Basic Estate Planning Documents

“Do you have a power of attorney agent?”

“Yes,” the client tells me, “I named him in my Will.”

This is a common question that I ask individuals who come to my office for a consultation and a common response that I receive from the client.  Over time, this answer tells me that there is significant misunderstanding among people about estate planning documents.

I always say that there are three, fundamental estate planning documents.  Every person over the age of eighteen should have these estate planning documents.  The documents are a last will and testament, a power of attorney, and a living will/healthcare power of attorney.

I always tell my clients that a power of attorney and a living will is for them and a Will is for other people.  What I mean by this is, a power of attorney and living will permit someone else, someone of your choosing, to make decisions for you during your life if you are unable to make decisions for yourself.  A Will is a document that parses out your property to other people after you die.

A Will is an ineffective document during your life.  During your life, you can modify your Will anytime you want.  You can revoke your Will.  Most Wills name a person to handle your affairs, called an executor.  But because a Will is only effective after you die, the person you name as your executor has no authority over your property until you die.

If you become ill and cannot handle your affairs, whether financial or health-related, the person you have named as your executor has no ability to handle your affairs for you, because you are still alive and your Will isn’t even effective until after you die.  For this reason, while a Will is a very important estate planning document, it is not the complete package.

When people talk about a power of attorney, they are typically talking about a power of attorney for financial decisions.  A power of attorney permits a person, called your agent, to make financial decisions for you during your life.

If the power of attorney is drafted correctly, your agent could make whatever financial decision he may need to make for you.  Because people may be incapacitated for months or years, I always recommend that they draft a broad power attorney, a power of attorney that permits their agent to make a great many medical decisions for them.

Your agent can only make those financial decisions that the power of attorney document permits him to make.  If the power of attorney doesn’t address a certain financial issues, for instance, accessing brokerage accounts or retirement accounts, then your agent may not be able to access any assets that you have in accounts such as those.

The authority of the power of attorney agent ends when you die.  After you die, your Will becomes an effective document and the person you have named as your executor takes over the affairs of your estate.

A living will or healthcare power of attorney is a document that permits someone else, called your healthcare proxy or healthcare agent, to make financial decisions for you.  Furthermore, if the document is drafted correctly, the living will permits your healthcare proxy to access your medical information, which is a big issue since the Health Insurance Portability and Accountability Act (“HIPAA”) became effective.

HIPAA became effective in 2003, yet, to this day, most living wills that I see fail to address HIPAA.  If you have been in a hospital recently, you probably know how important HIPAA is because the law prevents your healthcare provider from sharing your medical information with anyone other than you.  For this reason, it is important that your living will address HIPAA, so your healthcare agent can access your medical information.

Like a power of attorney, a living will ceases to be effective when you die, and your Will takes over.   Having a Will, power of attorney, and living will is fundamental to any good estate plan.

Will Obama Increase the Federal Estate Tax?

“We need to change our estate planning documents before the end of the year when the Bush tax cuts expire.”  For the past month or two, some couple has come to my office making this statement.  People believe now that President Obama has been re-elected, the federal estate tax exemption equivalent (the “credit”) will be allowed to roll back to $1,000,000.

The fact of the matter is, no one can tell you with absolute certainty what is going to happen with the credit, but here are my thoughts.

The federal estate tax is a tax on the gross value of an estate.  If the gross value of the estate exceeds the credit amount, the estate is subject to federal estate tax.  The gross value of the estate includes all assets that the decedent died owning (his bank accounts, 401(k)s, stocks, bonds, annuities, IRAs) and the death benefit of his life insurance policies.

The federal exemption equivalent is a fixed dollar amount.  Currently, the credit is $5,000,000.  If the gross estate exceeds $5,000,000, the estate is subject to federal estate tax.  If the gross value of the estate does not exceed $5,000,000, then the estate is not subject to federal estate tax.

In 2001, the exemption equivalent was only $675,000.  Between 2001 and 2009, the credit gradually rose and ended at $3,500,000.  In 2010, President Obama and Congress extended the Bush-era tax cuts, but they actually increased the exemption equivalent against federal estate tax from $3,500,000 to $5,000,000.

The extension of the Bush-era tax cuts that occurred in 2010 was temporary, designed to only last two years.  The extension expires at the end of 2012, at which time the so-called “fiscal cliff” will occur.  Part of the fiscal cliff involves the federal estate tax.

The history of the federal estate tax has been one in which the government increases the amount that is exempt from federal estate tax.

