5 Types of Estate Planning Tools
Updated: Jun 13, 2022
Wills, trusts, powers of attorney, living wills and life insurance can work together to help you plan your estate.
Five key tools can work together to help you plan your estate.
Wills dispose of their maker's individually owned assets at death, through a probate proceeding, and have no effect on assets or property owned in many other forms (e.g., property with a right of survivorship: retirement plans, insurance policies, or annuities; trust assets, life estates, all of which are discussed below) which pass by operation of law or beneficiary designation. If the decedent leaves no valid will, Florida's intestacy statute mandates the order in which relatives take the decedent's estate.
Valid wills require a competent testator or testatrix (i.e., the man or woman who makes the will; hereinafter referenced as testator) and must be executed in compliance with strict statutory formalities. To be competent, the testator must be of sound mind, meaning that, when the will is made, he or she generally understands:
The nature and extent of his or her property
The natural objects of his or her bounty
The practical effect of the will
A trust is an agreement between a creator (referred to as the settlor or grantor) and a trustee, where the trustee agrees to hold legal title for the beneficiaries. It is not uncommon that two or more of these roles are filled by the same person. The general types of trusts are classified below.
Living vs. Testamentary
A living trust, also known as an intervivos trust, is created during the settlor's life while a testamentary trust comes into existence after death, through the maker's will or revocable trust. Testamentary trusts are always irrevocable since the creator is no longer alive to revoke the trust. Living trusts may be revocable or irrevocable. Revocable living trusts are created during life, may be revoked or amended, and are commonly used to avoid probate and guardianship proceedings. Irrevocable living trusts cannot be revoked or amended (except as provided below under the section on Irrevocable Trusts), usually involve gift tax considerations, and are commonly used for estate tax reduction or asset protection against future creditors.
Revocable trusts may be amended, revoked, or terminated by the grantor while irrevocable trusts lack these features.
Because the Florida probate process tends to be lengthy, costly, and time consuming, the revocable living trust has emerged as a popular vehicle that substitutes for a will, avoids probate proceedings, and allows for a more efficient and less costly transfer of assets to the decedent's beneficiaries.
In order for the revocable trust to achieve its purpose of probate avoidance, it must be funded. In other words, the grantor's assets must be transferred to the trustee of the trust. Many (actually most) grantors of revocable trusts initially serve as sole trustee or co-trustees; in this situation, the grantor transfers assets to himself or herself as trustee. Revocable trusts require the same formalities discussed above for wills.
Revocable trusts also serve as a vehicle for disability protection in the event of the grantor's incapacity. Without the proper estate planning documents, an incapacitated person's assets must be administered in a guardianship where the assets of the incapacitated person (ward) are subject to court supervision.
Irrevocable trusts have multiple uses in estate planning. Most often, they are created to make lifetime gifts to third parties such as the grantor's spouse and descendants, thereby removing assets and their future appreciation from the grantor's estate. To the extent that a transfer to an irrevocable trust for the benefit of a third party exceeds the annual gift tax exclusion, it constitutes a taxable gift. While the grantor could retain certain powers to avoid gift tax consequences, doing so would cause inclusion of the assets in the grantor's estate for estate tax purposes.
Irrevocable trusts created in Florida (and most other jurisdictions) for the benefit of third parties can provide maximum protection against the creditors of the grantor and the trust beneficiaries. These so-called spendthrift trusts assist beneficiaries who are poor stewards of wealth, shield beneficiaries from divorcing spouses, and allow beneficiaries with special needs to preserve their eligibility for government benefits. To help ensure asset protection, the trust should provide for an independent trustee, who can make discretionary distributions, in addition to spendthrift provisions, which prevent alienation of a beneficiary's trust interest.
Although irrevocable trusts generally cannot be changed, Florida law does provide for certain instances where irrevocable trusts can be modified or reformed, usually with the consent of the trustee and beneficiaries, or by court order. Types of irrevocable trusts include:
Life Insurance Trusts -
A good measure of estate planning with life insurance involves the implementation of an ILIT, which owns one or more policies insuring the grantor so that the proceeds will be excluded from his or her estate. However, as the transfer tax exemption has increased, the need for life insurance trusts to provide liquidity for the payment of estate tax has significantly diminished.
