Estate Planning: an Overview of the Basics and Relevant New Law

• Publication year: 2022

ESTATE PLANNING: An Overview of the Basics and Relevant New Law

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By Summer G. Shelverton and Janine M.Yim

Over the past two years, various events—from the global pandemic to the war in Ukraine—have altered our lives. These events have changed the way that we do our jobs—from working at home to attending virtual meetings to conducting hearings over online platforms. For some of us, they have also profoundly impacted our health or the health of our loved ones. They have affected our finances, perhaps changing our investments or the assets that we own.

The uncertainty of the last few years has also extended to estate planning laws. Currently, the federal estate tax exemption is $12.06 million for an individual ($24.12 million for a married couple) with inflation adjustment, and the state estate tax exemption is $5.49 million for an individual ($10.98 million for a married couple). While Congress has been unable to pass any new laws reducing or affecting the current estate and income tax laws impacting estate planning, it is not for want of trying and it is worth keeping a close eye on in the coming years.

In Hawai'i, the most noteworthy change in laws governing trusts and estates is the recently adopted Uniform Trust Code ("UTC"), which went into effect on January 1, 2022. In addition to reenacting various pre-existing laws, the UTC alters certain aspects of the state's trust law.

Amidst so much change, this article seeks to highlight for readers (whether new to estate planning or seasoned estate-planning practitioners) both the basics of estate planning that should be considered personally and professionally, while also providing a synopsis of the new UTC, which impacts aspects of trust planning and administration.

We begin with an introduction—or refresher—on the estate planning basics. That is, what documents do you need to have in place to ensure that you and your loved ones are taken care of if something happens to you. The next section provides a brief overview of the UTC and highlights some of the important changes in trust law in Hawai'i affected by it, which practitioners in Hawai'i should be aware of—when creating your own estate plan, revisiting your estate plan, or talking to clients about estate planning.

BASIC ESTATE PLANNING DOCUMENTS Importance of Having an Estate Plan

Before diving into the basic estate planning documents, it is important to review why you should have an estate plan in place. As explained more below, an estate plan does more than just give you control over the distribution of your assets at death. It can also, for instance, direct who will manage your finances and your health in the event that you become incapacitated, or ensure that your privacy is maintained after you pass.

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You Direct the Distribution of Your Assets

An estate plan allows you to direct how your assets will be distributed at your death. Without an estate plan, your assets will be distributed in accordance with a statutory scheme called intestacy. Intestacy neither considers personal preferences nor allows for special circumstances. It can also be more time consuming and costly for your surviving family members.

Planning for Disability During Your Lifetime

An estate plan not only says who gets what when you pass, but in the case of the power of attorney and trust, it can help avoid a conservatorship proceeding if you become incapacitated. A conservatorship is a legal proceeding whereby the court appoints a person to manage the finances and assets of another person who is deemed physically, medically, or psychologically unable to care for themselves. Likewise, through an advance health-care directive, you can avoid the need for a guardianship, which—like a conservatorship—is a legal proceeding whereby the court appoints a person to manage the general care of another person who is deemed unable to do so themselves. Both processes—a guardianship and conservatorship—can be long, expensive, and cumbersome.

Avoid Probate and Maintain Privacy

If your assets do not pass through a revocable trust, are not held in joint tenancy with the right of survivorship, or do not have a beneficiary designation, they will pass through a court-supervised procedure called probate. For many individuals, probate proceedings are more time-consuming and expensive than creating an estate plan. Probate also requires the disclosure of personal information—including a person's assets, outstanding debts and expenses, terms of a will (if applicable), and heirs-at-law—in public filings.

Asset Protection to Beneficiaries

Depending on how the plan is drafted, an estate plan can protect against losing assets to creditors and/or disgruntled or former spouses or your children. This is typically accomplished by holding assets in trust for the benefit of the spouse and/or children, with restrictions on how the funds can be utilized and language to direct that the assets not be considered marital assets or subject to creditor claims, including spendthrift provisions.

Guidance

Dealing with a death is challenging. If you pass without an estate plan, your surviving family members must figure out how to handle your affairs on their own, often guessing at your preferences. An estate plan allows you to plan in advance to guide your loved ones through this process.

Basic Estate Planning Documents

Everyone needs at least three (and usually four) estate planning documents: (1) a durable power of attorney, (2) an advance health-care directive, (3) a will, and (4) a revocable living trust. The next section provides an overview of each document—what it does and why it is important.

Durable Power of Attorney

A durable power of attorney designates an individual, who is called your agent, to make decisions regarding your property. Through a durable power of attorney, your agent may act and sign documents on your behalf. That said, your agent only has the powers that you specifically grant them. Such powers can be limited (e.g., allowing control only over specified assets) or broad (e.g., allowing control over all of your assets, or granting the ability to alter your estate plan or make gifts). Your durable power of attorney can be written to be effective immediately or only upon your incapacity (the latter generally being called a "springing power").

Because an agent acting under a broad durable power of attorney can perform most of the functions of a conservator, this instrument can be used to avoid the need for a conservatorship proceeding. In 2010, Hawaii enacted the Uniform Power of Attorney Act ("UPOA"), which includes default provisions and affords protections to third parties in accepting a power of attorney.¹ The UPOA also includes a statutory form power of attorney, which can be found at Section 551E-51.²

However, a durable power of attorney does not control assets held in a revocable living trust. Thus, a trust will typically contain provisions that allow a successor trustee to control such assets in the event you are incapacitated.

Advance Health-Care Directive

An advance health-care directive is used as both a durable power of attorney and a so-called "living will." As a durable power of attorney, this document can designate agents to make health-care decisions for you if you are no longer able to effectively communicate with your doctors. In turn, you can use this document to avoid the need to appoint a guardian if you become incapacitated.

As a "living will," this document can state whether you want your health-care provider to prolong your life using artificial life-sustaining procedures after you have lost the ability to communicate due to an incurable or irreversible physical or mental condition. You can require that all medical procedures be used to keep you alive, refuse all medical procedures, or customize the amount of medical care to be used. You can also designate whether you would like to donate your organs and specify the uses for such a donation.

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Will

A will directs the distribution of your assets at your death. While a will does not avoid probate, it gives you more control over what happens at your death by allowing you to deviate from intestacy.³In addition, you can use a will to exercise powers of appointment, nominate guardians for children or incapacitated relatives, and even establish trusts to control property in the future. You can modify, amend, or revoke your will at any time prior to your death.

Even if you have a revocable trust, you need a will to direct that any assets remaining in your individual name at death be transferred to your trust. A will can also be used to exercise certain rights—such as nominating a guardian for your child—that cannot be exercised through a trust.

Revocable Living Trust

A revocable living...