By the way, there is a New Jersey estate tax.  The exemption equivalent against the New Jersey estate tax is $675,000.  That has been the New Jersey exemption equivalent since 2001, and there are no plans to increase the exemption equivalent for purposes of the New Jersey estate tax.

So, what do I think will happen with the federal estate tax at the end of this year?  If President Obama and Congress fail to act and the fiscal cliff does occur, the exemption equivalent will plummet to $1,000,000.  For this reason, people are coming to my office asking me what they need to do to avoid the problem a significantly lower exemption equivalent will cause their estate.

Back in 2009, I thought that President Obama and Congress would leave the credit at $3,500,000 and index it for inflation.  Instead, they increased the credit to $5,000,000 and indexed it for inflation.  So, that tells you two things:  1.  I cannot predict the future, and 2. The federal government typically increases the credit, it doesn’t lower it.

Now, I think the federal government will leave the credit at $5,000,000 indexed for inflation.  I would put the chances of the credit going down to $1,000,000 at less than 10%.  I also think the government will incorporate a provision called “portability” into the federal estate tax law.

Portability is complex subject worthy of its own article, but essentially, portability permits the estate of the second-to-die spouse to use the unused portion of the first-to-die spouse.  In short, portability permits a married couple to exempt $10,000,000 from federal estate tax with greater ease than currently exists.

Contrary to many people’s way of thinking, I do not think the world is coming to end in 2012, either literally or figuratively.  I do not think that the taxes on people or on estates are going to shoot through the roof.  While I do believe income taxes are going up (and they probably should), federal estate tax will, effectively, decrease.

Where Do I Store My Will

As I gazed out over the mounds of trash that were once my neighbors’ furniture, personal belongings, and parts of their houses, I thought about all the documents my neighbors had lost in Superstorm Sandy.  I live close to a river and the ocean, yet for some silly reason, my family and I decided to stay in our house during the storm.

By 9:30 on Monday night, I realized that my house simply wasn’t high enough to prevent water from coming into the living areas of the house, and by 9:45 p.m., we were raising the furniture and our personal belongings off the floor to prevent damage.  To say that I never thought the water would reach as high as it did is an understatement.

Prior to Superstorm Sandy, the highest the water ever reached in my neighborhood was during the nor’easter of 1992.  Sandy’s tidal waters were four feet higher than the 92 storm.

The water in my house reached a height of about five inches, so things certainly could have been worse.  Many of my neighbors measured the water that came into their houses by the foot, not the inch, and most of my neighbors, like me, failed to prepare for water entering their houses; however, unlike me, they weren’t home to prevent their belongings from being ruined by the tidal waters.

As an elder law attorney, I am frequently called upon to draft estate planning documents for clients.  I have, quite literally, drafted thousands of last wills and testaments, powers of attorney, and living wills.

After my clients sign their estate planning documents, I provide them with a well-organized binder that contains the primary estate planning documents and many other helpful documents.  But no matter how great the binder is that I provide to my clients, it isn’t waterproof.

So, that’s what got me thinking about one classic question that many clients have asked me.  “John, where do we keep this binder?”

I always offer to store a client’s last will and testament for them.  I have large, fireproof safes in my offices, and I store the client’s Will in one of those safes.  I tell the client that if they retain their original Will and if they lose the Will, there is a law that presumes that they revoked their Will.  For this reason, I think it is helpful if I retain a client’s Will.

I do not, however, offer to store powers of attorney or living wills for clients.  Quite simply, if I stored all of these documents for clients, I would need a much larger storage space.  And some clients do retain their original Will notwithstanding my offer to store the Will for them.

When I drafted powers of attorney and living wills for clients, I provide the client with two originals of each document—two original living wills, two original powers of attorney.  When the client asks me where they should store their documents, I tell them it might be wise if they retain one original of each document and provide their agent (the person whom they have named to make decisions for them in the event they are incapable of making those decisions for themselves) with the other original.

By doing this, the original documents will be located in two different houses, and it is unlikely that two homes will be damaged at the same time.  At least it’s a lot less likely that such an event will occur, though not unthinkable after Superstorm Sandy.

A client may also wish to store his documents in a safe deposit box at a bank, but if the client does this, I always advise that they add someone else’s name to the box.  If you put your power of attorney and living will in a safe deposit box and you become incapacitated, how will your power of attorney agent get in the box if their name is not on the box as a co-owner?

Finally, you may want to put the power of attorney on file with all of your financial institutions and your living will on file with your doctor.  In this way, the places and people who need the documents already have the documents, so if the documents are destroyed, the hardship is substantially mitigated.