- A Will.
- Durable Powers of Attorney for both medical and financial matters. Durable powers allow your named agent(s) to act for you in the event of your death or incapacity.
- A Living Will (optional). The living will allows you to document your preferences about medical treatment at the end of your life.
- A Revocable Trust. The revocable trust, despite popular misconceptions, does not lower taxes of any kind. But a revocable trust does set the stage for reducing estate taxes—at least for married persons—by ensuring a means of using each spouses exemption equivalent. In addition, a revocable trust provides for a smooth transition to your chosen agent(s) for the management and distribution of your assets in the event of your death or incapacity.
- Marital Property Agreement (in some states). A marital property agreement establishes which assets of a married couple will be treated as marital property, not individual property, with respect to both ownership rights and tax liability issues.
- How do you want assets distributed to heirs—that is, who should receive what, under what terms, and when?
- In light of the above, what taxes might your estate be liable for, and are there tax-minimization strategies that would be appropriate and appealing?
- What are your preferences and values with respect to the management of medical and financial affairs in the event of incapacity?
- What particular circumstances will affect this estate plan? For example, if you are not a citizen, then certain provisions of our tax code do not apply. There may also be complicating family issues—e.g., children from a prior marriage, a disabled child, an unresolved family dispute, major charitable intentions, potential creditor problems, or a probable large inheritance to consider—in addition to the need to establish the presence or absence of community property.
- What provisions are necessary to make the estate plan as flexible as is appropriate? Documents are fixed in nature, but life is ever-changing. Excellent estate planning recognizes this fact by including reasonable provisions for changing circumstances—including, for example, the ability of an heir to disclaim or in essence to step away from an inheritance in favor of the next heir in line; the ability of an estate executor to withhold funds from an heir deemed incompetent; or the ability of the executor to decide whether or not to fund—i.e., to fill up—a trust with assets. In contrast, flexibility is deliberately not incorporated into an estate plan when the clients preferences are firm. For example, a surviving spouse may be given the use of assets for his or her lifetime but after the death of the surviving spouse, assets are designated to pass to the clients children with no possibility of redirection to other parties. Or, a childs inheritance might be made contingent on some accomplishment that is highly valued by the parent—e.g, earned income or a college degree.
- Demographic Information: spouses, children, date of residency in the state, date of marriage(s), country of citizenship, whether you have previously made taxable gifts and if you are a beneficiary or a trustee of an existing trust.
- Financial Information: a detailed list of what you own and owe, life insurance policies on your life, business interests, and how each asset is currently titled.
- Personal Circumstances: special issues for the attorney to consider—e.g., potential inheritances, creditor problems, a strong desire to give gifts, potential family disputes, medical concerns, or any uncertainty that you may have about your estate plan.
- Preferences: your wishes for end of life medical care, for how your wealth will be distributed to heirs, and for how much planning you are interested in doing to minimize taxes. After considering this information, the attorney might recommend any of a large number of possible strategies for you to consider.
- Whom would you ask to speak for you if a medical condition prevented you from indicating your own preferences about medical care? Who would be your second choice? What would be your preferences for care if a medical condition placed you in a persistent vegetative state? If you would choose to have life support procedures withheld, do you want family members to be responsible for the decision to remove life support measures? Or would you prefer to specify the conditions under which your medical care providers would remove life support procedures? Do you have preferences about your medical care that you wish to document now?
- Whom would you ask to act for you if you were unable to carry on your financial affairs? Who would be your second choice?
- If you die before your spouse, would you give your spouse full discretion over your assets? Would your spouse need assistance in managing finances? Are you concerned about the consequences of your spouse re-marrying?
- Do you prefer to keep ownership of an inheritance that you might receive, or would inheritances be shared with your spouse?
- How strongly do you feel about minimizing taxes?
- Who will take care of your minor children? Who would be your second choice? Who would take care of your minor childrens inheritance? Who would be your second choice? Do you want your children to have equal shares of your estate? Do you want your childrens funds pooled together or maintained separately?
- At what point would you give heirs full control of an inheritance? Would your heirs need help in managing an inheritance? Are you concerned about protecting inheritances from the spouses or creditors of your heirs? Do your heirs have any liability concerns because of their occupations or hobbies?
- How would you divide your estate between children from a prior marriage and your spouse and/or children from a current marriage?
- Do you wish to designate some portion of your estate for charitable purposes? Are you interested in donating any part of your body for medical purposes?
