Tax Planning Never Was the Main Reason to Plan Your Estate

July 11, 2014 in Estate Planning

Most people know by now that unless they are members of the elite group of Americans with a net worth of over $5.3 Million ($10.6 Million for married couples), they likely won’t need an estate planner to manage the potential tax on their estates.

So, far fewer people are planning their estates these days.

That’s unfortunate. You see, tax saving never was the primary reason to engage in estate planning. Consider the benefits that flow from estate planning that have nothing to do with taxation:
First, a carefully planned estate can provide legal protection for your loved ones’ inheritances which they could never achieve themselves after your death. In the absence of this planning, there is an unnecessarily increased risk the inheritance you pass could land in the hands of a claimant or a divorcing spouse of a child, or the future stepchildren of a spouse who survives you.

Second, you have the ability through an estate plan to nominate the individuals you want to act for you should you become incapacitated and, if you have minor children, the individuals who will act as their guardian should you die before they reach adulthood.

Third, without an estate plan, your estate likely will require a probate upon your death and could require a conservatorship should you become incapacitated.
The bottom line? Estate planning still makes sense, even though it may not save you a dime in taxes.

The Estate Planning To Do List

October 29, 2012 in Estate Planning

By no means is this list exhaustive, but these items should be on everyone’s estate planning to do list.

Life Insurance

The life insurance most Americans carry is woefully inadequate, especially if they have young children or a dependent spouse. Quite often, the breadwinner in a family carries life insurance with a death benefit equal to only one year’s income. What your family needs is a death benefit that will generate income equal to your annual income, which typically is between ten and twenty times your annual income.

Succession Planning

Too many businesses are lost to unexpected death of the business owner. Succession planning is, no doubt, a challenge. More often than not, the business owner is the heart and soul of a small business. But leaving succession planning unaddressed is not an option. Do you have a child who is active in the business and who could take over? Could your employees take over and buy out your surviving family members? Can the business be sold without tremendous value being lost? Even if there are no “good” options, it’s important to identify the “least bad” option and implement it, as the financial stakes are enormous.

Guardianship Nomination

Couples usually think of where the money will go when they consider the need to execute Wills.  But there’s a more urgent matter addressed in your Will: Who will raise your children? In legal terms, that translates into who will serve as guardian for your children and conservator of their estates? These matters are handled in a Will, and should never be left unaddressed. And they require careful consideration. For example, it may seem sensible to name your 65 year-old parent as guardian of your three-year old child, but doing so means your 80 year old parent could be faced with the task of raising a potentially rebellious teenager.

Structuring Your Children’s Inheritance

Deciding how an estate will be shared among children and others typically is a straightforward decision. Indeed, the intestacy laws of most states usually will vest the estate in those whom the decedent most likely would have named in a Will. But intestacy laws, simple wills and canned living trusts utterly fail to address the critical question of that age at which your children will take control of their inheritance and who will manage the money for them until they reach that age. So, unless you’re comfortable with your eighteen year old child getting a six or seven figure check to spend as he wishes, some planning here is critical.

Asset Protection Planning For Your Children

In today’s litigious society, many people consider their own asset protection planning. Planning to protect your assets from adverse claimants, however, can be complex, costly and often only marginally effective. But protecting your children’s inheritance through basic estate planning is straightforward and cost effective. If your children follow your plan, the likelihood that claimants could reach their inheritance will be remote. And this planning also will protect them from divorcing spouses and estate taxes. This basic planning on your part provides benefits to your children that no amount of planning on their part could achieve.

Estate Planning for Perfectionists and Social Engineers

November 3, 2010 in Estate Planning

The ordinary estate plan does what it is supposed to do. It provides for the distribution of wealth in a tax-efficient manner, taking into account planning for special needs, asset protection and perhaps divorce protection. Some people, however, like to take things a step further. Their attempts to achieve perfection and desired social objectives for their children have given rise to some interesting (and somewhat amusing) provisions in their estate plans. This article provides a few examples of those provisions. My purpose in writing this is not to suggest that you should incorporate such provisions in your own estate plan, but rather to provide food for thought and perhaps a chuckle or two. There is a fine line here between planning on the one hand, and obsessing, on the other. You’ll never achieve the perfect estate plan, but sometimes you can come a little closer to your goal.

