Trust, wills, and other components of estate planning can seem arcane to the uninitiated. Nevertheless, they concern aspects of law and finance that are essential knowledge for planning for the future.
Tim Madigan, vice president and senior trust officer for the Martha’s Vineyard Financial Group, the trust and brokerage arm of the Martha’s Vineyard Savings Bank, offered insight into some of the fundamentals of estate law and finance during a recent interview with The Times.
Mr. Madigan began by explaining that a solid estate plan is comprised of four elements: “[For] a good estate plan for a Massachusetts resident — you should have a will; you should have a trust; you should have a durable power of attorney; and you should have a healthcare proxy,” he said.
A will is a legal instrument for divvying up assets upon someone’s death according to their wishes. If the deceased owned everything in his or her estate solely and directly, then the will should encompass their whole estate. If the deceased also has a trust, the will governs those assets not in the trust, often things like automobiles, checking accounts, and personal belongings. Absent a will, the wishes of the deceased may not come to pass.
“If you don’t have a will, then the state of Massachusetts, through its intestacy laws, basically provides how your assets are going to be distributed.”
Intestacy law falls within the purview of the probate court. “Everybody who dies doesn’t necessarily have to go through the probate court, because it all depends on how their assets are held,” Mr. Madigan said. “If an asset is held in your individual name — say you own a piece of real estate — and it’s only in your name, and you die with a will or without a will, you have to go through probate court to make sure that the house gets transferred to whomever the intended is.”
Mr. Madigan added that because a will is a public document, the assets and beneficiaries contained in it can be seen by anyone. Therefore assets distributed through a will don’t afford much privacy.
Be that as it may, Mr. Madigan affirmed that wills are essential to estate plans, and that his group, via the bank, is specially empowered to oversee them.
“Under Massachusetts law, the bank has what’s called trust powers,” he said. “That allows the bank, as a corporate entity, to serve in the capacity as a trustee or as executor of a will. Now it’s called a personal representative, but same result.”
He said impartiality is a particular advantage to having the bank administer a will: “I’ll have a couple come in, and I’ll say, Who’s the executor of your will? And they’ll say, Our oldest child, and I’ll say, How does she get along with her siblings? And they say, Oh, they don’t get along. And I say, Do you really think that’s the best person to be the executor of your will? Then they realize there’s an inherent conflict in those kinds of situations.”
A trust is a type of legal entity created to contain assets. Trusts are administered by a trustee or trustees. A trust can hold “pretty much any assets you can own in your individual name — real estate, stocks and bonds, cash,” Mr. Madigan said.
“What the trust accomplishes, along with a durable power of attorney and a healthcare proxy, is it allows you to plan for incapacity. That’s really the primary reason you want to have a trust.”
According to Mr. Madigan, through a trust a person can count on management of their financial affairs should they become incapacitated due to dementia or some other medical condition. In those circumstances, the trustee steers the ship for the incapacitated party in accordance with prearranged parameters.
“The second part of the trust is the dispositive provisions that are very similar to what you’d have in a will,” he said. In essence, when the beneficiary of the trust dies, the trustee distributes the assets in the trust to whomever the deceased had chosen.
Alternatively, assets can remain in a trust for an extended duration, and be managed for the benefit of a surviving spouse, then perhaps children, and then perhaps even grandchildren.
“So you can have a trust that’s in existence for several years and therefore that individual trustee, such as a lawyer or family member, may not be the perfect choice. It’s probably better to have a corporate trustee. A corporation doesn’t die or get sick or retire, and therefore can continue to serve in that capacity,” Mr. Madigan said. “We have the expertise to deal with money management, probate, tax law, all the legal requirements required by the trust.”
Unlike a will, a trust is a private agreement between the person who established the trust and the trustee. As such, trusts keep assets out of the public eye, especially after somebody dies: “Nobody knows how much money is involved or how much real estate is involved, or any of those kind of issues that would be an open book if it’s filed in probate court.”
The medical proxy and the durable power of attorney
“In Massachusetts, a healthcare proxy is something that you prepare and have in place in case of incapacity,” Mr. Madigan said. “So if I can’t make a medical decision, then whoever I named as my healthcare agent in that healthcare proxy can make the medical decision on my behalf, and has the right to consult with doctors and the hospital.”
A durable power of attorney grants someone else the ability to act in your stead in legal and financial matters. It also grants this power after you become incapacitated. That’s the durable portion.
“Let’s take the example of a husband and wife,” Mr. Madigan said. “They own a house jointly. The husband’s going to have to go into a nursing home because he has dementia. The wife decides she’s going to sell the house and downsize into a condominium. Well, they own it jointly, so she can’t, unless somebody has been given the power of attorney. The husband’s incapable of signing the deed, so somebody has to be appointed to sign the deed. If you don’t have a power of attorney with someone who’s already handpicked, there’s a court proceeding — probate court — [to] have either a conservator or a guardian appointed.”
Mr. Madigan cited vehicles, checking accounts, and savings accounts as other examples of assets outside a trust that can become difficult to manage or liquidate should a durable power of attorney not be set up.
The Medicaid hedge
Sometimes trusts are utilized to shield assets from Medicare and nursing home costs. Mr. Madigan said that’s a less common kind of trust, best addressed by a specialized attorney. Even with one, the work is complicated.
“The problem is [that] it’s become more and more difficult, because the state and the federal government continue to try to close loopholes to prevent people from protecting their assets in that way. Essentially, somebody really has to give up control of their assets and transfer [them] into an irrevocable trust at least five years before they are applying for Medicaid. That’s the look-back period,” he said.
He added that there’s an element of chance in the establishment of an irrevocable trust for protection against Medicaid, because some people don’t become chronically ill or need to enter a nursing home. Yet they will have consigned themselves to a more rigid type of asset management than the typical revocable trust. The irrevocable trust demands control be surrendered permanently.
“It’s important [for parents] with a couple of small kids to have an estate plan in place with wills and trusts,” Mr. Madigan said, “to really provide for their minor children if the couple ever dies, heaven forbid, in a common disaster — a car accident, for instance.”
He suggested that in part, a life insurance policy with a trust as beneficiary can protect against this type of tragedy. He added that parents must choose potential guardians carefully, and furthermore must not assume that the guardian is simultaneously a good choice to manage the assets of the children. He also pointed out that for young couples with limited financial capacity, constructing a trust to be funded or further funded by a life insurance policy is a money-wise method that can be incorporated into a plan that also includes the other important ingredients of an estate plan.
He added that a consultation with a trust department or financial planner can be an efficient, cost-saving step prior to consulting a lawyer. “It saves you some money,’ he said, “if you develop the plan first, because now you’re going to the lawyer with pretty much the mechanics of the plan worked out, as opposed to spending additional time with the lawyer to develop your plan.” He also said that from time to time he encounters folks who have already consulted an attorney, and that works out too, because they show up informed.
The important thing is to consult with a professional and put a plan in place — and do it now.