A Guide to Dealing With an Estate Planning Attorney
by Paula Hogan
I found this out myself several years ago when I called our attorney to request an update of our estate plan documents and further inquired about the possibility of a quick turnaround time. After a polite pause, the attorney laughed and asked: Where are you going, Paula? The answer, of course, was that I was about to accompany my husband on a business trip to Croatia and neither of us felt comfortable leaving our four young children at home while traveling across the ocean to a newly post-communist country.
There are, of course, excellent reasons for consulting with an estate planning attorney other than exotic travel.
Up-to-date estate plan documents maximize the chance that your wishes with respect to both medical and financial affairs will be carried out in the event of your death or disability. Thus, you do not have to be wealthy to benefit from good estate planning. It is sufficient simply to desire that your personal values about both medical and financial matters be honored in the event that death or incapacity prevents you from acting for yourself.
In addition, tax minimization is a further and very important goal of estate planning for persons with taxable estates. As of January 1, 2002, an estate is taxable when it exceeds $1 million.
In general, your estate includes all of your assets, less all debt, plus death benefits from all life insurance policies not held in an irrevocable trust. Thus, for many people, the purchase of life insurance coverage can create a taxable estate.
What They Include
Estate plans typically include:
Who Needs It?
In this light, there are many people, in addition to world travelers, who can benefit from consulting with an estate tax attorney.
Heres a list of some of the more common types of individuals who should consider discussing their personal circumstances with an estate planning attorney:
Parents of minor children regardless of financial status: Absent a will that specifies who will take care of your minor children and their money if they are orphaned, the court will use general legal provisions and its own best guess to appoint responsible parties to care for your children, to disburse wealth to your heirs, and to manage wealth for any heirs below the age of majority. There is no assurance that the courts decisions will match your own preferences.
Parents whose children are growing older: As your children mature, you can allow increasing responsibility to them in the event that they are orphaned. For example, young adult children may not be ready to inherit assets outright, but at some point you might want to encourage their further maturity by arranging that they share responsibility for management of their finances with an adult co-trustee.
Couples in non-marital relationships: Well-drafted estate plan documents can empower your non-spouse partner to act for you in the event of your incapacity and to inherit wealth from you to the extent that you desire.
Parents in second marriages: Inheritance issues in blended families can be complicated. Estate plan documents can set the record straight by ensuring that your assets are divided between your spouse and children from a prior marriage according to your preferences.
Persons concerned with a looming incapacity: A recent difficult medical diagnosis or simply the normal aging process can make one reasonably concerned about arranging for a smooth transition for management of both medical and financial affairs. With adequate legal documents put in place before the incapacity, your family or other named agents can step in to help manage your affairs, without anyone having to trigger a guardianship proceeding through the court system.
Persons with estates that are either taxable now or might be taxable in the near future: In 2002, the highest estate tax rate is 50%, making successful tax planning potentially highly profitable. There are numerous tax planning strategies to minimize estate tax liabilities. The estate tax rate—and also the amount to which it is applied—is scheduled to decrease gradually through 2009, then to disappear for one year in 2010, and then, absent further Congressional action, to snap back to levels set by the 2001 tax law. Political strategists predict that Congress will in fact take some—but as yet unknown—action between now and 2011. The current speculation is that the estate tax will remain in place for at least some estates—e.g., perhaps for estates in excess of some specified amount in the $1 million to $3 million range.
Wealthy persons interested in making tax-efficient gifts to heirs: In addition to estate taxes levied after ones death, the government levies a gift tax on lifetime gifts or transfers to heirs according to a rate schedule that is integrated with the estate tax. These gift taxes come into play whenever a gift to a single heir exceeds the annual exclusion amount, i.e. the IRS-determined amount that each person can give away to individual heirs each year free of gift and estate tax. As of January 2002, the annual exclusion amount is set to $11,000. When a gift exceeds this amount, there is a gift tax return requirement, as well as a potential gift tax liability. In addition, the government also levies a generation-skipping tax on taxable transfers made either before or after death to heirs who are more than one generation away from the donor.
These gift and generation-skipping taxes are currently comparable in amount to estate taxes and so are worthy of tax planning attention. Helping clients to address these special concerns is a key responsibility of the estate tax attorney.
