Smith & Pugh, PLC: What's So Complex About Administering a Trust?

The process of identifying and collecting assets; paying debts, expenses and taxes; and making proper distributions of remaining assets after one’s death is referred to as estate or trust administration.

The identification of assets begins with the inquiry as to how assets are titled. Assets that are jointly held with survivorship will pass automatically to the survivor; assets that have a beneficiary designation will go to the person(s) so designated. Assets held in a trust are to be administered pursuant to the instructions provided in the trust document. Assets in a person’s sole name must be administered pursuant to the terms of his/her will or, if none, by the laws of intestacy (that is, death without a will).

The collection of assets depends on who may access the deceased person’s assets. With respect to assets held in a trust, the trust document typically designates someone (individual or financial institution) as Trustee. A person who established the trust (the Settlor or Trustor) often designates himself/herself as trustee. Upon his/her death, a successor trustee is typically named in the document. In other words, the trust document itself gives the successor the legal authority to administer the assets.

If assets are administered under a will, an Executor (sometimes called “Personal Representative”) is named to administer assets. If there was no will, an heir (or sometimes a creditor) may step forward to be the Administrator. In either case, however, the Executor or Administrator must apply to the local court having probate authority to qualify as such. This begins the process referred to as probate. This process can vary greatly from state to state.

The administration of the estate of a deceased person can be viewed as:

1. determining the extent and nature of the deceased person’s assets,

2. transfering title of assets to obtain legal control,

3. paying debts, expenses and taxes, and

4. distributing the remainder pursuant to the terms of the trust, will, or laws of intestacy.

This person may be an Executor under a will, or an Administrator in intestacy, or a Trustee under a Trust. Sometimes the documents require that the assets be held in trust for an extended period such as for the life of a beneficiary or until the beneficiaries reach a certain age. By the end of the process, there should be no assets left in the name of the deceased person.

Estate and trust administration takes time. How much time depends on several factors: Can the original documents be located easily? Is real estate among the assets? Are the assets easily liquidated? Are there estate or income taxes to pay? Who is the executor or trustee? Who are the beneficiaries and can they be located? Are there any provisions in the trust or will that are unclear? Are there significant assets which were held jointly or passed by beneficiary designation? Were the rights of the surviving spouse addressed in the documents?

As with estate planning, the complexity of the administration of an estate or trust is affected by the beneficiary list and decedent’s financial holdings. Anyone who has served as Executor, Administrator, or Trustee can attest that these are positions of great responsibility. For most clients, service in such a position is a once in a lifetime role. Most people finding themselves with such responsibility can benefit from legal and accounting guidance throughout the process.

The foregoing article contains general legal information only and is not intended to convey legal advice.

Daniel D.  Smith and W. Franklin Pugh are partners in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176 (703-777-6084, www.smithpugh.com).

Amy V. Smith, CFP®, CIMA®: Starting at the Finish Line

In preparing for a recent speaking engagement on “Financial Planning for Life,” I was reminded that there is more to talk about than money in the world of financial planning. Money is just the vehicle to get us to our financial destinations.

What we do when we arrive is another issue.

Why should we try to plan for life? Because life is full of surprises. We cannot control our future, but we can control our financial behavior—planning, saving, budgeting, investing, and covering risk of loss. This is when the discipline and benefit of financial planning is realized.

After 15 years as a certified financial planning practitioner, I have learned that the essence of effective financial planning is holistic, not compartmentalized. To talk only about money is to see a work of art with one eye closed.

Sticking with the vehicle analogy, you may have a brand new car, but where is it taking you? If you’re planning a trip, where are you going? How will you get there? When will you arrive? You’ll likely need a road map to reach your final destination.

The same analogy applies to financial planning. For example, when setting goals for retirement, most of us will want to maintain, at the very least, today’s standard of living, before inflation, when we retire and not take a pay cut when we no longer earn an income. How and when we plan to get there is the equivalent of a financial road map, a financial plan.

Starting this month, I’d like to expand the scope of this column to include the whole picture, not just the parts, and begin asking the “big questions.” This means not only presenting ideas on individual topics such as investments, taxes, and insurance, but also exploring how these financial vehicles can work together to benefit you, the reader, in your personal retirement planning, risk management and legacy planning.