“Fairness” Provisions. In most, but not all, estate plans, parents want to treat their children equally. Ordinarily, that simply means dividing their estate into equal shares when both parents have passed away. Some parents, however, question whether that is entirely fair. For example, if they die when Johnny is 23 years old and has completed his college education (funded by mom and dad, of course) and Susie is 18 and a senior in high school, is Susie getting cheated? After all, she will have to pay for her education out of her inheritance, while Johnny has already had his paid for. So what is a fair-minded perfectionist to do? The most common solution to this perceived problem is to hold the entire estate until all children are through college, making distributions only for the college and support expenses of the younger children. When the youngest child graduates, the remaining estate is split into equal shares.

The thinking does not always stop there. For example, what if one daughter’s wedding has been paid for and the other’s has not at the time both parents die? The thinking can even go the other way – that the older child is being treated unfairly. For example, suppose Johnny and Susie each inherit $1 million when Johnny is 35 and Susie is 30. If Susie then invests her inheritance for five years, she will have perhaps $1,500,000 when she turns 35, whereas Johnny only had $1 million. Believe it or not, I have had clients actually take this into account. In simple terms, they reduced Susie’s share so it would grow to equal Johnny’s share by the time she reached age 35. This is an area where the fine line between planning and obsession perhaps has been crossed.

Obviously, you do not want to over-think this issue, but there may be circumstances where equal shares of an estate are not necessarily equivalent treatment of children. But do not obsess here. It is impossible to achieve perfection.

“Anti-Laziness” Provisions. Many people are concerned that the receipt of an inheritance by a child will destroy that child’s ambition. Indeed, charities prey on this fear in people. In some cases, they convince them to leave all or substantially all their wealth to charity in order to avoid destroying their children.

Some parents are not that gullible, but they do fear the effect a large inheritance might have on their children, so they create mechanisms to make sure that their children do not rely on their inheritance as a means of avoiding hard work. My favorite provision in this area is elegant in its simplicity, although perhaps somewhat narrow-minded. My client provided that each child would have an equal share of his trust, but that the distribution paid to each child in any year would be limited to the income that child earned himself or herself. In other words, the more you work, the more you get. Of course, this mechanism may unfairly penalize a child who chooses a lower paying career, such as teaching, but it certainly does discourage laziness. I am not sure I would include such a provision in my own trust, but I do applaud the creativity.

The “Don’t Let My Siblings Cheat My Kids” Provision. This is one of my favorites. Here is the situation: My client wants to make sure his elderly parent is provided for in the event he dies prematurely. But he also wants to make sure his siblings contribute their fair shares to mom’s cause, so that his kids’ ultimate inheritance is not depleted any more than is appropriate. So, he establishes a trust for his mom’s health, support and maintenance after his death. That, by itself, is not the least bit unusual. Included in the trust, however, is a provision which conditions any distributions from the trust on equal contributions being made by his siblings to mom’s cause. So, if bro and sis don’t kick in their fair shares, mom doesn’t eat. Clever, huh?

Conclusion. There are numerous other concerns that I have seen addressed through unusual estate plan provisions – divorce, education of grandchildren, hurt feelings over selection of trustees. Although you may conclude that these concerns are better left unaddressed in your estate plan, they’re worth a passing thought.

This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

Avoiding Probate: Living Trusts Are Not The Only Way To Go

November 3, 2010 in Estate Planning

In the absence of any planning, your assets must be “probated” upon your death. That is, a probate case must be opened with the superior court, the court must thus determine who is entitled to receive your property and must approve the transfer of your assets to those individuals. Although the probate process in Arizona is relatively simple, it is still worthy of avoidance. It typically involves legal fees and will delay the distribution of your estate. Also, if privacy is a concern, a probate necessity makes information about your estate public information.

The most common and comprehensive vehicle for avoiding probate is the revocable living trust. If you transfer your assets to a revocable living trust during your lifetime, it will be the trust, not your estate, that owns the assets upon your death. The trust instrument will contain language, similar to language found in a will, which provides who will be entitled to distributions from the trust upon your death. The trust also will contain language that allows another individual (or perhaps a corporation) to serve as trustee should you become incapacitated. That will allow you to avoid a conservatorship in the event of your incapacity.

