An Overview of Estate Planning | Marek & Lanker LLP

From Alan LankerMarek & Lanker, LLP 810 SW Madison Ave. Corvallis OR 97333 541-754-1411

Our clients expect their estate planning will cause their property to go to whom? they want, the way they want, when they want and that it will minimize the?impact of taxes, professional fees and court costs. They also expect their estate planning will help them keep control of their property while they are alive and well and provide for themselves and their loved ones if they become? disabled.

Traditional estate planning often falls short of some of these goals. In this? issue of The Wealth Counselor, we will examine the traditional estate
planning process, some of its shortfalls, how modern estate planning
overcomes them, and the pros and cons of modern versus traditional estate
planning.

The advisor who understands the advantages and disadvantages of various
modern and traditional estate planning techniques will be able to influence
not just their client, but their client?s family for generations to come,
bringing considerable value to both their client and to the advisory team.

Traditional Estate Planning

Traditional estate planning is focused on the transfer of ownership of assets
at their owner?s death. Its cornerstone is the will. Too often traditional
estate planners treated the creation of an estate plan as a transaction. They
would also often ignore the client?s assets that are not usually subject to
probate and focus only on the assets that, with traditional estate planning,
must go through the probate process before they can pass to the
heirs.?It relied on the durable power of attorney to protect the client
from having an expensive court ordered and administered guardianship in case
of incapacity.

In today?s world, with a proliferation of non-probate assets, a more mobile
society, and increased longevity, traditional estate planning often falls short
of your clients? goals. It does not provide for your client?s disability; it
does not necessarily give what they have to whom they want, the way they
want, and when they want; it will not avoid probate; and it too often ignores
or inadequately deals with non-probate assets.

Non-Probate Assets

?Non-probate? assets are those that pass on death in accordance with some
contract and thus without being involved in the probate process. In the
traditional estate planning days, pretty much the only non-probate asset one
ever saw was life insurance. In modern times, the portion of the typical
estate that is non-probate assets has dramatically increased.

Where once defined benefit retirement plans for the worker and the
worker?s spouse were the norm, today the norm is the defined contribution plan,
which passes by beneficiary designation. Today?s planners must also deal with
right of survivorship property, IRAs, and all sorts of annuities. Moreover,
non-probate assets are typically a much larger portion of today?s client?s
total wealth than they were in the days of traditional estate planning.

The proliferation of the types of no-probate assets, especially accounts with
transfer on death or right of survivorship provisions, have likely led many
of your clients to the false conclusion that they do not need to invest their
time and money in estate planning to avoid probate and meet their estate
planning goals. Nothing could be further from the truth.

Reliance on the most typical non-probate account provision, joint ownership
with right of survival, for example, creates risks for the asset owner that
are seldom considered.

Adding a joint or co-owner exposes the affected asset to the joint or
co-owner?s liabilities, increasing the owner?s risk of being named in a
lawsuit or losing the asset to a creditor of the joint or co-owner. There is
also the risk that the joint or co-owner will not be able to resist the
temptation to take or use the property while its original owner is still
living.

With some assets, especially real estate, all owners must sign to transact
business. If a co-owner (including an owner?s spouse) is unable to do so
because of incapacity, a guardianship may be required to have someone able to
act for the incapacitated owner.

With right of survivorship property, when one owner dies, full ownership
usually does transfer to the surviving owner without probate; but what if
that owner dies without adding a new joint owner, or if both owners die at
the same time? Then the asset must pass through probate before it can go to
the heirs. And because a will does not control most jointly owned assets,
someone in your client?s family could become unintentionally disinherited
when the property transfers automatically on death.

Planning Tip: Joint ownership with right of survivorship is
often relied upon as a probate-avoidance mechanism, but its risks are often
not even considered.

Moreover, avoidance of probate is not guaranteed with non-probate transfers.
If ?my estate? is listed as the beneficiary, or if a valid beneficiary is not
named, the affected non-probate assets will have to go through probate, which
will determine who gets what part of the estate. So, too, if a minor is the
beneficiary, the asset holder will probably insist on there being a court-appointed
and supervised guardian to receive the assets and manage them for the minor.

There is, however, one kind of non-probate asset system that has been
demonstrated to work exceedingly well to meet all of the client?s estate
planning goals. That is the revocable living trust. Property that is held in
a client?s revocable living trust will bypass probate and can be used by the
trustee to care for the incapacitated owner without court involvement or
interference. Other non-probate assets that name the client?s revocable
living trust as the beneficiary will also bypass probate.