For example, one common planning technique to minimize gift tax liability is to make good use of special provisions in the law—e.g., the provision that states that in addition to the annual exclusion amount, taxpayers can make unlimited gifts for education and medical expenses if the gifts are paid directly to the provider. Such gifts include for example, the payment of a grandchilds tuition by a grandparent if paid directly to the school, and the payment of a parents long-term care insurance premium by an adult child if paid directly to the insurance company. A major part of the estate planning attorneys responsibility is to match knowledge of such provisions in the tax code with a thorough understanding of the clients goals and circumstances.
Wealthy persons with charitable intent: Our tax law supports charitable giving by offering numerous income and estate tax breaks to donors. As a persons wealth grows, the potential planning strategies for tax-efficient charitable giving also increase. Detailed knowledge of these sophisticated gift-giving strategies is a given when working with an experienced estate planning attorney.
Someone who has just moved from one state to another: States levy their own estate taxes, and so a move from one state to another can trigger a need to update estate plan documents. In particular, states differ in whether they are community property states. Wisconsin, for example, is a community property state, but Illinois is not.
In community property states, after the death of the first spouse, there is a difference in tax treatment of assets owned by the couple with respect to capital gains taxation depending on whether the asset is deemed to be community property. Determining which property is community property—and working to recharacterize assets if appropriate—can be an important part of the estate tax planning process.
Persons newly divorced or newly separated: In the context of a dissolving or a dissolved marriage, there is usually at least a change in preferences with respect to how assets are allocated to heirs.
What the Plan Considers
When you consult with an estate planning attorney, the attorney considers five big questions:
First Meeting: Be Prepared
Before you meet with your attorney, you should consider how you feel about some important and highly personal decisions. You will be better prepared to ask questions and to discuss alternatives about these decisions if you consider them before your meeting:
Maintaining Your Plan
There are also a number of steps you can take to make sure you have a more effective relationship with your estate planning attorney, and to ensure that your estate plan is maintained properly.
Be organized: Attorneys need to consider a large amount of information in a short time, and they sell time and attention. Be accurate. Be concise. Dont postpone meeting with your attorney because you think you have an irresolvable issue. No one expects that you have answers for any special issue that may be on your mind, just that you are up front and clear about how you see the issue. In fact, the attorneys role is to present a spectrum of possible planning solutions for you to consider and even to help you develop an interim planning strategy if a permanent solution seems inappropriate. Remember that what to you is a new and difficult problem may be a planning challenge that the attorney has encountered several times before. Let your attorney be a resource to you.
Ask questions: Be sure you understand what the attorney is saying. Estate planning ideas can be elusive, but strive for a laymans working knowledge of the material presented for your consideration. It is also appropriate and expected for you to ask about the attorneys fee for any legal service you are considering.
Authorize your attorney to work with your other advisers: A team effort by your advisers to pool information and to exchange planning insights will often produce a better plan for you. A typical team includes your attorney, accountant, financial planner, and sometimes your life insurance agent. You can either quarterback this team yourself, or, often preferably, ask one of the advisers to coordinate the team on your behalf.
Carefully review draft legal documents and the estate plan summary information provided by your attorney: You are not reviewing for accuracy of legal terminology, but rather to confirm that your agreed-upon preferences are accurately reflected.
Follow directions: Properly handle issues of beneficiary designations and asset titles and decisions as to whether or not to establish and fund a revocable trust, or ask your attorney to take care of these details for you.
Stay in touch: Good attorneys, like good clients, are looking for agreeable, long-term relationships, so keeping in touch is an important issue. In a perfect world, the attorney would have your estate plan in the law firms database cataloged with respect to each important characteristic so that when a new law or planning idea arises, the attorney would automatically call you. In the real world, the attorney works with hundreds of clients each year and, except in unusual cases, does not track each client by type of estate plan and so will probably not call you when a change in law applies to you.
The attorney also has no information about changes in your personal circumstances unless you tell him. Expect to update your estate plan documents whenever there is a change in your life or in tax law—or typically at least once every three years. It is reasonable and expected for you to call the attorney to inquire if a particular circumstance warrants your making an appointment for an estate plan update.
With this information as background, it is more likely that you will establish an agreeable, long-term relationship with an estate planning attorney and that you will maintain an estate plan that accurately reflects your values.
Keeping your estate plan current is one of the best gifts that you can give to your heirs.
Paula H. Hogan, CFP, CFA, is the founder of Hogan Financial Management, a comprehensive fee-only planning firm based in Milwaukee, Wisconsin. She also maintains a Web site at www.hoganfinancial.com.