Last Will and Testament
The Last Will and Testament of each spouse is found here. If you are married, the Will is absolutely necessary. It is my position that every couple must have a Spousal Protection Trust”. It is that important. Federal law mandates that the Spousal Protection Trust must be established only by a Will if the Spouse is the beneficiary.
NOTE: My work is proprietary. It is unique and involves the use and interaction of your Will, not one but two community property agreements, trusts and beneficiary designations. For my clients, this is all illustrated and explained in the first steps of the planning process.
Spousal Protection Trust
Contained within the Will, the Spousal Protection Trust holds the assets of the first spouse to die. This is necessary in order to protect those assets from creditors, in particular Medicaid liens and spend downs but also tax, i.e., Washington state estate tax for larger net worth couples. One could also include general creditors under some circumstances.
Financial Power of Attormey
The Power of Attorney delegates decision making to a third party, called the Agent. The Power of Attorney is lengthy because the future events of your life are unknown. The Power of Attorney, in a sense, it trying to predict the future or possible futures for you. If negative medical or financial events occur, e.g., diagnosis of disease, significant loss of investment value of your retirement assets, etc., then it is prudent to give a trusted family member of friend the authority to take some of the burden off of you or make decisions for you if you are incapacitated.
Health care documents
Health Care Power of Attorney, which delegates decision making for health care decisions to a third party. This document gives a family member legal authority to make decisions for you, sure. However, an impactful health care power of attorney also gives guidance to your Agent as to your care, long-term care in particular.
Authorization of Release of Protected Health Information, which lists the people in your family or possibly friends to whom you have given permission to have information regarding your care. While you Agent always has authority to receive health care information, other family members do not. Imagine how you would feel if your mother suddenly had heart surgery and you would not even receive information about the results of the procedure because of privacy laws. This can be remedied by listing all of the people you wish to have this info. This reduces stress and conflict.
Living Will, which is often called an “Advanced Directive” or “Directive to Physician.” This is what my clients call the “Pull the Plug” document. Morbid description but it immediately invokes a mental image.
A powerful tool in Washington is the Community Property Agreement because Washington law allows spouses to define property rights between them by contract. This is convenient because Washington law also allows title of probate assets to pass from the deceased spouse to the living spouse by a simple procedure that is fast and inexpensive when the couple had entered into one of these agreements. Couples must use this tool to insert flexibility into the asset protection plan.
The Agreement as to Disposition of Assets
This agreement governs the community and separate property of both spouses under Title 26 of the Revised Code of Washington. The Agreement is a “switch” because, like a railroad switch, the train of your asset protection plan will direct the assets of the first spouse to die if one set of circumstances exist and different direction if these circumstances do not exist.
The circumstances that flip the switch are whether one or more of the following exist at the time of first death.
The survivor is:
Age 80 or over. (NOTE: This requirement may be revised. It is not a requirement of the law. Rather, it is a recommendation. The purpose is to require a funding of the spousal protection trust if the survivor is “aged.” Depending on the history of illness or longevity in the family, this age requirement may be lowered or increased.
Disabled. In particular, the survivor has been adjudicated disabled by a government agency authorized to make such a determination.
Currently or imminently in need of care. The Personal Representative of the deceased spouse makes this determination.
Addendum: Schedule of Assets
This document is incorporated into the Agreement and simply lists all of your assets by spouse and by category, e.g., community or separate property. If for no other reasons, the Addendum gives your Personal Representative at least a clue as to what you own. Many people do not share that information with their children and so, when the time comes, the stressful fact finding process of “what did mom own” begins. This is unnecessary. This document provides you a framework to organize your assets by category. Organized estates are easier to manage and protect.
Personal Property Memorandum
Your Will and Trusts have a provision that allow you to use a personal property memorandum to direct the disposition of specific items of personal property, e.g., a family heirloom or items of sentimental value to one heir, e.g., a wedding ring cherished by daughter.
Washington law allows an informal writing, if found with your estate planning documents, to govern these dispositions. This is the personal property memorandum.
