The Importance of Estate Planning
By John Hanson, Attorney at Law
Attorneys John Hanson and Ken Tharp are licensed to practice in the state of Oregon. This article is based on Oregon law. It is intended to be informative. The article does not provide legal advice. The article is not intended to apply to a person’s specific situation. Any person interested in estate planning should consult with an estate-planning attorney in the state where they reside.
Elizabeth Hayes suffered a severe stroke last winter. Elizabeth’s husband, Charles, passed away in 2007. Elizabeth is the mother of three children. Two are stepchildren from her deceased husband’s prior marriage. Elizabeth and Charles are the parents of the third child. Elizabeth considers the two stepchildren to be her children for all practical purposes. One stepchild lives with and cares for Elizabeth. Elizabeth’s natural child lives out of state and has not visited Elizabeth for several years.
Elizabeth has always made it clear that she wants all three children to share equally in her estate. Unfortunately, Elizabeth does not have an estate plan and because she is now incapacitated due to the stroke, she is not able to prepare a plan. As a result, Elizabeth’s estate will be controlled by Oregon law. This means that Elizabeth’s natural child will be the sole beneficiary of the estate and her two stepchildren will receive nothing from her estate.
Elizabeth’s name has been changed and the facts altered to protect her privacy. Elizabeth’s situation illustrates how vital estate planning can be in order for your wishes to be carried out upon your death. Many people do not realize the importance of an estate plan until it is too late.
As people age, they become more vulnerable. Mental and physical issues, such as illness and dementia-related problems can arise. In order to plan their estate, a person must have the mental capacity to approve and sign estate-planning documents. Once a person becomes incapacitated, it is often too late to plan.
It has been our experience that children have a difficult time discussing estate planning issues with their parents. These issues include gifting of the parent’s property, end of life decisions and burial or cremation decisions. Perhaps one of the best gifts a parent can give a child is an estate plan which covers and sets forth the parent’s wishes.
There are three primary methods of transferring property at death. These methods are: (1) by contract, (2) by will, or (3) by some form of trust. The most common way of transferring property at death is by contract. Without realizing it, people plan their estate all the time by entering into contracts. Some examples of contracts are joint bank accounts, life insurance policies, pension plans and deeds to property. For example, a real property deed to a husband and wife means that the husband and wife own the property “with the right of survivorship.” This means that when the first person dies, the jointly owned property passes automatically to the surviving spouse.
Some people execute a will and/or a trust covering property governed by “contract.” The problem is that the contract language supersedes any language in the will and/or trust to the contrary. With this said, a “contract” can be a feasible method of transferring property at death.
A will is a common way of distributing property after death. A will sets forth a person’s wishes and instructions for how their property will be managed and distributed at death. For example, Elizabeth could have executed a will which would probably have named one of her children as her personal representative (executor). Her will would probably have provided that Elizabeth’s child could serve as personal representative “without bond.” In the absence of this language, Elizabeth’s estate would have to pay for a bond which can easily cost several thousand dollars. More importantly, Elizabeth’s will would have stated her desire that all three of her children receive an equal share of her estate upon her death.
A trust is another method for managing and distributing assets after death. An advantage of a trust is that you may be able to avoid probate. A disadvantage of a trust may be that it avoids probate. Many times, it might be better to manage and transfer a person’s assets with the benefit of judicial supervision. This is especially true in a situation where conflict or friction is likely to occur between the beneficiaries of a person’s estate.
There is a lot of confusion and misinformation regarding probating a will or a trust. One common misconception is that a living trust saves death (inheritance) taxes. This is not true. The assets of a living trust are subject to federal and state death (inheritance) taxes in exactly the same way as a person’s other assets.
