care decisions for you, or, in some states, even to visit you in the hospital. Executing a health care proxy or health care durable power of attorney can grant the person the legal authority to visit you and to make those decisions.
It is important that you write down the phone number of the health care agent in the document. After all, if you are in an accident, and it is a life-threatening situation, the health care professionals will want to call and immediately discuss the situation with the named agent.
It is also important to tell your health care agent that you have named him or her as your proxy. Make sure to give a copy of the document to your primary care physician and keep a copy of it with your passport when traveling.
Reason 3: protect your children by nominating a guardian
If you have minor children, no matter what your net worth is, you need an estate plan so you can choose the person who will make decisions concerning their care, upbringing and education if you are not around to do so yourself.
If you do not take the time to designate who should serve as their guardian, you could be leaving that important decision to a stranger — probably a judge.
This is a decision you not only want to make yourself, but one you want to think through carefully. Raising someone else's children is a tremendous responsibility and the choice of who should serve in that capacity takes time. You want a guardian who shares your value system, religious beliefs and attitude towards education. Ideally, the guardian should also share your money value system — what is OK to spend money on and what is not.
Making parental decisions is very subjective. We all have our own ideas on whether or not it is appropriate to send a child to private school, summer camp or on vacations, purchase an automobile for him or her, put a down payment on a child's home or pay for post-graduate education.
Sitting down annually and writing a letter to the person you have selected is a wise idea. The letter can be maintained with your legal documents and replaced annually. That way you can offer the guardian a guide to your child's personality — what to watch out for and what to protect.
When choosing a guardian, if you name a couple — your sister and brother-in-law, for example — you must weigh the pros and the cons.
The "pro" side is since both will have the legal responsibility as guardians to make decisions, they will both feel actively involved in your child's upbringing. If there is a medical emergency on the school playground, either one of them can act. Either one of them can attend school conferences.
The "con" side is that if they divorce, your child or children could be involved in a custody battle. Or, if one of them dies, the other, as legal guardian, has standing in custody matters.
Reason 4: if you do not have an estate plan, Massachusetts, as the state in which you are domiciled, will write one for you
The laws of the state in which you live will dictate who receives any asset that is in your name alone. Many spouses are surprised to learn that in Massachusetts (and every other state) they do not automatically receive all of their deceased spouse's assets. Any asset that is in your spouse's name will be split between you and your children.
Establishing an estate plan allows you to control the direction of your assets.
Patricia M. Annino is chair of the estate planning department at Prince, Lobel, Glovsky & Tye in Boston.
November 6, 2006
