The Basics of Building an Estate Plan

Estate Planning is coming back on radar screens. Uncertainty over the direction of estate taxes and the probability that the estate tax would be eliminated caused many people to ignore their plans the last few years. They did not want to spend time and money on a plan that might be unnecessary or need major changes in a few years.

With the change of control in Congress, the odds are slim that the estate tax will be eliminated. The issues now are the level of the estate tax exemption and when it will be made permanent. While waiting for those decisions, most people should be busy developing the outlines of new or revised estate plans.

Most people believe that estate planning primarily is tax planning. That is not the case for a good estate plan. Many non-tax issues are vital and need to be resolved before tax issues are considered. If these issues are ignored or slighted, the heirs will be worse off and the goals of the estate owner will thwarted. Estate owners should be reviewing those issues now so they will be ready to complete plans when the tax law is settled.

Define the estate. This issue is less easily resolved than many people realize. The estate planning process begins with a list of assets and liabilities and their values. Assets include many things that often are overlooked. Life insurance is included in the estate if the insured has incidents of ownership. Annuities are included if payments will continue to a beneficiary. Trusts of which the estate owner is a beneficiary might be included, depending on the trust terms. Jointly-owned property, living trusts, partnership interests, and retirement accounts are among the assets often included in the taxable estate.

The then must be valued. With publicly-traded property, valuation is easy. But with real estate, collectibles, business interests, and many household items it can take some time to determine the value. If an estate plan is a few years old, the values might have changed, perhaps enough to require a change in the plan.

Identifying assets and their values also helps with administration of the estate. If the administrator has a list of the assets and their estimated values, the process will be much faster and less expensive. If the administrator has to locate the items and have them appraised, time and money will be lost.

After you have identified assets and their values, update the list as least annually. Be sure you administrator knows where the list is as well as where your files and records concerning the assets are located.

Choose the players. There is work involved in administering every estate, even a small estate. The assets must be identified, located, and listed, as must the debts. Documents must be filed with the probate court, and debts must be paid. Then, assets are sold or distributed to heirs as directed by the will. If one or more trusts are created by the estate, there must be a trustee and assets must be transferred to the trust.

Too many times appointing the people to perform these tasks is an after-thought. Many people automatically select either the estate planning lawyer or the oldest adult child as the executor. In most states a lawyer-executor receives a percentage of the estate for serving as executor. Choosing a non-lawyer as the executor can reduce costs. A friend or family member often will serve for free and hire a lawyer on an hourly basis to do work that requires expertise. If you choose a non-lawyer select a responsible family member or friend who will waive a fee, perform the duties responsibly, and is able to work with the attorney and any other experts required by your estate. The selection of a trustee is even more important, since that is a long-term position. We have discussed different criteria and methods for choosing trustees in past visits, and those articles are in the Archive on the web site.

Who is included? In many estates this is an easy decision, but for many others it is not. Sometimes there are reasons to consider excluding a child from the estate. Some estate owners want to include grandchildren, some do not. Or non-family members and charities might be included, especially in larger estates. There are many blended families today, and decisions must be made over whether to include stepchildren and grandchildren in the will. Ideally, this is determined before marrying a spouse with children from a prior marriage but it doesn’t always happen that way.

Before excluding a child from the estate, a couple of other options should be considered.

One option is to leave property through a trust. The trustee controls how much property is distributed and when it is distributed. You also can establish distribution formulas. Another option is to leave the child something, but less than an equal share with the other children. In addition, include a provision in the will that says anyone who challenges the estate and loses will not inherit anything. This approach is most likely to work if the person is left enough wealth that he won’t want to risk losing it.

If you do include beneficiaries other than your natural children, or exclude a child, it is important to discuss this with each of the children. Family dissension and hard feelings are less likely if people are not surprised when the outline of the will is revealed.

What are the shares? The estate owner needs to consider all the beneficiaries and his goals. Then, decide if unequal shares to the main beneficiaries are consistent with the goals. Last month we discussed pros and cons of leaving unequal shares. There is no right or wrong answer to this issue. What is important is that the estate owner let the beneficiaries know ahead of time if the shares will be unequal.

Lifetime gifts. Most discussions of gifts focus on the estate tax implications of lifetime gifts. In general, taxes can be reduced if at least some property is given during life. Some people stopped or reduced lifetime gifts in recent years because of the prospect that there will be no taxes on their estates under current or proposed law.

But the non-tax aspects of lifetime giving also are important. Another topic we discussed in last month’s visit concerned people who give either too much or too little during their lifetimes. Study the factors we reviewed last month (available on the web site Archive) and decide the extent to which lifetime giving is appropriate for you. If you have decided there are good non-tax reasons to make lifetime gifts, discuss with your estate planner the best way to make those gifts.

Remember that lifetime gifts can be given outright or through a trust. You also can give non-cash gifts. In past visits we also have discussed unconventional gifts, such as paying for family vacations, referring business clients, or paying for financial planning. Don’t forget, of course, to retain enough wealth to ensure your standard of living.

How much control? Many people want to benefit their loved ones, either now or through their estates. But they either want to retain some control or are concerned about how the wealth might be used (or abused). We considered this last month and in past visits. In the web site Archive you can find several articles on different ways to exert control after relinquishing property and also on the pros and cons of using such control.

Some heirs need financial help but should not be given outright control of the wealth. But some estate owners try to exert too much control or give the wrong incentives.

What about special assets? In some estates, the major special asset is the family home or vacation home. These are assets in which most family members have some emotional investment as well as a financial interest. In many families there also are personal mementoes and household furnishings that might have non-monetary value either to you or to members of your family.

You should review your assets and talk to family members to determine which assets have special status. There are many ways to consider handling such special assets. The methods vary, depending on the type of asset. On the web site Archive you will find ideas for dealing with family homes and vacation homes, personal items, and items in your home. Find the ideas that work best for your items. Surprisingly, personal assets that have fairly low monetary value cause some of the worst disputes among heirs, so take care how you distribute them in your estate plan.

Other types of special assets are those that are precious to you and require special care or knowledge, such as antiques, collections, and businesses. These assets require special care to maintain their value and need to be sold by a knowledgeable person to realize their value. It is best to identify who will be the next owner of such assets or who will sell them early in the estate planning process. Some people find a friend or family member who will value and take care of the asset and who is deserving of it. Others learn that it is best to find a buyer during life or a charity that will receive it through the will. An alternative is to leave detailed instructions for the executor on how to maintain the asset, how much it might be worth, and how to find a seller at fair value.

When to start. Estate plans are among the biggest victims of procrastination. People find many reasons not to finish plans. The prospect of tax law changes has put many plans on hold. Some of the issues listed here can be difficult ones, and tax law options are full of trade offs that are not easy to assess.

Do not let imperfections and uncertainty leave you with no estate plan or an outdated plan. Most parts of an estate plan can be changed. The only permanent steps are gifts you make today and the lost opportunity of gifts you do not make. The rest of a plan can be changed. If one or more issues are tough to resolve, don’t let that cause leave you with no plan. Execute the will or other documents with the best plan you can develop today. Revisit the other issues periodically with your estate planner and perhaps with family members. If a better solution appears, have the will and other documents re-drafted. It is not unusual for an estate plan to be developed in stages or to change over time.