To address these bigger life issues, I’ve invited my husband, Dan Smith, practicing estate planning attorney for more than 40 years, to join me in writing this column with a new title to fit this broader perspective: Amy and Dan Smith’s Planning For Life. Dan and I have been married almost eight years. We both experienced the death of our spouses. While neither of us had planned for this to happen, it did. Were we prepared? Not really. Were these lessons learned that influenced our work as professionals? Absolutely.

As this column goes forward, we will share with you information and suggestions, which hopefully, you will find helpful in your planning for life.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Smith & Pugh, PLC: The Essential Components of Estate Planning

The careful planning of an estate can serve to avoid unnecessary taxation and expense and, very importantly, assure that the desired distribution of assets will be carried out accurately and efficiently.

Where minor children are involved, careful thought should be given to the appointment of guardians for the person of the child and to the appropriate method of distributing assets to the child or held for his/her benefit. Custodial accounts may be utilized until the child reaches age 21, or trusts may be established to provide for the administration of assets for the child’s benefit until a later age.

Many clients consider the use of a revocable living trust for the purpose of avoiding probate and adding flexibility to the administration of their estates during their lifetime. A common misunderstanding is that a living trust avoids death taxes; in fact, that is not the case. However, the living trust may contain a plan which will serve to avoid death tax, particularly when husband and wife are creating estate plans jointly. However, such provisions can be included in a properly drafted will as well. The trust will avoid probate with regard to the assets which are properly included therein, whereas assets passing under a will are subjected to the process of probate.

A will or trust may also address payment of estate taxes. Moreover, a married couple, planning together, can arrange their affairs so that, between them, they may pass twice the value of assets tax-free to the next generation than one individual might do acting alone.

The proper designation of beneficiaries for life insurance, annuities, and retirement plans is a very important component of estate planning. Typically, the applications for these contracts or accounts include beneficiary designation forms. Careful planning is required in the completion of the beneficiary forms to avoid misdirection of benefits or the inadvertent failure to take advantage of tax and probate avoidance opportunities. Your primary will or trust will not control the distribution of such assets unless the completed form specifically so designates, or one fails to designate beneficiaries. It is very important to ensure that the beneficiary designation forms complement your will or trust, rather than working at cross purposes.

Estate planning also should involve the preparation of durable general powers of attorney and medical directives. The primary purpose of these documents is to designate substitute decision-makers in the event you become unable to manage your affairs during your lifetime or make informed medical decisions. The medical directive may include a “living will” to address questions about end-of-life medical and support measures.

Wills, trusts, powers of attorney, and medical directives are important legal documents that require thoughtful planning. While many of estate planning documents have standard legal wording,“one size fits all” documents usually fail to meet an individual's needs fully and accurately.

The foregoing article contains general legal information only and is not intended to convey legal advice.

Daniel D.  Smith and W. Franklin Pugh are partners in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176 (703-777-6084, www.smithpugh.com).

Amy & Dan Smith's Planning for Life: Explaining the Process of Probate

The term “Probate” derives from the Latin Probatio meaning “proof.” The term came to be applied specifically to proof of wills. In common practice, when a person dies, the proponent of a will takes it to court (usually a probate clerk) and “proves the will”; that is, the proponent submits the will as the true and authentic last will and testament of the deceased person (the “decedent”). In addition, a death certificate or an obituary notice must be produced and a “list of heirs,” which consists of the names and addresses of the people who would take an estate if the decedent died without a will.

The term “probate” now is commonly used to refer to the process of administration of a decedent’s estate whether he/she died with or without a will. If there was no will, the decedent is said to have died “intestate,” in which case the estate will pass to the “heirs at law.” Each state by statute lists the order of family members who will take the estate of a person dying without a will.

Once an estate is opened, a person is “qualified”; that is, he, she or they is/are appointed to settle the estate. If there is a will, he is “executing” the will. The person is given a Certificate of Qualification by the clerk that proves his authority to act on behalf of the estate. Traditionally, the person who administers an estate with a will is called an “executor,” and the person appointed to administer an estate where there is no will is called an “administrator.” The term “personal representative” (the “PR”) is becoming more common as a generic name for both an executor and an administrator.

The PR is sworn in and must give a “bond” for the performance of his duties. A bond is simply a person’s word reduced to writing. In some cases a “surety” may be required. That is, an independent insurance carrier must guarantee the performance of the PR’s duties. This will entail an annual premium payment until the estate is fully settled.

