The Estate Planning Process: The Basics

by Bryan Lane Berson, Esq.

An estate plan accounts for one’s assets, identifies recipients, and selects people to carry out instructions. Where appropriate, it may address tax and elder law issues. Consider these issues before meeting with professionals to make the process and plan more effective. This column discusses wills, revocable living trusts, and beneficiary designations. Other columns discuss powers of attorney, advance directives (i.e., health care proxies, living wills), choosing fiduciaries (i.e., agents), and probate and estate administration.

I. Wills

A testator uses a last will and testament to identify beneficiaries who will inherit assets, an executor to administer the estate, and a guardian for orphaned, minor children. A testator must be (1) at least 18 years old and (2) of sound mind and memory. The testator must have a general understanding of (a) the extent and nature of his property; (b) the natural bounty of his affection; (c) how the assets are being allocated; and (d) how these factors relate to one another.

To execute, revoke, or amend a will, a testator must have “testamentary capacity” – a fairly low standard. If there is a question about the person’s capacity, one should consult with a psychiatric professional. Parties who would have been beneficiaries under a previous will (or distributees of a decedent without a will) can challenge a will’s validity where it appears the testator was improperly influenced. The “natural bounty of one’s affection” is a legal term that refers to people who are close to the testator (e.g., family).

Specific assets are left through specific bequests. For example, one can leave a piece of jewelry or artwork to a relative. The assets that remain after the specific bequests are called the “residue” and tend to be shared by beneficiaries. A will can establish a testamentary trust that is funded with estate assets. Periodically, the testator should review the will. To amend it, one must execute a codicil. Instructions outside the will and codicil are not binding.

When the testator dies, the executor initiates probate at the Surrogate’s Court (“Court”). The will becomes part of the public record. The Court authorizes an executor to represent the estate by issuing letters testamentary. The executor satisfies creditors, distributes assets, and pays estate taxes.

II. Revocable Living Trust

A trust is a legal entity. A trustee manages property for a beneficiary’s benefit (possibly his own) according to the terms of a “declaration of trust.” Often, the creator, trustee, and primary beneficiary are the same person. The creator funds the trust by contributing property to it.

To create, amend, or revoke a trust, one must be at least 18 years old and possess contractual capacity. This is a higher standard than the testamentary capacity that a testator requires to execute a will.

There are many types of trusts.

– Testamentary trusts are created by wills when the testator dies.
– Supplemental needs trusts are used to maintain eligibility for government benefits.
– Irrevocable life insurance trusts (ILITs) hold life insurance policies so that the policy proceeds avoid estate, death, or inheritance taxes at death
– Medicaid asset protection trusts are used to become eligible for Medicaid benefits.

People use revocable living trusts to avoid probate. For example, a married couple can place their homes and accounts in the trust. If they name themselves as trustees and beneficiaries, they can manage the property like they did before they created the trust. They can make their children the beneficiaries after they (the spouses) die. Sometimes, elderly parents name children as co-trustees to help manage the property.

Probated wills become part of the public record, and the executors of wills are subject to court supervision. Usually, trusts do not become part of the public record, and trustees are not subject to court supervision. Thus, it is important to choose trustees and successor trustees who are honest and capable. Periodically, the trustee must provide beneficiaries with an “account,” explaining how funds are used and managed.

People with revocable living trusts should have a will. Assets within the trust avoid probate, but usually, it is not practical or possible to transfer all assets (e.g., an automobile, personal checking account) into the trust. Sometimes a grantor misses an asset (e.g., a refund check). The will disposes of assets outside the trust. Under New York law, if those assets (excluding real estate and assets that pass outside the estate) are worth less than $30,000, they are distributed through an accelerated small estate administration procedure.

III. Assets that Pass Outside the Will and Trust

Retirement plan (e.g., 401(k) plans, IRA accounts) assets, annuity contracts, and the proceeds of life insurance policies pass to beneficiaries through beneficiary designations. Their owners use forms to identify beneficiaries. Plan administrators and insurance companies keep these designations on file.

Bank accounts, brokerage accounts, and mutual funds have transfer-on-death (TOD) or pay-on-death (POD) provisions. Where effective, when the owner dies, the named person automatically inherits the account. Some assets (e.g., houses and cars) have deeds. A deed can list co-owners as joint tenants with right of survivorship. In that case, when the first co-owner dies, the living co-owner inherits the property without it having to go through probate.

About the Author:  Bryan L. Berson, Esq. is an attorney and mediator at The Berson Firm, P.C., a commercial and civil law firm that handles estate administration and planning, real estate, commercial transactions, mediation, and commercial litigation.  His e-mail is bberson@bersonfirm.com.  His phone number is (631) 517-1055.  Connect with The Berson Firm on Facebook and Bryan L. Berson on LinkedIn.  The firm’s website is www.bersonfirm.com.

Disclaimer:  Constructive Knowledge is published by The Berson Firm, P.C. (the “Firm”).  The information contained in this column is provided for informational purposes only.  It is not tax or legal advice on any subject matter.  No readers, clients or otherwise, should act or refrain from acting on the basis of any content without seeking appropriate legal or other professional advice with respect to one’s particular circumstances.  This column reflects a general discussion of the law in New York.  It may not accurately reflect the law of other states.  The content is general information and may not reflect current legal developments, verdicts, or settlements.  The Firm expressly disclaims all liability with respect to acts taken or not taken based on any or all content of this column.  This column is Attorney Advertising.  IRS Circular 230 Legend:  Nothing in this column is intended to be used and cannot be used to avoid U.S. federal, state, or local taxes.  It was not written to promote, market, or recommend any tax planning strategy or action.  Copyright:  All rights reserved.  No part of this publication may be reproduced without prior written consent.  Readers may share this column through, but not limited to, social networks.

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Tags: beneficiary designation, probate, revocable living trust, trust, will