Special Needs and Medicaid Planning. -
Planning for a beneficiary with special needs involves: protecting the beneficiary by managing his or her available resources; distributing or applying assets for his or her benefit; and ensuring that government benefits are not jeopardized. Because most governmental benefit programs are needs based, special needs trusts must be carefully drafted to restrict the trustee to making only discretionary distributions which supplement, not replace, government benefits. These trust distributions should be paid directly to vendors and service providers, not to the impoverished beneficiary.
In order to qualify for Medicaid benefits based upon a minimum of countable assets, a Florida resident must make transfers at least five years in advance of filing his or her application. A person desiring to establish Medicaid eligibility, whose income exceeds the permissible limit, may establish a Miller trust to receive the excess income, and the government will be entitled to reimbursement after the Medicaid recipient dies.
Powers of attorney
There are two main types of powers of attorney:
Financial powers of attorney make financial decisions and manage your assets. They dictate who will handle your affairs in the event you become incapacitated.
Health care powers of attorney make decisions for your health care and treatment.
A living will, sometimes called an advanced directive, indicates your desired treatment if incapacitated. It will also guide your family and health care providers in fulfilling your wishes.
Life insurance accomplishes what no other planning tool can. It provides an instant source of income tax-free cash. Your family members can use this cash to maintain their lifestyle, pay taxes (without liquidating your assets) and carry out your estate distribution wishes.
At the Kendrick Law Group, we provide a full range of estate planning services to help you protect your assets and preserve your legacy for future generations. We prepare Wills, Trusts, Health Care Surrogate Designations and Powers of Attorney. Our experienced attorneys will work with you to make sure your estate plan is specifically tailored to your needs. We provide assistance in all of the following areas:
Preparing Wills Preparing Health Care documents Preparing Powers of Attorney Establishing Revocable Living Trusts to avoid Probate and protect financial decision-making Special Needs Planning for disabled individuals Planning to eliminate or reduce Estate Taxes We spend time with our clients to discuss goals and review assets.
Do I need a Will? Every adult who has assets or may have assets in the future should have a Will to ensure their property and savings will pass to the individuals they choose. A Will allows you to direct how your property will be distributed after your lifetime. This includes not just real property, such as your home, but also other investments, bank accounts and interests you may have. A Will allows you to name a personal representative (known as an executor) who will manage and distribute your property immediately after your death and to name trustees who may manage money for children or other individuals with special needs. A Will also permits you to nominate a guardian who will take care of your children if you die while they are under the age of 18 years.
If you die without a Will, Florida law determines who receives your property after death. When should I review my Estate Plan? You should review your Will and Estate Plan periodically and whenever your circumstances change. A change in your family situation, such as the birth of children or grandchildren or the marriage of your adult children, may require some fine-tuning of your estate plan. If looking forward to a second marriage, it is important to consider your Estate Plan in advance of your marriage, especially if you or your fiancé have children from a prior relationship. A change in the size of your estate (i.e. the total value of your assets) can require further planning to avoid estate taxes. Changes in the laws that affect estates (especially tax laws) may require changes in your Estate Plan. We periodically check in with our clients to ensure their Estate Plans are current.
Revocable Living Trusts A trust is an entity that can hold and manage property in the trustee’s name instead of your name. Revocable living trusts are a useful tool, both to ensure that whoever you select will handle your finances if you become incompetent and to avoid probate of your estate. A revocable living trust is one which you establish during your lifetime. You can revoke or amend the trust at any time. The person you select to manage the assets in the trust is your trustee. You can be your own trustee and you can also appoint a successor trustee who will handle the trust if you are no longer able to manage your own finances. After your lifetime, the assets in the trust pass to the individuals you designate without the requirement of probate or any court involvement. If you are interested in Wills, Trusts or Estate Planning services, contact us today to set up your complimentary consultation.