If you have a substantial estate, the revocable living trust almost undoubtedly will be the way to go. But what if your estate is not that substantial and you do not want to pay the attorney fees involved in establishing a living trust? There are alternatives.

The most common alternative is the joint titling of assets. For example, you want your house to pass to your son, so you title the house in your name and your son’s, as joint tenants with right of survivorship. Thus, upon your death, the house passes to him outside of the probate process. The same mechanism can be used on bank accounts, brokerage accounts and automobiles.

There is a pitfall associated with joint titling of assets, however. If your tenant (in this case, your son) has problems with creditors, his interest as a joint tenant can be seized. Also, the establishment of a joint tenancy is an irrevocable act. If you have a falling out with your son, you cannot undo the gift you made to him. Finally, if you were to title your residence in joint name, then sell the residence, you could jeopardize one-half of the exclusion from gain for which you otherwise would qualify.

There may be a better alternative. For real property, you may file a beneficiary deed. A beneficiary deed simply states who is entitled to the property upon your death. It is entirely revocable during your lifetime. Similarly, bank accounts and brokerage accounts may contain a transfer-on-death designation. Again, the designation is entirely revocable during your lifetime. It simply states who is entitled to the contents of the account upon your death. These vehicles avoid the risks associated with joint tenancies. Note that you are not required to name only one beneficiary on a beneficiary deed or transfer-on-death designation. For example, you could name all of your children, in equal shares.

In the case of very small estates, there is an exemption from probate for up to $50,000 in assets. That exemption sometimes is sufficient to avoid probate on those assets for which no probate avoidance device is appropriate.

Lastly, pay attention to beneficiary designations on life insurance policies, IRA’s and retirement plans. If you fail to name a beneficiary, your estate will be the beneficiary and a probate will be required. The beneficiary designations on IRA’s and retirement plans should be carefully considered, as there are significant income tax considerations associated with beneficiary designations. When considering beneficiary designations on life insurance policies, consider whether it’s possible the life insurance proceeds will cause your estate to be taxable. If that is the case, consider whether an insurance trust is appropriate.

Probate also may be required if you become incapacitated and a conservator must be appointed to manage your assets. Conservatorships can be expensive and should be avoided if at all possible. Again, the living trust is the most common vehicle for avoiding a conservatorship. There is one alternative, however, if you want to avoid the cost of establishing a living trust. A durable power of attorney, if worded correctly, will allow one or more individuals you name manage your assets in the event of your incapacity. Note that a durable power of attorney may be made effective only in the event of your incapacity or may be made effective upon signing. The advantage of having the power of attorney become effective only upon your incapacity is the avoidance of unintended use of the power by your agent. Ordinarily, however, that is not a concern. The advantage of having a durable power of attorney become effective upon signing is that it allows your agent to act on your behalf without having to prove that you are incapacitated.

To sum up, if a living trust is not appropriate for you, consider your alternatives. Quite often, through a combination of powers of attorney, beneficiary deeds, transfer-on-death designations, beneficiary designations and other measures, probate can be avoided without a living trust. In many cases, you can avoid costs and delay by employing those alternative measures.

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This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

The Practical Side of Estate Planning

November 3, 2010 in Estate Planning

By Robert J. Lord

I like to view estate planning as having two components. One component, and the one to which all estate planners and their clients pay careful attention, is the tax component. Estate planners do a fine job on tasks such as maximizing the benefits of their clients’ unified tax credits and generation skipping tax exemptions, keeping life insurance proceeds out of the estate, and making sure that any amount passing to a so-called “QTIP” trust qualifies for the unlimited marital deduction.

The other estate planning component, which in many estates is far more important than the tax component, is the practical, or non-tax, component. The practical component includes such decisions as when automatic (i.e., mandatory) distributions of trust property are made to beneficiaries of the estate, who to name as trustee of the children’s inheritances, and whether direct bequests should be made to grandchildren. All too often, less attention is paid to this practical side of estate planning than is paid to the tax side of estate planning. Why is this? Probably because the failure to accomplish proper tax planning translates neatly into a hard dollar cost, whereas the failure to address practical considerations carries with it only an intangible cost. But is the emphasis on tax planning appropriate? In most cases, no. While it is obviously important to plan in the most tax efficient fashion, it is equally important (in most cases, more important) to make sure the estate is used in the desired fashion. After all, if Junior squanders his inheritance on fast cars and entertainment instead of using it to pay for college, the wonderful tax planning you implemented won’t mean terribly much.