A probate tax is imposed on estates in excess of $15,000. The state rate is 10¢ per $100 of value and the county can add a third to that. So, for example, an estate of $15,500 would be taxed at $15.50 (state) plus $5.17 (local) for a total of $20.67. A common misconception is that avoiding probate avoids estate tax. No so.

The personal representative is required to provide a notice to certain people who may be affected by the probate of the estate and must prepare and file with the commissioner of accounts an inventory of assets in the estate and annual accountings for the estate until it is fully settled.

Probate consists of collecting all the assets of the estate, paying all the debts, and disbursing the balance of assets, and may be concluded in a matter of months. If there are delays in the process, typically they are caused by events outside of probate, such as disputes among heirs.

Probate is easily avoided as, for example, by the titling of assets “joint with survivorship,” by beneficiary designations, by adding “pay on death” or “transfer on death” designations to accounts, and by living trusts.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: The General Power of Attorney

A power of attorney is a writing authorizing one person (the agent) to act for another person (the principal). The term “durable” is often used with power of attorney. This simply means that the power continues even if the principal becomes incapacitated. By law in Virginia now, all powers are durable unless they expressly state otherwise.

A power of attorney is effective upon signing unless it states that it is effective upon a certain date or only upon the occurrence of a future event or set of circumstances. A power which is to become effective in the future is called a “springing power.” A power which is effective immediately avoids the difficulties necessitated by having to prove the satisfaction of whatever conditions are established before the power becomes effective such as, for example, obtaining a doctor’s certification of incompetency. Thus, a power which is effective immediately is more efficient, but of course, leaves the principal at greater risk of being victimized by the agent. Trust is the basis for any appointment of an agent under a general power.

A power of attorney may be general in scope or specific. For example, a person may authorize another to execute documents on his behalf in a real estate settlement. A special power of attorney would be drawn for that purpose and would be limited in scope only to those actions necessary to close the transaction. Usually an outside date is set upon which the power will expire if the transaction has not been completed by that time.

The existence of a valid general power of attorney can avoid the time-consuming and costly process of appointing a guardian or a curator for an incapacitated person. The process requires a physician’s report on the nature and extent of the incapacity, a judicial hearing, and regular reporting to the court or to the commissioner of accounts regarding the finances (the “estate”) of the incapacitated person.

A power of attorney may be revoked by the principal at any time (assuming he/she is competent) but terminates automatically upon the death of the principal.

An agent under a general power of attorney has broad authority to deal with a wide range of matters on behalf of the principal, everything from, for example, buying and selling real estate to providing for the support and maintenance to the principal out of his/her resources.

As explained in a prior column, the medical directive is a different document. It is similar in that both the medical directive and the power of attorney involve the appointment of an agent. The agent under the medical directive and the general power may be the same person or persons. The authority of the agent under the medical directive is restricted to health-related matters.

Tip: Even if you have a valid general power of attorney, it is wise, if you are able, to sign the power of attorney forms with each of your financial institutions (banks and brokerage firms) so that they have on record the appointment of your agent on their own form.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning For Life: Do Not Resuscitate Order ("DNR")

The DNR is a written order issued by a physician to withhold cardiopulmonary resuscitation for the patient in the event of cardiac or respiratory arrest. The DNR is now referred to officially as a “Durable Do Not Resuscitate Order.” The term “Durable” simply means that the order remains applicable even if the patient is for any reason incapable of making an informed decision.

A DNR is not an Advance Directive. Except in the case of certain optional, rarely used provisions of an Advance Directive which require a physician’s signature, the Advance Directive is not signed by a physician. Rather, it is signed by the patient and two witnesses. In certain cases the Advance Directive can be oral. In contrast, a DNR cannot be oral and must be signed by the doctor. (A provision of the Virginia Code appears to allow an oral DNR by the patient, but a recent opinion from the Virginia Attorney General’s office declares that the Virginia Code does not create a verbal DNR.) While the DNR must be written, it can be revoked by the patient verbally.

A doctor may issue a DNR only for a patient with whom the doctor has a bona fide physician/patient relationship and only, of course, with the consent of the patient. Note, however, that consent to a DNR may be given by the agent of the patient pursuant to an Advance Directive. Recall that for an agent to be empowered to act under an Advance Directive, the patient must be determined by two medical caregivers to be “incapable of making an informed decision.” Only after such a determination has been made may the agent request, or consent to, a DNR from the patient’s doctor.

