Wills, Healthcare Proxies & Trusts
Douglas Schnapp, Esq.
845 Third Avenue, 11th Floor New York, NY 10022-6601
(212) 829-1991 (212) 888-7776
DougSchnapp@aol.com
I. LIVING TRUSTS
A. General. There has been a lot of publicity regarding the beneficial uses of living
trusts, and in some situations there are some. However, the use of a living trust in New
York is not necessary in most client situations. One benefit of using a living trust is
avoiding the probate process: a process which has been widely criticized and is a
procedure that is stressed by the financial community to be avoided. The primary
criticisms of the probate process are the perceived costs (legal and court fees) and the
length of time. Although New York is a solemn probate state, in situations where the
family is cooperative, the probate process for a Will should take approximately two to
four weeks (once all of the necessary information is supplied by the nominated
executor) and the filing fee will be no more than $1,250 (maximum fee for estates
greater than $500,000 and less for smaller estates).
B. Anatomy of a Living Trust. A living trust is established by an individual (called either a
Grantor or Settlor) during his or her life pursuant to a written agreement. The Grantor
is usually a trustee and is often the sole trustee. A co-trustee to serve with the Grantor
and at least one or two successor trustees are also typically named in the trust
instrument. Upon the Grantor’s incapacity or death, the co-trustee or the successor
trustee will continue the management of the trust’s assets in accordance with the terms
of the agreement. The living trust is typically drafted to be fully revocable and
amendable during the Grantor’s lifetime, as a Will substitute. However, the execution
of a living trust in New York is not required to follow the formalities of execution of a
Will pursuant to EPTL 3-2.1. Instead, it just needs to be signed and notarized or
witnessed in accordance with EPTL section 7-1.17. Since it is fully revocable, for estate
tax purposes the trust is part of the decedent’s gross estate at death in accordance with
Section 2038 of the Internal Revenue Code. Likewise, since the trust is revocable, it is a
Grantor trust for income tax purposes, which means, that the accounts transferred into
the trust will typically bear the Grantor’s social security number (as long as the Grantor
is a trustee) as it is essentially an alter ego of the Grantor. The living trust provides no
asset protection for the Grantor until the Grantor’s death when it becomes irrevocable.
The living trust disposes of the majority of the Grantor’s estate. The estate plan should
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also include a pour over Will which will pour over the decedent’s property into the living
trust where the Grantor’s assets will be distributed.
C. Uses of Living Trusts. As stated above, in most situations the use of a living trust in a
client’s estate plan is not necessary. However, there are situations where a living trust is
not only advisable, but is preferable. These are a few such common situations:
1. Avoidance of Ancillary Probate. The transfer of title to real estate is
controlled by the state in which such real estate is located. Accordingly, for
those clients who own real estate outside of the state of their domicile, the
transfer of the real estate to those persons entitled to it under their Will will
involve an ancillary probate proceeding in the non-domicile state. Regardless of
the net value of the real estate, the process to transfer title will be governed by
the state where the real estate is located and its specific probate procedure.
This generally means the hiring of local counsel, the preparation of out of state
probate papers and the payment of such state’s probate fees. The total costs of
this have to be quantified. Therefore, avoiding ancillary probate could be value
added advice to the client. The use of the living trust in this situation would
involve the actual transfer of the out-of-state property into the name of the
living trust. The costs associated with this lifetime transfer, other than drafting
the trust, are usually a few hundred dollars (the legal fees to prepare a new deed
and the filing fees for the local county clerk’s office).
2. Unknown Heirs. New York law requires the decedent’s legal heirs to consent
to the probate process through their execution of a waiver and consent form. If
an heir does not consent to the probate of the proposed last will and testament,
then the nominated executor will serve a citation on such person that directs
them to appear at the Surrogate’s Court to state why the proposed last will
should not be admitted to probate. The legal heirs of the decedent are those
persons who would be entitled to share in the decedent’s estate under the
intestacy laws, EPTL 4-1.1, based upon who survived the decedent. Where the
decedent’s heirs are unknown, such as when the decedent was estranged from
his/her family, the probate process becomes more complicated. The fiduciary
will have to diligently search for the heirs, execute an affidavit describing such
actions to the court, obtain an order from the court that grants the service of
process upon the missing heirs through publication and finally, a guardian
adlitem will likely be appointed to represent the missing heirs and prepare a
report to the court. The costs associated with this more complicated and time
consuming probate process can be substantial. Therefore, in such a case
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establishing and fully funding the client’s living trust with all of his/her assets is
advisable.
3. Expectation of a Will Contest. As stated above, New York requires the waiver
and consent of the decedent’s distributees in order for the decedent’s will to be
admitted to probate. Where the decedent’s will distributes his property in a
“natural” order: to the surviving spouse, or if the surviving spouse predeceases
the decedent, to the children equally, the possibility of a will contest is not great.