With that as background, here are a few of the practical issues to consider when structuring your estate plan:

Should Your Spouse Be the Sole Trustee of Your Estate Assets Upon Your Death? Ordinarily, your estate plan will provide that upon your death at least a portion of your estate to be held in trust for the benefit of your spouse, with the remainder passing to your children upon your spouse’s death. In most cases, your spouse will serve as the trustee of that trust. In some cases, however, it may be appropriate to name a co-trustee to serve with your spouse, or not to name your spouse at all. For example, if there are children from prior marriages on both sides, do you want to take the risk that your spouse will use his or her position as trustee to divert the inheritance you intended to go to your children? If your spouse is a spendthrift, an independent trustee may help to ensure that he or she will not go through the trust too rapidly.

Should Your Children From a Prior Marriage Inherit Upon Your Death, or Only Upon Your Spouse’s Death? Most married couples provide in their estate plans for all of their wealth to be held for the benefit of the survivor of them and pass to children only on the death of the survivor. In some cases, that is not appropriate. For example, if you have children from a prior marriage and your second spouse is fifteen years younger than you and lives a long life, the receipt of an inheritance upon your spouse’s death will do little to benefit your children, as they will be in the last years of their lives at that time. In this situation, you should consider whether a portion of the estate should pass directly to your children at the time of your death.

How Should The Estate Be Divided When You and Your Spouse Both are Deceased? Most people treat their children “equally” in their estate plans. Whether that is appropriate raises philosophical questions that only you can answer. For example, if one child has children and the other does not, do you divide the estate into equal shares or do you adjust the shares such that that first child’s inheritance will buy the same lifestyle for that child and his or her children as the second child’s inheritance will buy for a single person? Is it appropriate to have wealth pass directly to your grandchildren, or should the wealth pass entirely to your children on the theory that they are in the best position to determine what is best for your grandchildren? There are no right or wrong answers to these questions.

When and Under What Circumstances Should the Children’s Inheritances Be Paid Out to Them? Many estate plans provide for the distribution of each child’s inheritance to that child in increments at specified ages, such that the child has received his or her entire inheritance by age forty. There are strong, in many cases, compelling, reasons not to structure your estate plan in this manner. If your child’s inheritance is held in trust, it is there when he or she needs it. If the inheritance is distributed to the child, it can be lost to the child’s irresponsibility, a creditor, or a divorcing spouse. Although there are disadvantages to leaving a child’s inheritance in trust indefinitely (ongoing trustee fees for example), in many situations those disadvantages are far outweighed by the advantages.

Who Should Serve as Trustee? Do you want an individual to serve as trustee, or would your beneficiaries be better served if you chose an institutional trustee. Each choice has its advantages and disadvantages. For example, an individual trustee, especially a relative, may be better suited to making decisions regarding distributions to the beneficiaries. An institutional trustee may be more reliable in terms of administrative matters and may be better suited to managing the investments of the trust. An institutional trustee, however, may be rigid in its decision making and typically will charge significantly higher fees than an individual.

What Limits Should Be Placed on the Trustee’s Discretion? Ideally, the person you name to serve as trustee will be one whose honesty is beyond reproach, who is a brilliant investor, and who would do exactly as you would wish in determining whether and when to make distributions to your children. However, we don’t live in a perfect world. Thus, you need to consider whether you want the trust agreement to force the trustee to make decisions consistent with your intent. For example, do you want to limit the amount that can be made available to a child for investment in a business? Do you want to limit the types of investments into which the trustee may enter? Do you want to preclude the trustee from opening a margin account?

Who Should Inherit in The Event of a Common Disaster? Who will inherit if you, your spouse and all your descendants are wiped out? Although the likelihood of this situation arising hopefully is remote, it does happen. You should consider whether there are friends, relatives, or charities who you especially would want to inherit from you in this situation.

Obviously, these are not the only practical issues you will want to consider when creating your estate plan. The important point to remember is not to get lost in the tax planning. It’s important, but there’s more to a good estate plan than tax avoidance.

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This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.