The authority to consent to a DNR can create a dilemma for the agent under an Advance Directive. Consider, for example, the situation where a patient remains conversant and apparently cognizant but whom the doctors have certified to be incapable of making an informed decision. The medical caregivers come to you suggesting the advisability of a DNR while citing the pain and discomfort of the patient, an incurable and deteriorating condition, and, if cardiac or respiratory arrest occurs, the prospect of an indefinite vegetative state if resuscitation is successful. Add to these facts that the patient purposely did not seek a DNR while competent and, even now in his diminished capacity, resists the idea of a DNR when it is suggested. The foregoing facts are from an actual case and are not unusual, especially for elderly patients.

An agent who consents to a DNR under an Advance Directive may revoke that DNR. However, an agent under an Advance Directive cannot revoke a written DNR that was issued upon the request of the patient himself/herself.

The DNR should be readily accessible to emergency medical services personnel. Some folks post a copy on their refrigerator. Family should be advised of your DNR, and doctors, in addition to your primary care doctor, should note the existence of your DNR in your medical files.

While an Advance Directive is highly recommended and is usually prepared by the attorney in conjunction with other estate planning documents, the DNR is an entirely separate matter. It is issued, if at all, by the patient’s physician. It is a personal decision to be weighed carefully after consultation with your physician.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Health Care Decision Making

Because of the evolution of the law, documents relating to medical decision making have a variety of names, which together are confusing if not downright bewildering.

The Advance Directive, Medical Directive, Advance Health Care Directive, Medical Power of Attorney, Durable Power of Attorney for Healthcare, or Power of Attorney for Healthcare can all refer to a document wherein:

1. You instruct medical caregivers as to how you wish for them to proceed if you are in a condition in which you cannot make decisions or communicate your desires regarding medical treatment; and,

2. You appoint an agent to make decisions on your behalf under certain circumstances. In addition the document may – and in current practice usually does – include Living Will provisions, which pertain to end-of-life circumstances.

For simplicity (and consistent with the Code of Virginia) we will use the term Advance Directive. While there could be separate documents, the Advance Directive in current practice usually includes:

1. Your wishes as to healthcare treatment generally;

2. Your wishes in end-of-life circumstances; and

3. The appointment of your agent to make decisions on your behalf. The person so appointed may be variously referred to as your Agent, Attorney-in-fact for Healthcare, Surrogate, Patient Advocate or Health Care Proxy. The document can also specify an anatomical gift to be made after death of any part or all of the body.

The Advance Directive is inapplicable unless two medical caregivers (who must be either a licensed physician or clinical psychologist) certify in writing that the patient is unable to make an “informed decision.” Until such a certification is made, the patient will be making his/her own decisions for medical treatment. Note that your agent cannot act on your behalf until the certification is made, and the agent does not make the certification.

An oral Advance Directive may be enforceable in some circumstances, but a written Advance Directive is highly recommended. Two witnesses are required to sign the document. There is a subtle trap here: a power of attorney is valid if notarized. Therefore, a power of attorney appointing an agent for health care decisions (“a “Healthcare Power of Attorney”) should be enforceable. However, in some states (e.g., Florida) a notarized Healthcare Power of Attorney with no other signature is unenforceable as lacking the second witness.

Interestingly, suggested forms instruct the agent to follow the desires and preferences for treatment as set forth in the form, but the standard form does not provide alternatives for such preferences. I find that it is very difficult for the average person to specify the type of treatment he or she might want in the abstract—artificial nutrition and hydration, mechanical breathing, and amputation, to name a few. Obviously, much would depend on the circumstances at the time. For example, what if I’m in a coma with little likelihood of full recovery of my mental faculties? On the other hand, what if I don’t have a terminal condition, but my mental faculties will be substantially diminished even after recovery? How would such conditions affect my choice of treatment?

Life, as we know, does not always lend itself to pre-scripted scenarios. I can say from personal experience that there are gray areas calling for loving, wise, and sometimes courageous judgment. At a basic level, appointing an agent is an issue of trust: as the principal you are appointing someone who may be making life and death decisions on your behalf; the agent also must trust your choice of him or her as decision maker without second guessing, which can be self destructive.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.