There are a number of tools available to us in crafting your estate plan. We have listed some of them below. Because each one of us possesses unique concerns and goals for our lives, not all of these tools will be suitable for everyone.
A will is a written document that is both signed and witnessed. In Virginia, an affidavit to prove the will is recommended. It must be signed by the will-maker and the witnesses, and notarized. A will is considered a “death” document as it only goes into effect when you die. Generally, a will:
- Provides for the distribution of assets owned by you, but not assets directed to others through beneficiary designations, such as life insurance or retirement benefits;
- Sends assets in your individual name, or payable to your estate, through the probate process;
- Allows you to nominate permanent guardians for your minor children;
- Names the person you wish to settle your estate, such as an executor or personal representative;
- Permits you to revoke or change your instructions during your lifetime;
- Tends to cost less than a trust on the outset, but costs more to settle during court proceedings after death.
A will can set up a trust as part of its distribution of assets plan. These are called “testamentary trusts” and are subject to the continuing oversight by the Commissioner of Accounts, the office set up under Virginia law to assist the courts in reviewing and overseeing the administration of estates and trusts.
A non-testamentary trust is a legal document that is effective during your lifetime, during any period of disability, and after your death. There are many types of specialized trusts. Two common types of trusts are the revocable and irrevocable trusts. Both types of trusts:
- Offer lifetime benefits;
- Provide for the distribution of your assets;
- Avoid probate if fully funded;
- Provide for a successor trustee upon your death or incapacity;
- Allow for the management of your property, even if you’re incapacitated;
- Can address appointing disability guardians for minor children;
- Often include protective trusts for beneficiaries and tax planning;
- Cost more than a simple will at the outset, but much less after your death.
Revocable trusts are also known as “living trusts” because you can alter, change, modify, or revoke them if your circumstances or goals change. You stay in control of your trust. You can transfer property into a trust and take it out, serve as the trustee, and be the beneficiary. You select successor trustees to manage the trust if you become incapacitated and when you die. Your trust assets avoid probate. This makes it difficult for creditors to access assets since they must petition a court for an order to enable the creditor to get to the assets held in the trust. Assets in your revocable trust remain in your estate for estate tax purposes but do not go through the public probate process at your death.
As the name states, you, as the creator of an irrevocable trust, cannot later revoke it. There are some powers that you can retain if the document allows it, such as the power to make investment decisions or change beneficiaries. The assets of an irrevocable trust have increased asset protection, meaning they are kept out of the reach of your creditors. Taxes are often reduced because, in most cases, irrevocable trust assets are no longer part of your estate. Trust protectors can, however, step in and modify your trust in certain circumstances. Many people are uncomfortable giving up control over their assets, and with the need for federal estate tax planning necessary only for estates over $12.06 million per person in 2022, the popularity of irrevocable trusts is waning.
Life insurance is a unique asset in that it serves diverse functions in a tax-favored environment. Life insurance proceeds are received income tax-free and, if properly owned by an irrevocable life insurance trust, life insurance proceeds can also be received free of estate tax. These proceeds then become available as a source of liquidity to aid your estate in meeting tax or other financial obligations, or to provide an inheritance or gift to your loved ones, among other things. An irrevocable life insurance trust allows you to accumulate assets outside your taxable estate protected from the claims of your creditors.
A financial power of attorney allows you to select a trusted family member or friend who will be responsible for managing your money and other property if you become mentally incompetent. Without this document, bank and investment accounts held in your name will become inaccessible, IRA distributions cannot be requested, bills do not get paid, tax returns cannot be filed, and property cannot be bought or sold. Instead, a loved one may be forced into court to prove you are incompetent and be appointed as your legal guardian; a judge will oversee the guardian’s every move. A financial power of attorney can provide authority to handle these issues privately without the court’s involvement.
An advance directive (also known as a medical directive, medical or health care power of attorney, or designation of health care surrogate) allows you to choose the trusted family member or friend who will be responsible for making health care decisions if, for any reason, you lose the ability to make them for yourself. The advance directive will tell this person what your wishes are regarding treatment, extraordinary life-sustaining procedures, participation in clinical trials and organ donation. It authorizes your trusted agent to hire and fire medical personnel and choose medical and living facilities for you. It is a powerful document and, if you fail to have one, Virginia law contains default provisions that may not reflect what you actually want.
A standalone retirement trust is a tool used to provide asset protection and maximized tax-deferred growth for your spouse, children, and other loved ones. This means more assets go to the people you love.
During your lifetime, after you set up a standalone retirement trust, you still have full control of your assets and the right to enjoy your retirement funds for years. The standalone retirement trust will protect your loved ones and their inheritance after you die.
Virginia law authorizes the designation of a standby guardianship that takes effect if you and your spouse become unable to care for your children. You choose who you trust rather than leaving the decision to a judge who does not know you, your values, or your family dynamics. You retain the right to change the guardian named. If events trigger the standby guardianship, the guardians you chose have the immediate authority to care for your children while they petition the court for approval of them as standby guardians.