When people meet with an attorney to discuss estate planning, they usually learn the advantages and disadvantages of a will versus a trust. The primary difference between a will and a trust is that a properly drafted and managed trust will avoid probate. Unfortunately, some estate planners encourage the use of trusts over wills when a will might be a better fit given a person’s assets and estate planning needs. A main selling point used by estate planners is that trusts avoid probate and that probate is costly. The facts are that a will can have many advantages over a trust and can actually cost less money. In addition to being more expensive, a trust can needlessly complicate what would have otherwise been a straightforward estate plan.
The term “probate” is actually a process for transferring a person’s assets after death. For example, many people are familiar with transferring property while alive. They enter into sales agreements, sign transfer documents at title companies and execute other documents which transfers their real and personal property. The “probate” process deals with the issue of how to transfer a person’s property when they are no longer able to review the documents, make decisions and sign the transfer documents. In the probate process, the judicial system oversees the distribution of a person’s assets pursuant to the person’s will and/or trust or similar document.
A living trust avoids probate because a person can transfer their assets while they are alive. In order for a living trust to avoid probate, it is necessary for a person to transfer their assets out of their individual name and into the name of the trust. Because the assets are held in the name of the trust, it is not necessary to probate a person’s estate because, in theory, all of the person’s assets have previously been transferred to the trust.
The problem with a living trust is a person must transfer their assets into the trust in order for the trust to be effective. Many times it is costly, time consuming and inconvenient to transfer assets into a trust and manage the assets afterward. For example, a person’s home must be transferred into the name of the trust. Every time title is changed or the home is sold and/or refinanced, it may be necessary to transfer the property into and/or out of the trust.
When using a trust, a person will also need “transfer documents” which are necessary to transfer real property, bank accounts, pension plans, investment accounts and other assets into the name of the trust. You should keep in mind that completing these transfer documents can be time consuming, expensive and complicated.
If a person is active in managing their property and assets, a better choice might be a will. The reason is that the assets remain in the person’s individual name. The person retains full control of their assets and it is not necessary for the person to constantly transfer property into or out of the trust.
In addition to a will and/or a trust, additional documents are part of the estate planning process. If a person elects to control the gift of their assets using a will, the person should also consider executing a durable power of attorney and an advance directive. The durable power of attorney is necessary to avoid or alleviate the issues arising out of a guardianship and/or conservatorship in the event of a person’s incapacity. An advance directive is a special kind of power of attorney for health care. A power of attorney for health care appoints a person to make medical decisions, including end-of-life decisions, in the event the person becomes incapacitated or is not able to make their own decisions.
If a person elects to control the gifting of their assets using a trust, they too will need a durable power of attorney and an advance directive identical to that needed when executing a will. The person will also need a will, in addition the trust. This form of will is commonly referred to as a “pourover” will. A person using the living trust will need a pourover will because it is common for issues to occur in the administration of a trust, such as a person forgetting to transfer title to all of their assets in the name of the trust. For example, let’s say a person sells their home which is titled in the name of the trust and then purchases a new home. After purchasing the new home, the person forgets to transfer the new home into the name of the trust. Because the new home is in the name of individual at the time of death, it is usually necessary to “probate” the new home, in addition to any other assets that were not placed in the name of the living trust. The will is necessary to ensure that all assets are gifted pursuant to the person’s instructions as set out in the will and/or trust.
In summary, estate planning is necessary if a person wants to decide who will manage their money and other assets and how these items will be gifted upon death. The decision between using some form of contract (joint bank accounts, life insurance or real property deeds), a will and/or a living trust largely depends upon a person’s assets, beneficiary issues and the individual’s preference for managing and gifting their estate. In the absence of estate planning of some kind, the person’s estate will be controlled by the laws of their state of domicile which may or may not be desirable.
The best time to consult with an attorney is now! Once a person becomes incapacitated, it is probably too late to address estate planning issues. The key is finding an estate-planning attorney who will listen to you, explain the methods of transferring property at death, discuss the advantages and disadvantages of each method and then help you decide which method is best for your individual needs.
John R. Hanson & Kenneth M. Tharp, Attorneys at Law
23 Newtown Street, Medford, OR 97501 • (541) 776-3405 • [email protected]