Estate planning is a process where the planner works with the client to put together a plan to secure the maximum benefits for the client during his/her lifetime; and enables the assets to be transferred as quickly and easily as possible at death, with the least amount of costs and taxes as possible.
A good estate plan will seek to:
1. Reduce Federal and State taxes, as much as possible;
2. Reduce probate and other transfer delays and costs;
3. Preserve and enhance the assets for the client, during his/her life, and maintain the assets for the benefit of the beneficiaries;
4. Adhere to the objectives of the client so that the assets are held and transferred in the least restrictive manner.
To develop a full and sound plan, the estate planner should take into consideration the client’s family situation; including the spouse, if any, the children and other intended beneficiaries. This, of course, will include a discussion of their ages and their ability to manage assets. Often, especially with minor children, trusts are established since a guardianship would otherwise be required for a minor; and it is difficult to ascertain their abilities to manage assets in the future, when they would attain their majority.
It is also important to fully understand the nature and value of the assets and liabilities of the client. This would require a complete and detailed analysis of the assets, and how they are currently titled. All cash, stocks, bonds, mortgages, real estate, life insurance, annuities and retirement plans should be shown. This will determine, at first blush, whether there are tax issues that need to be addressed. If so, the tax effects need to be considered, and suggestions made as to how to reduce or eliminate the tax liability. The character of the assets must also be addressed to determine if there is sufficient liquidity for the estate and the beneficiaries to provide for their ongoing lifestyle. Also, in the case of assets held in businesses or real estate, if there are any agreements in place for the purchase of these assets, or the continued management. Finally, it is important to see where the assets are located. If they are in another state or jurisdiction, an ancillary administration may be required and this may be avoided with some thoughtful planning. Otherwise, separate probate proceedings may be required in other states, where such real estate assets are held.
An issue of great importance, that is often overlooked, is how the assets are owned, or titled. There are many different ways to own assets i.e. individual name; joint tenancy; tenancy by entireties; ITF; and many more. Despite the best planning that can take place, if the ownership of the assets is not properly aligned with the plan, then there are real deficiencies in the plan. This sometimes occurs when a client has a Will and a Trust, but all of the assets pass to the spouse or some other party by operation of law. If that occurs, all of the planning for the Will and Trust will be negated, since the assets passed outside of the plan.
In many plans, life insurance plays a significant role. If there are not sufficient assets to provide for the family, or if there is not sufficient liquidity to pay the bills after a person’s death, insurance can be the essential ingredient to complete the estate plan. Insurance can also be used to help pay the taxes imposed on the estate or the administrative costs. Proceeds from insurance can even be set up so that they are tax free to the beneficiaries if proper planning is done.
Estate plans can be either simple or very sophisticated and complex, and anywhere in between, depending upon many factors, which have previously been discussed. The types of assets and their values may have a significant impact on the complexity of the plan. Of course, the potential estate tax liability will also directly impact the type of plan to be used, and its complexities.
Every person should have a basic Will, at the very least. Many plans also include Trusts. There are many types of Trusts used in estate planning, including the following:
- Inter Vivos or Revocable Trusts. These are Trusts established and maintained during the lifetime of the Grantor.
- Testamentary Trusts. These Trusts come into existence at the death of the Grantor; even though they may be funded at a later point in time.
- Lifetime Irrevocable Trusts. These Trusts are irrevocable as opposed to the Revocable Trusts, and cannot be amended or changed after being established. These include Trusts for children or grandchildren, when there are gifts to be made; or Life Insurance Trusts. Assets properly transferred to an Irrevocable Trust should not be included in the decedent’s estate at the time of his death.
There are many other planning techniques that may be used in the more complex estates. They include:
- Family Limited Partnerships
- Qualified Principal Residence Trusts (QPRT)
- Grantor Retained Annuity Trusts (GRAT)
- Grantor Retained Income Trusts (GRIT)
- Sales to Defective Trusts
- Charitable Remainder Trusts
- Qualified Terminable Interest Property (QTIP)
- Generation Skipping Trusts