Simply list items you wish to distribute to specific people. You may add, subtract or edit entired onto the form without notary or witnesses. Your personal representative is required to distribute the item accordingly.
Certificate of Trust
A certificate is a summary of any trust and is presented to financial institutions rather than the trust instrument when opening a financial account or any other entity or person who is required to verify the existence of a trust.
The Survivor’s Trust holds the assets of the surviving spouse when the first spouse dies. In the event the surviving spouse is not ill, aged or in need of long-term care when the first spouse dies, the Survivor’s Trust will also hold the assets of the deceased spouse.
The Survivor’s Trust is not signed until the first spouse dies and is signed by the surviving spouse. It will be the responsibility of the surviving spouse or his or her agent, i.e., the person assigned as decision maker pursuant to a power of attorney, to fund the survivor’s trust. The steps to fund the survivor’s trust is contained in the section labeled “Estate Assets” and the document is entitled “Funding Instructions.”
Important Trusts for Singles
Medicaid Asset Protection Trust
This trust is used for single people. It holds assets that were transferred into it more than five years prior to a Medicaid application. It requires foresight. But, once implemented, is a powerful tool in the asset protection toolbox.
Health Care Reimbursement Trust
Long-term care insurance is not necessary when and if a trust is funded during lifetime. Similar to a Medicaid Asset Protection Trust, this trust will purchase assets for the benefit of the estate of each spouse or of a single person. When the Trustor dies, the assets in the trust are used to fund the retirement of the surviving spouse, pay estate taxes (if any) but more importantly to replace any retirement assets that were spent on the medical bills of the Trustor who just passed. This is a wealth replacement trust but, really, it pays for long-term care costs retroactively far more efficiently and with greater flexibility that long-term care insurance.
Additional trusts that may be necessary:
Credit Shelter Trust:
Sometimes called a bypass trust or family trust, this trust allows a person to bequeath an amount up to (but not over) the estate-tax exemption. The rest of the estate passes to a spouse, tax free. Funds placed in a credit shelter trust are forever free of estate taxes – even if they grow.
This irrevocable trust shelters a life insurance policy within a trust, thus removing it from a taxable estate. While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies.
Qualified Terminable Interest Property Trust:
This trust allows a person to direct assets to specific beneficiaries – their survivors – at different times. In the typical scenario, a spouse will receive lifelong income from the trust and children will get what’s left after the spouse dies.
Separate Share Trust:
This trust lets a parent establish a trust with different features for each beneficiary (i.e., child).
A Spendthrift Trust:
This trust protects the assets a person places in the trust from being claimed by creditors. This trust also allows for management of the assets by an independent trustee and forbids the beneficiary from selling his interest in the trust.
This trust benefits a particular charity or non-profit organization. Normally, a charitable trust is established as part of an estate plan and helps lower or avoid estate and gift taxes. A charitable remainder trust, funded during a person's lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period of time, and then donates the remaining assets to the charity.
Special Needs Trust:
This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. Setting up the trust enables the disabled person to receive income without affecting or forfeiting the government payments.
Domestic Asset-Protection Trust (DAPT)
This trust is an irrevocable self-settled trust in which the grantor is designated a permissible beneficiary and allowed access to the funds in the trust account. If the DAPT is properly structured, the goal is that creditors won’t be able to reach the trust’s assets. In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when sitused (yes, that is actually a word lawyers use “sitused”) in a no-income-tax state.
A DAPT is of no benefit until it’s funded with assets. Trust assets typically include: (1) cash, (2) securities, (3) limited liability companies (LLCs), (4) business assets like intellectual property, inventory and equipment, (5) real estate, and (6) recreational assets such as aircraft and boats. Each asset under consideration for transfer into a DAPT must be evaluated from different vantage points, including its effect on: legal protection, taxation, business and growth potential, and future distributions to spouses and heirs. Thus, the asset-transfer planning process is a critical area requiring the assemblage of a range of skills