Modern Estate Planning

Modern estate planning is not a transaction; it is a process. It involves not
only your client but many generations. It allows your client to care for
their loved ones with resources, love and wisdom. It truly is ?wealth
counseling.? Modern estate planning is not just something done to plan for
death ? it is planning for life, and life involves changes and uncertainties.

Typically the cornerstone of a modern estate plan is a revocable living
trust, because a properly funded revocable living trust can avoid both the
huge expense of guardianship if the client becomes incapacitated and the
expense and delays of probate when the client dies. But a revocable living
trust plan is not a Ronco appliance ? your client can?t just ?set it and
forget it.? Over time your client?s assets change, their family members?
circumstances change, and the law changes. There is truth in the saying,
?There is nothing as certain as change.? Failure to fund a revocable living
trust and keep it properly maintained is an almost sure fire way to get to a
probate court.

The modern estate planning process, therefore, includes education, design,
drafting of the documents, and implementation. Like traditional estate
planning, modern estate planning includes medical directives. Today those
include a health care power of attorney, a living will, and a HIPAA
authorization. For asset management if the client becomes incapacitated,
modern estate planning uses a revocable living trust, backed up by a durable
power of attorney.

Planning Tip: A living will lets physicians know the kind of
life support treatment your client would want in case of a terminal illness
or injury. But its scope is limited, and in some states physicians are under
no legal obligation to follow it. A health care power of attorney is broader;
it lets your client give legal authority to another person in advance to make
any health care decisions for your client?including the use of life
support?should your client become unable to make them.

Revocable Living Trust

A living trust-centered estate plan is more likely to achieve your client?s
goals in today?s world. It plans for your client?s disability, provides for
your client?s loved ones, contains your client?s caring instructions,
addresses your client?s fears, and reflects your client?s love and values. It
can also avoid probate, is valid in every state, and is more private and
confidential than a will. For all these reasons, a living trust-centered plan
has become the plan most preferred by estate planning professionals and
clients alike.

Planning for Disability

Planning for disability with a living trust is superior to relying solely on
a durable power of attorney. Today, many financial institutions and other
third parties will not accept a durable power of attorney unless it is
recently signed and on their own form. But they will, and indeed must, accept
the instructions of a trustee (or successor trustee) named in a revocable
living trust concerning the trust assets. This makes it less likely that a
guardianship/conservatorship will be needed for your client. (Note: A will
has no effect at disability because it can only go into effect after your
client dies.)

Planning Tip: Usually, several successor trustees are named in a
trust, in the order in which the grantor wants them to serve. It is a good
idea for your client to also have a durable power of attorney with the same
successors named, in the same order, for even more ease of acceptance.

Why a Revocable Living Trust Works

The concept is simple. When a revocable living trust is established, the name
on the titles to the client?s assets is changed to the trustee of the trust.
Legally, the individual no longer owns the assets; the trustee of the trust
owns them. Thus, when the individual becomes disabled or dies, there is no
reason for the court to become involved. The trustee (or successor trustee)
already has the legal authority to transact business with the assets. The
trust is made revocable so the client retains the power to change his or her
mind as well as adapt their plan to changes in their assets, their family,
and the law.

Planning Tip: Most people name themselves as trustee of their
revocable living trust so they can keep control of their assets, naming a
successor to step in when they can no longer conduct business due to
incapacity or death. Many include a corporate trustee as co-trustee for
professional asset management.

Avoiding Probate

Probate administration is very state specific; procedures and costs vary
greatly from state to state. Wills do not avoid probate. Assets titled in the
client?s name at death and assets that are directed by a will must go through
the probate process before they can be distributed to the heirs. If a client
dies intestate (without a will), their assets will be distributed according
to the probate laws in that state, which will almost certainly not be
what the client would want. If a client owns out-of-state real property,
probate is usually required in each state in which the client owned real
property at death.

As explained earlier, many assets (survivorship and pay-on-death property,
life insurance, IRAs, defined contribution retirement plans, and annuities)
are designed to pass outside of probate. That can result in an uncoordinated
estate plan. Moreover, many clients?and even attorneys and professionals?fail
to understand the importance of asset titling and beneficiary designations,
and it is not unusual for a non-probate asset to become a probate
asset because of a title or beneficiary designation that is incorrect or out
of date.

