A 3-in-1 estate planning tool: Wills, Trusts and LPA
Admit it! You are as enthusiastic about addressing your estate plan as you are about taking a seat at your dentist to have a root canal surgery.
But not addressing the consequences of the final visit of the grim Reaper or the consequences of losing mental capacity or falling onto a coma does leave heirs and loved ones very vulnerable at a time when they are already in one of the most extreme life situations upon your passing or upon your losing mental capacity. And yet, most of us spend more time planning for our upcoming vacation than planning for our estate. Without a proper estate plan in place, a significant part of our assets, investment portfolios and of our legacy could be lost entirely or severely diminished in value. What would happen to our loved ones and can we make sure that we are able to impart our most cherished values to our heirs, besides only sorting out the financial side of estate planning?
Our loved ones will attain the highest level of peace of mind if we settle all the important things which really matter to our family members by drawing up a Will and/or Trust and drawing up a Lasting Power of Attorney (LPA). While the Will and/or Trust settle our affairs upon our passing, an LPA settles our affairs when we still have a pulse but when we have lost mental capacity and are not able to take care of our own affairs anymore. Having seen first-hand how debilitating strokes, Alzheimer’s and a family member falling into a coma can severely disrupt family estates, it is high time that we properly address these scenarios for ourselves. We really do owe this to our loved ones.
Isn't a stand-alone Will sufficient? Proper estate planning certainly goes way beyond simple nomination of beneficiaries and writing one's Will in case you leave loved ones behind. A Family Trust is often required to protect our loved ones and assets against untimely death and to fullfil the overall aspirations of the family. And even affluent singles without children might not want to straight away reject the creation of a Trust, in case charitable giving, providing for non-related persons or other aspirations are planned to be addressed upon one's passing.
2 Circumstances where a Trust Proves Indispensable:
What if my heirs are too young and/or financially immature?
In case you only have a Will in place, estate distribution happens in one lump sum. Hence, when your children reach the age of 18, they will have instant access to all insurance payouts of the deceased parent. Once your children attain the age of 21, they will acquire title to all physical properties and all other assets of your estate. While your child might like the idea to be born to retire, it is questionable that you will be able to instill the virtues of hard work, discipline and delay of gratification which allowed you to build up your own estate in the first place. Do we really want to roll the dice to see if our newly minted 21-year old millionaire heirs will be able to resist the siren songs of Ferrari dealerships and luxury labels when becoming overnight millionaires? Will this windfall enrich them or ruin them? Will it be in their best interest at such a young age? With a Trust in place, it is possible for estate distribution to be delayed and staggered. This means that instead of receiving the proceed in one lump sum at age 18 or 21, children can receive the estate in adequate drip-feeds over a planned period, structuring payouts in accordance with their educational needs, when starting their own families and when reaching other milestones. The flexibility of a Trust allows a very detailed and very planned estate distribution for literally all scenarios.
What if my heirs are too old and/or mentally incapacitated?
As we age, the likelihood of our surviving spouse losing mental capacity in her/his twilight years and being an easy target to be swindled by legacy hunters increases dramatically. Dementia affects more than 20% aged 65 and above and a whopping 53% of seniors aged 85 and above. In case our surviving spouse is the sole operator of the bank account and other financial accounts during the final years of mental incapacity before death, no other person will have the authority to manage his/her financial affairs unless so authorized by the Courts. With a Lasting Power of Attorney (LPA), the entire process is simplified and you as the individual (the donor) are able to appoint your most trusted person to take care of you and manage your affaires as your donee. An LPA is very easy to set up and is an effective way to ensure that you as the donor will be well protected in the event of mental incapacity. And, of course, the same rationale holds true for your heirs should they be mentally incapacitated. The only requirement is that one possesses full mental capacity during the time when one sets up one's LPA.
The picture below showcases how you can effectively combine a Will, a Family trust and a LPA. The 2 trigger events where assets are poured into the Trust are Death (left side) and Mental Incapacity (right side in the picture below). In case of the testator’s demise, immediate gifts can be bequeathed to loved ones, before the remaining assets can be poured into a Standby Trust for distribution of the loved ones in accordance to the settlor’s Letter of Wishes (notice that “testator” is the person who writes a Will, while a “settlor” is the person who sets up a Standby Trust. In the example below, both roles are filled by the same person, i.e. the testator also sets up a Standby Trust in combination with a Will).
In the event of loss of mental capacity (right side in the picture below), the LPA will be triggered in a matter that some (or all) of the assets are poured into the Family Trust and provide a monthly payout for the LPA donor and the other family members.
Since the Trust is set up on a Standby basis and only gets triggered in the event of Death or Mental Incapacity, the ongoing administrative and management costs of the Trust are minimized. In addition, the solution above is extremely flexible as changes to one’s intentions can be made through the Letter of Wishes, without needing to undo the Trust. The settlor (the person who set up the Trust) retains control of all assets during his lifetime prior to the two trigger events mentioned above.
In a nutshell, while proper Estate Planning might have first felt like getting a root canal surgery, it is in fact your one chance to impart your own values to your heirs. After all, you should not miss the opportunity to bestow the exact same values which have made you successful onto the next generation thereby creating a values-driven legacy. A well-structured Trust, in combination with a Will and a LPA, is the ideal vehicle to transfer and perpetuate your own success habits and success values to your loved ones.