There are 4 types of Wills:
1. A Simple Will – states who the beneficiaries are and what they receive.
2. A Joint Will – is signed by more than one Testator usually a husband and wife.
3. A Living Will – basically outlines what you want to happen due to incapacitation or terminal illness and provides medical directives on how you should receive medical treatment.
4. A Testamentary Trust Will – is a trust set-up through the last Will and Testament and is usually done to protect children and others regarding the disposition of the Testators property for a given time frame. With a Trust comes the assigning of a guardian to take care of children and others as stated in the Will; as an Executor’s purpose is primarily to ensure that distributions from the estate take place in accordance with the Testator’s wishes.
It should be noted that whilst I have described 4 types of Wills, they can be bundled together to form part of the Estate Planning process as each type of Will serves a specific purpose.
It is also important to understand that a Power of Attorney (POA) is needed as it works hand in hand with a Will. The POA works whilst the Testator is alive empowering an assigned agent to ensure their business, legal and financial obligations are meet should they become in-capacitated or have a need for someone to act on their behalf; whilst the Will becomes active only upon the death of the Testator.
There are generally 3 types of POA i.e.
1. A General Power of Attorney – is used specifically for assets such as property, investments and financial affairs. It can be set for a limited period (known as a Limited POA) or last indefinitely and is operational only as long as the items covered exist and the persons involved remain alive, of sound mind or in the case of the attorney (the assigned agent) financially solvent.
2. An Enduring Power of Attorney – remains in place even if the Testator becomes incapacitated and is not limited in its function or duration.
3. An Immediate / Springing Power of Attorney – is activated either immediately as said or is activated upon a specific event or time. Both are put in place to cover certain medical events and treatments as would be outlined in a POA.
A POA agent (or attorney) does not have more power than the Testator as a POA can be rescinded and limited in terms of function, as to when it can become active and how long it can be active.
In protecting a Testator’s assets and their disposition before and/or after death the setting up of a trust can be very useful and given the variety of trusts – at last count there are over 15 specific types of trusts – there is one that will suit virtually anyone. There are basically 2 ways to setup a trust - Revocable or Irrevocable. A Revocable Trust (RT) can be modified and cancelled at any time by the Testator (known specifically as the Grantor). An RT can also be known as a Living Trust and is usually set up by an individual who has their property in their name only. The use of such a trust allows control to be maintained by the individual (Grantor) who can receive income generated from the property whilst being held in a tax efficient structure which can also avoid probate. When the Grantor dies or once a triggering provision is activated the trust could be subject to taxes and would then convert to being irrevocable. An Irrevocable Trust (IT) is basically a trust that cannot be modified once it is setup and provides potential tax and creditor shelter for the property held through its structure.
Another tax efficient structure is a Foundation which can provide control over the Testators property (this is known as a Private Foundation) whilst they are alive and also after their death. This structure can allow family members and designated individuals to maintain control over the property held within the foundation including how disbursements from the foundation are conducted. It should be noted that the use of a foundation is to provide donations to select charities and in some cases disbursements to individuals.
When looking at the Estate Planning needs of an investor a financial advisor needs to consider the 3 other modules i.e. module 2 “Structure”, module 3 “Strategy” and module 4 “Cost / Benefit” as such planning can have a significant affect on how those 3 modules are put together, arranged and defined for that specific investor.
The purpose of this article is primarily informational and as such legal advice in the jurisdiction in which the property is held and the tax residence of the Testator should be sought before structuring or setting up an estate plan.
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