Living trusts can avoid the need for probate altogether if the titles of all
assets have been vested in the trustee and all beneficiary designations have
been changed to the trustee of the trust. However, probate avoidance requires
rigorous maintenance of titling and beneficiary designations. All it takes to
require probate is for your client to open a bank or brokerage account in
their individual name instead of as trustee. Also, because living trusts are
valid in all states, the need for multiple probates can be eliminated.

Planning Tip: It is important to avoid any asset or beneficiary
designation not being changed to the trust. If one is forgotten, or the valid
reason for not putting it into the trust to begin with no longer exists,
probate may become necessary. If that happens, the client?s ?pour-over? will,
a standard accompanying document to a living trust, will redirect the asset into
the client?s trust. The asset may have to go through probate first, but it
can then be distributed according to the client?s instructions in the trust.

Planning Tip: It is usually advisable to transfer a client?s
home and all their other valuable assets to their trust to make sure they all
become part of the unified trust-based estate plan.

Privacy and Confidentiality

Once filed for probate, a will becomes a public document. Moreover, many
states have a statutory requirement to file a decedent?s will even if there
is no probate. With rare exceptions, probate files are open to the public,
and private information has become a commodity. Do clients really want the
planning they have put in place for their loved ones and what their loved
ones will inherit to become public information?

Living trusts are not a matter of public record. While some states now do
require some notices, a living trust provides more privacy than any other
estate planning mechanism.

How to Distribute Assets to Heirs

Distributions made outright to your client?s heirs have no protection from
the variety of risks to which personally-held assets are exposed. Once
distributed, the heirs can use those assets however they choose and the
assets can be subject to their creditors? claims. However, bequests that are
kept ?in trust? for the benefit of the heirs enjoy protection from creditors,
predators (including ex-spouses), irresponsible spending (protection from
?self?) and future estate taxes. Assets kept in trust can also provide for individuals
with special needs without affecting their entitlement to valuable government
benefits.

Basic Estate and Gift Tax Rules

Proper estate planning should always consider estate and gift tax rules. The
estate and gift taxes are transfer taxes. They apply to everything your
client owns unless their transfer falls under a tax exclusion. Here are the
rules for federal transfer taxes that, unless changed, will be in effect
until the end of 2012:

*??? Estate transfers and gifts are taxed at a flat 35%.

*??? There is a $13,000 annual exclusion for present interest
gifts to each individual. (Amount is indexed for inflation.)

*??? There is an unlimited marital deduction applicable to
gifts to a U.S. citizen spouse.

*??? There is a $5,120,000 unified exclusion for gifts and
death transfers not covered by annual exclusions or a marital or charitable
deduction. Under current?legislation, it becomes $1 million in 2013.

*??? There is an unlimited charitable deduction.

Of course, any exemptions that are not used in planning are lost when the
client dies or tax laws change. Speaking of change, there is a major change
scheduled for December 31, 2012.

Under current law, on January 1, 2013, the maximum transfer rate will
increase from 35% to 55% and the unified exclusion will be reduced from
$5,120,000 to $1,000,000.

What can we expect between now and 2013? This is definitely a political
issue, and one that the House Democrats have targeted. Possibilities bandied
about include a $5 million unified exclusion and 35% tax rate; $3.5 million
unified exclusion and 45% tax rate; permanent repeal; the end of the unified
exclusion; and a $1 million exclusion with graduated rates up to 55%.

Planning Tip: Some states have their own death/inheritance tax
in addition to the federal transfer taxes. Often they begin at a much lower
level than the current unified exclusions. So, while a client could be exempt
from federal taxes, their estate may have to pay state transfer taxes. Make
sure you know your state?s laws.

Conclusion

Many clients put off estate planning, thinking they have plenty of time to do
it before they die. But the truth is that none of us knows how long we have.
We only have to watch the nightly news to be reminded of that. And, estate
planning should be a process, not a transaction. The advisor who understands
this, as well as the advantages and disadvantages of the various estate
planning mechanisms, will be able to provide an invaluable service to their
clients and their families.

To comply with the U.S. Treasury
regulations, we must inform you that (i) any U.S. federal tax advice
contained in this newsletter was not intended or written to be used, and
cannot be used, by any person for the purpose of avoiding U.S. federal tax
penalties that may be imposed on such person and (ii) each taxpayer should
seek advice from their tax adviser based on the taxpayer?s particular
circumstances.

Source: http://mareklanker.com/2012/03/an-overview-of-estate-planning/

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