Developing and periodically reviewing a sound estate PLAN is the first, and most essential, step in estate planning. It has been estimated that about fifty (50%) percent of adults do not even have a Will. And how many of the other fifty (50%) percent have not reviewed or updated their older estate documents? Protecting oneself and one’s heirs is the principal objective of estate planning. Do you have the right plan to fully protect you throughout your and your loved one’s lives? Will you outlive your assets? Will your spouse and heirs? Sometimes a simple review of one’s beneficiary designations makes all the difference. The key focuses of estate planning are to determine if assets are titled properly, to consider how you wish your assets to pass at death, to review all beneficiary assets like life insurance policies, to assess how to pay for long-term care at the end-stages of life, and to make sure your standard of living does not decrease over time or after the loss of a spouse.
For example, consider a widow who lived a very comfortable life with her husband who had a child from a prior marriage. She believed she would inherit their expensive home, her husband’s interests in income-producing real estate properties and all other investments that kept her and her husband comfortable when he was alive. Upon assurances from her husband, she believed that any estate taxes due upon his death would be covered by her husband’s life insurance policy. She soon discovered that her husband had not availed himself of estate planning. As a result, when he died she learned that the beneficiary of the life insurance policy was her husband’s former wife, who was not willing to “share” any of the insurance proceeds to pay estate taxes assessed on her ex-husband’s estate. The husband’s simple Will contained a tax clause, one that many generalist lawyers use in their Will drafting, that made the “residual” estate (the probate estate) liable for all estate taxes due. Life insurance proceeds are not part of the probate estate. So the ex-wife received the life insurance proceeds estate tax free, despite an estate tax being due. Estate taxes – due just six months after death to Connecticut and nine months after death to the IRS – had to be paid from the portion of assets the wife inherited through her husband’s Will, thus depleting her ultimate inheritance. She also discovered that two of the commercial real properties could not be sold quickly to pay the estate taxes. One property had a long-term lease subject to an option to buy and the other had extensive environmental waste that she, as the new owner, was responsible to remediate. As the appointed executor, she was fully liable for the estate taxes due. The inheritance that was to continue her accustomed standard of living never materialized. To cover probate costs, legal fees and estate taxes, she sold the marital home and moved to a one bedroom apartment. Her life drastically changed for the worse when her husband died! A simple estate review or plan would have avoided her unfortunate change in life. This is one example of why having the proper plan makes all the difference.
So, how does a good estate planner devise the correct plan for clients? First, he gathers information on all assets, determines how they are titled, and spends the time to fully understand the client’s goals, objectives and concerns. An estate planning intake questionnaire and an informal discussion with clients is the best way to accomplish these tasks.
Second, the estate planner must skillfully devise how best to achieve these objectives in the most cost and tax-efficient way. The questionnaire should ask many questions – not just about assets and title, but also about matters such as citizenship, whether the client is a veteran of war, if the clients’ children are mature enough to manage inherited assets, concerns for divorce, law suits or bankruptcy of children, the public nature of the probate process, the private nature of trusts, dependents with special needs, retirement concerns, cost basis of assets owned, etc. All aspects dealing with asset ownership, management, transfer (during life and upon death) as well as health and financial needs/concerns should be discussed.
Third, an estate planning lawyer determines the total value of all assets to determine the “gross taxable estate” of the clients and whether a state and/or federal estate tax is due. This analysis is one factor that determines whether it is advisable to have trusts as part of the eventual estate plan (or a carefully constructed gifting strategy) and whether insurance proceeds of existing life insurance policies will cover the expected estate tax upon death.
Fourth, the lawyer discusses how best to transfer the assets owned to the intended recipients (beneficiaries). This may simply involve an outright transfer upon death as with a Will or a plan to hold assets for the benefit of someone who may or may not be the intended outright recipient. For instance, assets may be held in a trust for the benefit of a surviving spouse and then passed to other beneficiaries upon the surviving spouse’s death. For couples with taxable estates, this is a typical plan. This plan also fits well for couples with children from prior relationships in order to provide for a surviving spouse without disinheriting children, as an outright transfer via a Will would do. A trust may also hold assets for beneficiaries who do not demonstrate an ability to properly manage assets, such as younger children, or who may be exposed to creditor claims, lawsuits, divorce or bankruptcy. The trustee of the trust will be instructed in what conditions to distribute the income and principal of the trust assets to, or for the benefit of, the beneficiary. A properly drafted trust ensures against a beneficiary pledging trust assets and a beneficiary’s creditors attaching trust assets.
For example, the trust may instruct the trustee to provide for a beneficiary’s health, education and living expenses and then allow the beneficiary to withdraw trust assets at a later age, or to make partial withdrawals at successive ages. For beneficiaries who may be exposed to lawsuits or may have a taxable estate themselves, one could keep assets in a properly drafted spendthrift trust for the benefit of the beneficiary, thus preventing creditors from attaching trust assets and such assets being included in the beneficiary’s taxable estate. One could also create an Incentive Trust that encourages beneficiaries to act in certain ways, such as pursuing further education, in order to receive additional trust funds. The trust could instruct the trustee to distribute portions of trust assets upon the beneficiary’s achieving additional levels of education or other benchmarks.
Fifth, the lawyer discusses potential long-term care needs and how clients will pay for such costs. Although with any illness or accident an adult may require long-term care, the best time in one’s life to purchase long-term care insurance is in one’s early fifties.
To determine average costs and inflation rates of long-term care in Connecticut consult the Connecticut Office of Policy and Management website at http://www.ct.gov/opm/. Average skilled or intermediate care in Connecticut costs about $12,000 a month or $144,000 a year. Without long-term care insurance, a prolonged illness/disease could decimate assets available for a surviving spouse.
If one has a closely-held business or even rental real estate property, an additional review of how the business is titled, income tax aspects, asset protection matters, and business succession plans such as buy-sell agreements, are essential.
Estate planning is not a one-time creation of documents, but the careful, continual review of the overall composition of assets and how they distribute according to your wishes. Through proper estate planning advice and implementation, one may carefully navigate the many tax, family, business, probate, disability, asset protection and litigation issues that affect wealth and family harmony. Ignoring these issues could have drastic consequences. One’s most important ally is an experienced estate planning lawyer who can explain these many complicated issues in a simple, understandable and professional manner. This lawyer should also be able to coordinate his efforts with other professionals such as financial planners, accountants and insurance agents.