ESTATE PLANNING FAQ

What is an estate?

The word “estate” can be confusing because it has several different meanings. It can mean: 1) all of the property that you own or control; 2) the property that you own in your own name, which is thereby included in your probate estate; 3) the property that is treated as part of your taxable estate for federal or state estate tax purposes; or 4) the property that can be reached by your creditors in a bankruptcy proceeding, referred to as the “bankruptcy estate.”

 What is estate planning?

Because the term “estate” has multiple meetings, “estate planning” can also mean many things. People generally think of estate planning as involving what happens to your stuff after you die.

In the National Network of Estate Planning Attorneys, I learned to take a broader view of estate planning. Estate planning really involves: 1) caring for yourself and the people you want to take care of while you’re alive and well; 2) making sure that you and the people you care about will be taken care of if you become disabled; 3) assuring that after your death, your estate is used to care for the people you want, at the time and in the way that you want.

What is legacy planning?

When I use the term “legacy planning”, I am referring to comprehensive, integrated estate planning that focuses on the people rather than the money, and that addresses non-financial goals as well as financial goals.   This website contains a lot of other information about legacy planning.

What is probate?

Probate is a court-supervised process for administering a person’s financial affairs after death. It involves filing a will, if one exists, having someone appointed to administer the estate, paying taxes and creditors, and distributing whatever is left over according to your instructions.

What is a will?

A will is a document by which you can leave instructions about how your property should be distributed after death. A will only controls property held in your individual name, and not joint property, property held in trust, or property like insurance or retirement accounts, where a beneficiary designation controls who receives the property. People who are entitled to receive property under your will are called your “devisees.”

What is intestacy?

If you do not leave a valid will, the disposition of your property will be controlled by statute. In Massachusetts, that statute is Mass. Gen. Laws c. 190B, sections 2-101 to 2-114, part of the Uniform Probate Code. If you die without leaving a will, the people who will receive your property depends upon whether you are married, whether you have children, and whether all of your children are with the same spouse.  The people who are entitled to receive your property under the intestacy law are called your “heirs.”

What is a guardianship?

Just as the Probate Court may need to get involved to oversee a person’s affairs after the death, it may be necessary for the court to step in during a person’s lifetime. Before Massachusetts adopted the Uniform Probate Code (UPC), a single person, referred to as a Guardian, was appointed to make personal and financial decisions. Under the UPC, there are now two separate procedures. A Guardian may be appointed to make personal decisions, such as treatment and end-of-life decisions, while a Conservator would be appointed to handle financial decisions.

What does the term “Evils of Probate” refer to?

In the 1990s, there was a move to sell fill-in-the-blanks revocable living trusts to the public by emphasizing certain problems with the probate process. Whether a death probate or a guardianship is involved, it is necessary to file a petition with the probate court, give notice of a hearing on the petition to interested parties, sometimes including creditors. Anyone who objects to the petition has the ability to file an appearance and then objection. A judge then decides the merits of the petition. The formality required by the probate process leads to undesired publicity, as well as legal expense. The expense, delay, and publicity attendant on the probate process were called the “evils of probate.”

The Uniform Probate Code was adopted in many states to reduce the “evils of probate”, but many people still want to avoid probate by using joint tenancy, beneficiary designations, durable powers of attorney, or revocable living trusts.  As of the summer of 2014, it has been reported by probate attorneys that an appointment under the new, simpler “informal administration” in some Massachusetts counties can take six weeks or more, and that the assistant registers in some counties are so overwhelmed by the workload that a petition with any mistake will be denied without explanation.  It is then necessary to file a new petition with a new filing fee.

What is joint tenancy?

There are three different ways in which you can own property in your own name. First you can own it without any co-owners – individual ownership. Second, you can own it with one or more other persons, so that each co-owner owns a specific portion of the property – tenancy in common.  So that each if there are three owners, each can own one third of the property, and have control over that one third.  Finally, you can own the property so that each co-owner owns all of the property – joint tenancy. Typically one aspect of joint tenancy is the right of survivorship; the last of the joint owners to die becomes the sole owner, and has the ability to pass the entire property on to the people they choose.

What is a durable power of attorney?

A power of attorney is a document by which you can give another person (referred to as an “agent”) the ability to act on your behalf, e.g., sign deeds or other legal documents. A typical power of attorney loses its effectiveness if the principal (the person granting the power) becomes disabled. However, by statute in most states a person can create a power of attorney that will continue to be effective even during disability. These are referred to as “durable powers of attorney.”

In Massachusetts the statute permitting durable financial powers of attorney is found In the Uniform Probate Code beginning at G.L. c. 190B, section 5-501. In Massachusetts, durable powers of attorney can also be granted to make healthcare decisions. A health care power of attorney is referred to in Massachusetts as a “health care proxy”, and is authorized by Mass. G.L. c. 201D.

Durable powers of attorney can be used to avoid appointment of a guardian or conservator.

What is a trust?

A trust is a transfer of property, either during your lifetime or after your death, subject to your instructions. These instructions can include who will control your property (your Trustees), who will receive the benefit of that property (your beneficiaries), and under what circumstances and at what time property should be distributed to beneficiaries.

The person who creates a trust is sometimes called a “settlor”, “grantor”, or “donor”, but I prefer the term “Trustmaker.” The Trustee is the legal owner of the property, but they own it as trustee, and are required to use the property for the benefit of the beneficiaries named by the Trustmaker. You can be the Trustmaker, Trustee, and beneficiary of a trust at the same time.

Trusts can be revocable or irrevocable. If you create a revocable trust, you will retain significant flexibility and control over the property in the trust. Because of this level of control, revocable trusts do not offer relief from estate taxation, nor do they provide creditor protection. Irrevocable trusts can provide estate tax reduction, creditor protection, and can be used for Medicaid planning. However, because the Trustmaker gives up the ability to control the trust property, creating an irrevocable trust requires careful planning.

What is a trust protector?

In order to increase the flexibility available with an irrevocable trust, it is possible to have an independent person appointed who can make changes to the trust that the Trustmaker or the Trustee cannot.  The Massachusetts UPC does not include a provision that specifically addresses trust protectors, but the use of trust protectors is widely recognized in other states.

 What is a grantor trust?

Under normal rules of income taxation, the Trustee is responsible for paying taxes on the income generated within a trust. Under some circumstances, the Trustmaker rather than the Trustee can be responsible for paying the taxes. Those circumstances, referred to as the “grantor trust rules” are found beginning at section 672 of the Internal Revenue Code. There can be significant tax advantages if a trust is treated as a grantor trust.

 What is business transition planning?

Business Transition Planning is estate planning that involves a business. The meaning is essentially the same as “business exit planning,” “business succession planning,” and “business continuation planning,” but each of those terms has a slightly different meaning. “Exit planning” tends to focus on the departure of an owner; “succession planning” tends to focus on those who will assume control of the business; and, “continuation planning” tends to focus on the business as it moves through the transition.

Like other forms of estate planning, business transition planning can focus on the money, or, if done from a legacy planning perspective, can focus on the people.  This website contains several pages that discuss the integration of business planning and estate planning, the need for business transition planning, and a process for getting started on business transition planning.