By law, certain estate planning documents must be signed using proper formalities. Sometimes, however, you can require additional procedures that a beneficiary must follow to exercise their rights within your estate planning documents.

A number of reasons exist for doing this, ranging from ensuring proper notice is given to relevant parties such as your trustee, to limiting the time frame in which the beneficiary can exercise their rights, or to avoiding the possibility that someone might fraudulently exercise a beneficiary's power.

Powers of Appointment

One area where you may provide specific instructions or formalities is with respect to "powers of appointment". A power of appointment is a right that is granted to another person to direct the disposition of property.

For example, if I give you a power of appointment over my property, then I'm giving you the right to decide who will receive my property and how they are going to receive it. Often a beneficiary of a trust may have a power of appointment over the trust assets, which is effective at the time of the beneficiary's death (provided that the proper formalities are followed). In essense, this allows you to give whatever remains in the trust to others, subject to the restrictions contained in the trust document.

Common Formalities

A few typical formalities come up with respect exercising powers of appointment (or an exercise of another power):

1. The trust might require a person to exercise the power in his or her Will or a codicil to his or her Will.
2. The trust may require the document in which a person exercises his or her power to be notarized.
3. The trust might require the document in which a person exercises his or her power to be given to the trustee before his or her death.

This issue does not crop up all the time, but it's important to be aware of proper formalities if you are someone with such a power so that you can effectively exercise it.

Irrevocable trusts are trusts that cannot be revoked or amended (with a few exceptions depending on the state that you live in). There are different varieties of irrevocable trusts and they may be used for a variety of reasons, including tax savings, protection from creditors, and charitable giving. Usually, irrevocable trusts will be used by individuals or families who either have or expect to have a taxable estate for estate tax purposes.

Gift Tax

A transfer of property to an irrevocable trust with nothing in return is generally treated as a completed gift for gift tax purposes (it may be a whole or partial gift, depending on the circumstances). The transfer may not qualify for the "gift tax annual exclusion" ($15,000 in the year 2018) because usually a future, rather than a present, interest in the trust property is created (i.e., the beneficiaries don't get immediate access to the property). 

Income Tax

The irrevocable trust will generally have its own annual income tax returns depending on the items of income, deductions, gain or losses on sale of assets, and credits that it has. In some cases, special provisions will be included in the irrevocable trust to treat it as a "grantor trust," which cause these items to show up directly on the trust creator's income tax returns. There are strategic decisions that may cause one form to be better than the other.

Estate Tax

In most cases, unless the creator of the irrevocable trust retains some interest or power over the irrevocable trust he or she creates, the assets of the irrevocable trust will not be included in the trust creator's "gross estate" for estate tax purposes. In other words, the assets of the irrevocable trust won't be added into the value of the assets that he or she owns at the time of death.

For those with a particularly high net worth, it is worth considering how irrevocable trust planning can be incorporated into the estate plan, as it may bring considerable tax savings to you and your family.

Even if you already have an estate plan, it's still important to review it periodically to ensure that your wishes are accurately reflected. By reviewing your estate plan every 1-3 years, you can make sure that you and your family's needs are appropriately met. 

Updating Your Estate Planning Documents

If some time has passed since you created your estate plan, you may want to consider reviewing it (either with or without an estate planning lawyer) to see if there's anything you want to update.

If circumstances have changed since you initially created your estate plan, then you may need to hire an estate planning lawyer to help you make updates. Here are some common situations that prompt people to update their estate planning documents:

1. The death or birth of family members.
2. A substantial increase or decrease in wealth.
3. Changes in the law.

Partial Amendment or Restatement? 

If the changes to your Revocable Living Trust or Will are minor, you may only need a partial amendment or codicil, respectively.

However, if the changes are substantial, it's often best for the lawyer to "restate" or re-write the entirety of your trust or Will. This is often because your existing trust may contain provisions that depend on one another and making too many changes may detrimentally affect how your trust operates.

Indeed, with the rise of word processing and document assembly programs, restating documents can often be much cheaper than trying to hobble together changes to an existing document.

In simple situations, estate planning documents rarely need a complete overhaul. However, it's still a good idea to review your estate planning documents periodically, and at the very least, when there are major events such as the birth or death of a family member. In fact, you might consider setting a date every year where you review your financial situation, as well as your estate planning documents to ensure that both are performing properly.

Be Prepared

Kudos to you if you've already established an estate plan. You're among the small minority of responsible adults! You (and more importantly, your family) are likely in a much better position than other people you know. Interestingly, after a client finishes signing their estate planning documents, they often sigh and tell me how relieved they are. When I ask how it feels to be done, they reply, "I honestly can't believe I waited so long. I feel a sense of relief about concerns that I didn't even know I had!"

A shorty, but a goody today. The Durable Power of Attorney is a legal document that allows you to name someone (also known as an "attorney-in-fact" or "agent") to make financial decisions for you. The Durable Power of Attorney can even be drafted broad enough to allow the agents to make gifts on your behalf or to transfer assets to your revocable living trust if you have created one. This document is only effective while you're alive. 

Why Do You Need One?

Most people only plan for death, but with advancements in medicine, it's possible to be alive for quite a while but be incapacitated to the point where you're unable to make decisions regarding your assets. Having a Durable Power of Attorney can help you avoid a court-supervised conservatorship and may allow your loved ones to act more quickly in the event that something happens to you and important decisions need to be made regarding your financial affairs.

Overlap With Trustees?

You may be thinking that the agent under a durable power of attorney would seem to have a conflict of interest with the Trustee of your Trust, but that is generally not the case. First, the agent under your Durable Power of Attorney is often the same individual that you've chosen to be your successor Trustee. Second, your Trustee deals with assets contained within your revocable living trust, whereas the agent under your Durable Power of Attorney principally deals with assets that are outside of your trust.

The Durable Power of Attorney is frequently a standard document that is incorporated into an estate plan, so don't be surprised if your estate planning lawyer includes one for you as well. Even if the cost of estate planning is outside of your budget, I encourage everyone to have a Durable Power of Attorney, as it is inexpensive to prepare and can even be found in the California Probate Code (Section 4401).