Top 5 Reasons to Plan Your Estate

Let’s face it, we rarely believe that something will happen to us this year..but what if it did? Are you confident in what the outcome will be for the people that you love the most?

There are plenty of reasons to plan your estate now. I have listed five of the top reasons below. Although numbered, they are in no particular order of importance because everyone has different priorities and concerns.

If anything on this list strikes you as a concern, imagine the effect on your loved ones if you fail to take action. This should inspire you to make a firm to commitment to resolve this as soon as possible. Pick a date this year in which you will commit to competing your estate plan, and stick to it!

Okay, here are the top 5 reasons…

1)      Protect your family in the event of your incapacity. Without a properly drafted estate plan, your family will likely have challenges in managing any assets in your name, including your home. A court supervised conservatorship (otherwise referred to as a living probate) in which all of your transactions are recorded and affirmed through a series of court hearings will generally be required.  This public process goes on indefinitely, and requires your family to convince a judge (and in some cases even a jury) that you are unable to manage your own finances.

2)      Make your wishes known regarding distribution of your assets in the event of your death. Without an estate plan, any assets left in your name alone at your death will be left up to state law, and the probate court system, to determine who will receive those assets. 

3)      Avoid the delay and expenses of probate, and keep your affairs private with a living trust. Even if you have a valid will at the time you pass away, a court supervised process called probate will be required to inventory everything that you own and approve its distribution to your beneficiaries (spouse, children etc). The probate process is a public process in which anyone can review your probate file and determine what you have, who is scheduled to receive it, and when. Especially in today’s society, many people prefer to protect their loved ones by keeping their affairs private, which can only be accomplished through a properly drafted (and funded) living trust.

4)      Protect assets and keep them in the family.  Many people are concerned that property left to a child will be inherited by his or her spouse if that child were to die prematurely, or if the couple were to divorce. Leaving property to a child in trust helps ensure that those assets are kept separate and pass according to your wishes (i.e. to grandchildren).  These trusts may also protect asset from creditors if a child is ever involved in a lawsuit (business or personal) or collections effort. 

5)      Protect minor children by designating a guardian. Parents with minor children must ensure that they can decide who will raise their children if they die before those children become adults. Without a proper estate plan, a judge will make that decision under his or her own discretion. 

Succession Planning in Uncertain Times

These are challenging times for analyzing potential estate tax burdens. Last year, individuals could pass $3.5 million in assets upon their death free of federal estate taxes. Now in 2010, there is no federal estate tax whatsoever (maybe). Next year, current law would revert the exemption back to $1 million.

The impact of a $1-million estate tax exemption is significant. Many more Americans will potentially be faced with a maximum estate tax rate of 55%. Whether the law will change at this point is uncertain. A bill was recently introduced that would increase the exemption to $3.5 million retroactively back to Jan. 1. Unfortunately, the reality is that we simply do not know what will happen.

Whether a new estate tax law is enacted, or we revert to a $1 million exemption, the best approach is to put a sound, well thought-out estate plan in place now. This article outlines various tools available to reduce or even eliminate the estate tax burden, regardless of the exemption amount.

1. Properly drafted living trusts

Living Trusts have become an increasingly popular technique for avoiding lengthy, expensive and public court processes such as probates and conservatorships in the event of a person’s death or mental incapacity. Probate avoidance alone can mean large savings in the cost of estate administration.

Beyond saving estate administration costs and maintaining privacy, a properly drafted Living Trust can also mean substantial estate tax savings. For example, suppose Husband and Wife, with a taxable estate of $2 million, have a simple Living Trust that directs the transfer of all of their property to the other upon the first spouse’s death, and equally to their children thereafter. Assume Husband dies first, leaving everything to Wife. On Husband’s death, no estate tax will be owed because of the unlimited marital deduction, which defers estate taxes until a surviving spouse’s death. When Wife dies, however, she will only be able to pass the exemption amount in the year of her death before triggering an estate tax. Therefore, assuming an exemption of only $1 million when Wife dies, the children would receive approximately 50 cents on the dollar for all assets in excess of $1 million.

A better plan for Husband and Wife would have provided that an amount up to the exemption would be left in a tax-sheltered trust, frequently referred to as a “bypass trust,” for Wife’s benefit. Wife could then use the bypass trust to support herself during her lifetime, with the bypass trust going to the children free of estate taxes upon Wife’s death.