Where, however, the decedent deviates from the perceived “natural” order of
distribution by bequeathing property to non-relatives (i.e., domestic partners)
and/or bequeathing property unequally among a class of beneficiaries (i.e., the
children), the possibility of a Will contest increases and, depending upon the size
of the estate, can be highly likely. Since a living trust avoids the probate process
and circumvents the necessity of obtaining the waivers and consents of the
decedent’s distributees, the use of a living trust in a client’s estate plan is
advantageous where a Will contest can be anticipated. There is no specific
procedure to challenge a living trust as there is for a will. The disgruntled
distributees in this case will have to be proactive to have their complaints heard
and will be the ones who will have to to bring a count proceeding, as opposed to
being in a position to hold up the probate proceeding as is the case in the
probate of the Will. Here as well, the living trust should also be fully funded with
the decedent’s assets during his or her life. Upon the decedent’s death, the
trustees will distribute the trust’s assets to the beneficiaries in accordance with
the terms of the trust agreement without the need to inform the distributees of
this. The use of a living trust in the situation where a will contest is likely is
therefore highly desirable.
4. Enhanced Management of Financial Affairs. A living trust can act as a super
power of attorney so the family (through the named trustees) can manage a
person’s financial affairs. The trust would be funded during the person’s
lifetime and trust accounts opened in the names of the trustees. The process for
a power of attorney to be accepted by a given financial institution can be
cumbersome and time consuming. The power of attorney document would be
submitted to the financial institution which in turn will have it reviewed by the
appropriate internal department to ensure that the power of attorney is proper
and effective. In some cases, the financial institution may require its own power
of attorney form to be completed. This process will have to be repeated for each
financial institution where the principal of the power of attorney has assets.
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Thus, much time and effort on behalf of the attorney-in-fact will be expended to
gain control over the grantor’s financial affairs through the use of a power of
attorney. In comparison, the establishment of a trust account is administratively
easier, but there may be tax returns, or possibly accountings (if the grantor is
incapacitated, and there is more then one beneficiary, there will be accountings).
Moreover, financial institutions are more comfortable dealing with trustees then
with an agent. In the event of the grantor’s incapacity, where the grantor is a
trustee (which is usually the case) the remaining trustees will take over or a
successor trustee will replace the grantor as trustee. The ease of appointing
successors is an advantage for the living trust as opposed to using a power of
attorney. The living trust, as stated previously, commonly names successor
trustees and contains a mechanism for the appointment of further successor
trustees if the line of named trustees is exhausted. The power of attorney, on
the other hand, does not contain a mechanism after the principal becomes
incapacitated for the appointment of successor agents if all the successors are
unable or unwilling to serve.
The use of a living trust for the management of a person’s financial affairs could
be advisable where it is known or can reasonably be anticipated that a person
will lose the ability or desire to manage his or her own financial affairs. People
are living longer and are spending more than a few of their final years in an
incapacitated state. Accordingly, it can also be reasonably said that ultimately,
many individuals could benefit by establishing and funding a living trust for the
purpose of financial management.
5. Privacy Concerns. A will is a public document once it is filed with the
Surrogate’s Court upon a person’s death. Any person can obtain a copy of it by
going to the court and requesting it. Popular books containing wills of persons of
interest can easily be found. Some individuals, for whatever reason, do not wish
their will to be available for public inspection. A living trust may achieve this
objective.
II. POWERS OF ATTORNEY
A. General. A power of attorney, like a living trust, is used for the management of a
person’s financial affairs. It is executed by an individual during their lifetime and
terminates upon their death. It is also a very powerful document and can be a legal
license to steal. It is common for powers of attorney to be abused and the legal redress
for the abuse or misuse of a power of attorney can be difficult. Therefore, during the
estate planning process, the practitioner should caution the client on the choice of his or
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her attorney-in-fact and may suggest to the client to consider naming joint attorneys-infact as an option. Despite the obvious risks, a power of attorney is a standard estate
planning document and is highly recommended. The alternative is a costly and timeconsuming guardianship proceeding, the discussion of which is beyond the scope of this
presentation.
B. Types. There are two types of powers of attorney that one can choose from. The
type of power of attorney that a person settles on will depend on the degree of trust
that the individual has in the person that he or she is naming as the attorney-in-fact and
his or her concern for ease of administration.
1. Standard Power of Attorney. The first type is the standard or regular power of
attorney. It is effective upon its execution and it continues in effect after the
principal subsequently becomes disabled or incompetent. Most important, it
gives the attorney-in-fact the immediate authority to manage the principal’s
financial affairs. Therefore, this power of attorney should only be given to a
person who is trustworthy and responsible. It is the most commonly used and is
the easiest to utilize. Financial institutions generally recognize the standard
statutory form and will accept it more readily than its sister, the springing power
of attorney.
