Estate Planning is Not Just About Death and Taxes

by Steve Cassaday, CFP®, CFS

The primary purpose of estate planning is not the avoidance of taxes at death.

Making sure that heirs and executors don’t face unnecessary and expensive administrative burdens when you die is our primary goal when consulting with clients on estate issues. Many investors we meet fail to recognize the importance of this, and their estate plan does not adequately address administrative issues.

Although provisions addressing potential estate tax benefits should be included in any documents drafted, estate taxes are not the reason one does an estate plan. Under the most recent tax law changes, an estate tax will be levied only when the assets of the estate of two spouses are greater than $10 million. According to government statistics, that would be less than one-tenth of 1 percent of estates per year in the next two years.

Regardless of your circumstances, consult with a qualified attorney before making any decisions about your estate plan.

Here are the most common mistakes we see when reviewing estate plans:

Failure to fund trusts. Clients create trust documents but fail to retitle accounts in the name of their trust at banks and brokerages, which may render the trust worthless. Trusts have little or no power unless the affected assets are in the name of the trust. Make sure to retitle —as appropriate and based on your attorney’s guidance —real estate, other property and all accounts at financial institutions to the name of your trust.

Misunderstanding “title by contract” provisions. No matter how good your wills and trusts are, they will be superseded by contractual beneficiary designations. Title by contract means that at the owner’s death the asset passes to a named beneficiary, regardless of what the will or trust says. This feature is extant on retirement plans such as individual retirement accounts, 401(k) plans, annuities, life insurance and Pay on Death (POD) and Transfer on Death (TOD) accounts. Upon the owner’s death, all that is required to disperse the assets is verification of identity of the beneficiary and a death certificate.

The good news is that this strategy is easy to implement and has no costs, no probate, no publicity and no delays (we recommend it regularly as a strategy). The bad news is that if the named beneficiary is your first wife, she gets the asset, which might not please your second or third wives. We see this situation quite frequently. Make sure to review your beneficiary designations with a qualified adviser to ensure they reflect your wishes.

Poor trustee selection. Having relatives as sole trustees —even children or spouses —is often inadvisable for a number of reasons and can be a prescription for disaster. When considering a trustee or co-trustee, we recommend a corporate entity be your first choice. Corporate trustees don’t get sick, don’t die and are not vulnerable to the frailties that could plague a human trustee.

When considering a corporate trustee, banks or brokerage firm subsidiaries may be inadvisable because of their often inflexible, impersonal and bureaucratic nature. They also require custody of your assets in order to act as trustee, which means that all of your holdings need to be sold or transferred in kind to the trustee institution, potentially severing established relationships with other professionals or institutions.

If your relationship with your present adviser is important to you and your spouse or partner, then do not name a traditional corporate trustee. One solution we have found in many instances is an independent trust company. By using an independent trustee, you can provide continuity and predictability to your estate and financial plan. Your financial and investment plans continue seamlessly in the event of death or disability.

Assets need not be transferred away from your current adviser. The provisions of your wills and trusts will be carefully executed by experienced professionals who are objective, impartial and held to the highest industry standards.

Having too many accounts. Consolidation of one’s financial affairs has huge benefits for the estate administration process. Many investors would be better served by having all of their financial affairs in one institution.

As seen in the 4/29/2011 issue of Washington Business Journal


Contact Michelle Tigani

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