2. Planned gifting beyond the living trust

For wealthier individuals, basic Living Trust-based tax planning is not enough. In those situations, consider reducing the size of the estate through techniques such as those discussed below.

A. Irrevocable Life Insurance Trust

Suppose Husband and Wife were unable to totally avoid estate taxes despite the use of a bypass trust. In those cases, serious consideration should be given to preparing a specially designed trust commonly known as an Irrevocable Life Insurance Trust, or “ILIT.” If an ILIT is used to purchase life insurance, death benefits are kept out of the estates of both Husband and Wife (and therefore not subject to estate tax). The difference between having Husband or Wife own the policy, as opposed to having it owned by an ILIT, is staggering. For example, a $1 million life insurance policy kept out of the parents’ estates can prevent the children from having to pay roughly $500,000 of those proceeds for estate taxes. That means the full $1 million can pass to the children income and estate tax free.

B. Family Limited Partnerships (FLP’s) and Family Limited Liability Companies (FLLC’s)

Think of these entities just as you would any business, except they are owned by members of the same family. Parents initially contribute certain assets into a partnership or LLC in a manner that allows them to retain full control over those assets (just as any general partner or managing member would). The power for estate tax reduction comes from giving interests in these entities to the next generation during the parents’ lifetime. Since the gifts typically involve minority interests, the gift tax value can be discounted to reflect lack of marketability and control.
In many cases, these types of gifts have been discounted 40% or more. A 40% discount on a family entity could potentially provide for a gift-tax-free transfer of over $1.3 million more than could be achieved without the use of such an entity. Further, all income and appreciation flowing from the gifted property escapes both income and estate taxation at the parents’ generation. It may be important to act quickly with this type of gifting strategy, as there is a significant threat of legislation greatly reducing or even eliminating these discounts.

C. Charitable Giving

Where one has true donative intent, charitable contributions through gifts made outright or in trust may reduce the taxable estate. Private foundations are also becoming a popular tool for charitable giving. These arrangements are beyond the scope of this article, but merit consideration for the charitably inclined.

Conclusion

Planning for the worst in these uncertain times is critical. Regardless of estate size, proper planning will reduce both time and expense in estate administration, and leave loved ones with the clarity they deserve.

What is Estate Planning?

Let me start by describing what estate planning is not. I was having lunch with a financial advisor last week, who shared with me a great story about an event that occurred during his career in the military. Before troops were being deployed into hostile territory, they were summarily interviewed by a base attorney who filled in Will documents for them. The substance of the discussion was getting a response to the question, “How do you want to leave your stuff?”

Although that story certiainly (and bluntly) illustrates one element of one of the issues addressed in developing an estate plan, proper estate planning accomplishes so much more than just that.

Essentially, proper estate planning is taking responsibility for your finances, your person, and the well being of your loved ones at three critical times:

(1) Now, During Your Lifetime:

• What do you own? All that “stuff” (along with everything that you acquire in the future) is “your estate.” However you perceive the size and nature of your estate is irrelevant to whether or not planning should be done. It is simply a factor to help determine what type of plan will best suit your present situation and future goals.

• Is your estate exposed to unnecessary financial liability by the way that you hold title to real estate and other important assets?

• Who is on your team? Do you have an attorney you can trust to guide you through these important matters? How about complimentary professionals like insurance, financial and tax advisors? Bottom line, are you receiving the service that you need and deserve?

(2) If You Become Physically or Mentally Disabled:

• Who will manage your finances (i.e. pay expenses, endorse a check, withdraw funds, reallocate investments, sell property, etc) if you cannot do it yourself? Someone else must have legal authority to do it on your behalf.

• Who will make medical decisions for you if you can’t communicate? Will they have legal authority to do that? Will medical information privacy laws like HIPPA put them in a “catch 22” by preventing them from accessing medical information they might need?

• Who will take care of minor children if you (or a spouse) cannot? Again, someone else must have legal authority to act as a guardian. You have two choices here: You can name someone that you want, or you can leave it for a court to determine. Who knows your children and the people closest to you the best .... you, or a judge you have never met?

(3) When You Pass Away:

• What will happen to your property if you do no planning?