2. Springing Power of Attorney. The second type is a springing power of
attorney. If a person does not wish to give immediate authority to someone to
manage his or her assets, but nonetheless wants the management of his or her
assets to occur at some future time, such as in the case of incapacity or
prolonged absence, the springing power of attorney can achieve that objective.
A springing power of attorney is true to its name in that it "springs" into life or
becomes effective upon the happening of an event, such as the principal’s
incapacity. Although the springing power of attorney is facially very appealing
because management of the principal’s assets is only allowed when the principal
is in actual need of this assistance, it has its drawbacks. It is not widely used
which means on a practical level that its recognition by financial institutions can
be a difficult and time-consuming process. A process, as stated above, that
would have to be repeated at each institution where the principal is holding
assets. The proof that the power of attorney is effective: that the principal is, for
example, incapacitated could on its own be a procedure. Where the principal is
incapacitated, the attorney-in-fact will have to obtain a physician’s letter stating
that the principal is incapacitated and that proof will have to be submitted to the
financial institution along with the actual power of attorney form. Both
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documents will then have to be reviewed by the appropriate persons within the
financial institution to ensure that all is in order before the institution accepts
the power of attorney. Another option where the principal wishes to enjoy the
benefit of administrative ease of the standard power of attorney, but is
nonetheless concerned with the potential for improper use, is to execute a
regular power of attorney and have it held by an attorney or other trustworthy
individual for future use.
C. Potential Ethical Issue. A potential ethical issue that can arise is where the attorney
is requested by another person (usually a close family member to the principal) to draft
a power of attorney for the principal in his or her favor. For example, an adult child
requests a power of attorney for his elderly mother. In this case, the issue is who is the
client. A conservative approach would be to meet the principal alone to confirm the
given instructions, or to have a telephone conversation with the principal confirming the
same. During the meeting, the attorney should also assess (to the extent practical) the
principal’s capacity to execute the power of attorney and verify that the principal
understands the nature of the document to be signed.
D. Drafting Considerations. The proper drafting of a power of attorney should address
each principal’s unique family and financial situation. The attorney should consider
discussing the following points with the principal before drafting the power of attorney.
First, discuss which of the two types of powers of attorney, standard or springing, the
principal desires to execute after explaining the benefits and drawbacks of each one.
Second, if the principal has more than one child, he or she may wish to consider
appointing two or three of them to act either jointly or severally. Contrary to common
belief, it is not necessary for the attorney-in-fact to live close (or even in the same state
as the principal). However, naming an attorney-in-fact that resides outside the United
States could be problematic if documents need to have the attorney in fact’s signature
notarized since he or she would most likely have to go to the U.S. consulate. Third, the
principal’s granting of gifting powers should be discussed. Does the principal wish to
allow gifting? And if so, to what extent and to whom? Including a provision in the
power of attorney to essentially authorize unlimited gifting of the principal’s property to
certain individuals, including the attorney-in-fact, is common to allow for Medicaid
planning. Last, the issue of compensating the attorney in fact, especially where the
principal names an unrelated party or a professional (like the accountant or attorney),
should be discussed with the principal. Some powers of attorney include an annual
fixed fee or hourly rate. In any event, the agent should keep good records of all of their
transactions in the event they are ever questioned in the future.
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III. A POTPOURRI OF OTHER TOPICS
A. Titling of Assets: Coordination of Will Substitutes in the Estate Plan. Many persons
hold assets in will substitute or testamentary substitute form. A will substitute is where
an asset passes by operation of law (outside of probate) to a designated beneficiary or a
surviving joint owner. Common examples of will substitutes include life insurance,
retirement assets such as 401(k) accounts and IRAs, accounts that are payable on death
(POD), transfer on death (TOD) or are held by individuals as joint tenants with right of
survivorship (JTWROS). Real estate held by a husband and wife as tenants by the
entirety is also a will substitute. All that is generally required to transfer the title of a
will substitute upon the decedent’s death is to submit a death certificate and perhaps a
W-9 form or an affidavit of domicile or a claim form. Letters Testamentary or Letters of
Administration from the Surrogate’s Court are not required since non-probate assets are
not controlled by the fiduciary.
Probate assets are assets controlled by the decedent’s will (if there is a valid will) or are
controlled by the intestacy laws (if there is not a valid will). Probate assets are generally
in the decedent’s sole name with no beneficiary or joint owner. Will substitutes that fail
where all the beneficiaries predecease the decedent, or where the decedent names the
estate as the beneficiary are also probate assets. The coordination of will substitutes
with the client’s will is an essential part of the estate plan. After a will is executed, it is
important that the titling of the testator’s assets is consistent with the testator’s estate
plan. Therefore, in conjunction with the preparation of the testator’s will, changing title
to assets and removal of joint owners or beneficiaries may be advisable. It is important
to note, however, that for some will substitutes, such as retirement accounts, it is
preferable from an income tax planning prospective to name an individual and maintain
the will substitute format as opposed to naming the estate and having the asset
controlled by the fiduciary.
B. Supplemental Needs Trusts (SNTS). Estate planning that benefits individuals that are
receiving governmental benefits such as Medicaid and SSI has special considerations.
Since certain governmental benefits limit the resources and income that an individual
may have, an estate plan that leaves an inheritance to such an individual can
inadvertently jeopardize that individual’s eligibility for such governmental benefits. A
supplemental needs trust, however, can be a vehicle where a testator can leave an
inheritance to an individual who is receiving financial need based governmental
benefits. Where a trust is drafted that meets the requirements of EPTL 7-1.12 (New
York’s SNT statute), such trust’s assets will not be considered to be a resource of such
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individual, and will therefore not affect that person’s continued eligibility to receive his
or her governmental benefits.
C. Proper Choosing of Roles in an Estate Plan. Choosing the right persons to fill the
various roles in an individual’s estate plan are important decisions and should be fully
thought out. The main roles are the executor, the trustee, the guardian for the minor
children, the health care agent and the attorney-in-fact.
1. Executor. The executor is the person who is in charge of the decedent’s estate
and carries out the terms of the decedent’s will. The executor is also
responsible, among other things, for gathering and valuing all of the decedent’s
assets, settling the decedent’s debts, filing the decedent’s final income tax
return, filing the estate tax returns (if required) and distributing the estate assets
to those persons who are entitled to them. When considering who would be a
good choice as executor it does not have to be someone who lives relatively
close to the testator since he or she will need to travel to the decedent’s
residence maybe only one or two times. In addition, the executor should be
financially responsible, organized and reliable. He or she needs not be an expert
in the law or finances, but should have the good judgment to hire appropriate
people with that expertise.
2. Trustee. The trustee will manage the trust’s assets for the benefit of the
beneficiaries for the trust’s term. He or she is responsible for investing the
trust’s assets, filing the trust’s income tax returns and distribution of the trust’s
assets in accordance with the terms of the trust agreement. One does not need
to have an individual who is financially savvy as they only have to have the ability
to oversee someone who is. It is also not necessary to choose an individual who
lives close to the testator. In many cases, a disinterested third party or a bank or
trust company may be an alternative so as to avoid family conflict between the
beneficiaries and the trustee.
3. Health Care Agent. A health care agent makes health care decisions for an
individual when he or she is unable to make such decisions. An individual who
the person trusts, is knowledgeable about the person’s views on both end of life
issues and medical treatment and is able to make difficult decisions in
accordance with the person’s wishes in highly stressful circumstances is ideal.
4. Attorney-in-Fact. Last, and as mentioned above, one should choose an
attorney-in-fact that is trustworthy, organized and responsible. One final
consideration is the separation of powers amongst the various roles in the
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client’s estate plan so as to possibly implement a form of checks and balances.
An example of where these roles may “bump up” against one another is
between the trustee and guardian as to whether minor children should go to
private or public school.
D. Determine if the Conduit Theory of Inheritance Applies. The conduit theory of
inheritance provides that where a decedent leaves property to a person, then that
person upon his or her later death, will naturally wish to leave his or her property to
those persons whom the decedent would wish to leave his property on the death of the
first beneficiary. The classic example is where a husband leaves all of his estate to his
wife with full confidence that upon his wife’s later death that she will then leave her
estate to their children. With today’s modern families of stepchildren, multiple
marriages and domestic partnerships, the conduit theory of inheritance may often not
apply. This means that the estate planning attorney should consider estate planning
techniques such as trusts to protect the decedent’s assets where the conduit theory will
not apply to the decedent’s present and future intended heirs. Trusting the primary
beneficiary to ultimately leave the unconsumed inheritance to the decedents’ secondary
beneficiary is not advisable or realistic.
E. Treating Heirs Unequally. The treatment of the decedent’s heirs unequally generally
is not only legal and consistent with family expectations, but is preferable in many
circumstances. Indeed, a will leaving the decedent’s entire estate to his surviving
spouse, especially where minor children are involved, is expected and desired. It is only
where a testator desires to treat heirs unequally within a given class does this pose a
problem: a possibility of disappointed expectations, family discord and the anticipation
of a will contest. A couple of suggestions to protect the estate plan from the abovementioned risks are a letter to the family by the testator explaining his or her reasons
for the unequal treatment (i.e., one child is clearly in greater financial need than the
other), or including a statement of explanation of the estate plan in the will.
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