• What if you write a Will? Does that cover all of your assets? Hint: It probably controls very few of them.

• Do you want a court to have to approve the transfer your assets, or would you prefer to keep matters private?

• Who will be given the authority to care for minor children?

• How should you leave property to your children and other loved ones?

As you can see, estate planning involves very real and delicate issues that affect everything that you have, and everyone you love most. This planning is not automatic. You must choose to take control. If you are working with the right people, it’s a process that will empower you.

Where Do I Start?

You start by simply making a decision to complete your estate plan. Give yourself a firm deadline that you believe you will stick to. Make sure the deadline is early enough to cause you to stretch, as doing so creates urgency that will propel you through your planning. Once you have made that commitment, follow the 2 steps below to get started on the right foot with your initial appointment:

• Decide which estate planning attorney you'd like to work with. You should meet and feel a sense of trust and rapport with your attorney before you ever get "on the clock." In fact, you should be able to get a flat-fee quote during your initial meeting (i.e. there is no "clock"). Fees quoted may or may not be indicative of the attorney's ability or quality of service (you have to trust your gut and / or your referring source's endorsements). In any case, you'll want to hold the initial meeting with your attorney at least four weeks before your deadline. Beware: Not all attorneys will have your documents prepared for signature in a prompt manner. Some attorneys and firms get must very busy in order to meet revenue demands and can have a tendency to let files "sit in the office" for literally months before something is actually done with them (long after the details of the plan have faded in memory or been passed on to an associate to piece together). With our process,you documents are guaranteed to be prepared within four weeks, and its usually more like two or three. The details of your plan are arranged in our system within 48 hours of meeting with you, when details are fresh.

• Show up to your meeting having prepared in advance. Request a questionnaire from your attorney early on, and set yourself up to have it filled out and submitted to the law office three days before the meeting. You don't need to provide account numbers if you aren't comfortable doing so. Just the name of the financial institution, who's name it's in, and the approximate balance will suffice. You don't need to provide a copy of the deed to your home, but you should bring in a property tax statement so we can identify the property for you legally.

Once you have accomplished the above, you will be well positioned for an effective attorney-client meeting where you can actually design and understand your estate plan.

Estate Planning Should be an Easy Process

Today has been a good example of why I like what I do:

• I had a meeting with Jesse Lichaa this morning, a Fresno realtor I've come to know and respect this year. In the meeting, when he asked me an open ended question about my business, I responded (pretty much instinctively) that I have a passion for making estate planning easy for people.

• My afternoon primarily involved preparing for and attending a meeting with a new client. At the end of the meeting, one of the spouses said "thank you for making this process easy and enjoyable."

Estate planning is not a complex animal when broken down into its core components. It truly is rewarding to see people engage in the process and feel so much peace of mind as a result.

LegalZoom, Etc. Can You Do It Yourself?

The short answer is, yes. There are numerous products and online services available to create your estate plan in a do-it-yourself type of fashion. In most, if not all cases, you can create documents that will be legally binding. That is actually where the concern comes in. I've experimented with many of the big name document generation programs available including LegalZoom, Nolo, Rapidocs, US Legal Forms, Suze Orman, and Living Trusts on the Web. In my opinion as an estate planning attorney, the processes in these programs (and consequently, the documents they produce) all contain one or more of the following challenges:

• No legal advice
• The questions posed in the interviews can be ambiguous and confusing
• There are few options provided
• The wheels can fall off the wagon on the issues of contingent beneficiaries (if the person you named passes away before you) and trustee selection
• The issue of afterborn or adopted children is ignored in the interview process
• Poor incapacity planning (although that was less of an issue than I'd expected)
  
  

As a result of the challenges noted above, I do not recommend using any do-it-yourself program currently available as the only source of counsel you receive when creating your estate plan. They can, however, create a good starting point to build upon when you meet with your attorney, which might save you money. In all cases, they are good learning tools, and all of the programs noted above have their individual strengths and weaknesses. If I had to pick a winner, I would definitely say that Living Trusts on the Web produces the best state specific documents available. The options on the program are also more robust than the other candidates. That process, however, should not be completed without an attorney consultation and review. Technology has not made it far enough to replace the need for advice, which is what all these programs specifically disclaim.