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Top Ten “Non-Tax” Estate Planning Recommendations

| Stuart B. Dorsett

Effective January 1, 2011, a new federal law increased the federal gift, estate, and generation-skipping transfer tax to $5,000,000.  The new law also created "portability" with respect to the estate tax exemption, meaning that a decedent spouse became legally entitled to leave any unused exemption to the surviving spouse.  Having thus provided a married couple with a $10,000,000 estate tax exemption, the new provisions are viewed by many as an effective "repeal" of the estate tax for most Americans.  However, the new provisions did not repeal the need for careful estate planning, which requires attention to the following "non-tax" considerations:

1.   Don't Entirely Forget About The Estate Tax: The first "non-tax" consideration is that it may be imprudent to ignore estate tax issues completely.  As currently written, federal law returns the gift and estate tax exemptions to $1,000,000 in 2013, without portability of exemptions.  If a married couple's assets exceed $1,000,000, it would be wise to account for the possibility that the available exemptions might decrease dramatically in the future.  Often, this contingency planning results in the creation of a so-called "disclaimer trust" which allows the surviving spouse to make the decision, at the time of the first spouse's death, to allocate some of the decedent's assets to a separate trust share which will be immune from estate taxation in the surviving spouse's subsequent estate.  Given the dramatic fluctuations in the estate tax exemption over the past decade, it is best to adhere to the Boy Scouts' motto: "Be Prepared."

2.   Reassess Existing Life Insurance Policies: Most people follow the performance of their stocks, bonds, and mutual funds assiduously.  Surprisingly, however, they frequently ignore the economic performance of another important asset – their life insurance policies.  Any life insurance policy that has a cash value component is an investment and needs to be reviewed and evaluated like any other aspect of a financial portfolio to ensure the policy will remain in effect through the insured's death. 

Moreover, the insurance industry is constantly evolving and, as mortality tables change and new products come on line, existing policies need to be reassessed.  The best tools for assessing the performance of a policy are an "in-force" illustration (reflecting the policy's actual performance to date and projecting future performance based on current rates) and an analysis of the policy's "internal rate of return" (showing the effective return on the premium dollars paid, based on an assumed date of death of the insured).  These illustrations and analyses should be reviewed on a regular basis with an insurance advisor.

3.   Incorporate Asset Protection Planning Into Estate Plans:  One of the great "missed opportunities" in estate planning is structuring a child's inheritance in a way that protects the assets from unforeseen circumstances.  Decedents often leave assets outright to a mature, responsible beneficiary, but outright ownership exposes those assets to any third-party claims against that beneficiary, such as lawsuits, bankruptcy, and any claims of the beneficiary's spouse (who might become an embittered "ex-spouse"). 

Exposure of inherited assets to third-party claims can be avoided, however, through the simple expedient of leaving the assets in trust for the benefit of the intended person, rather than distributing them outright to that person. 

Such a trust need not be expensive or complex, and it need not involve a third-party trustee such as a bank.  Rather, the trust may be designed so that the trust beneficiary actually has managerial control over the trust assets (by serving as trustee), access to the trust assets for his or her support and maintenance (as the primary beneficiary of the trust), and the ability to designate the ultimate recipients of the assets (through the primary beneficiary's Will).  In other words, the trust may be designed so that the beneficiary retains all of the "good" aspects of ownership without any of the "bad" aspects of ownership.  

4.   Plan For The Disposition Of Family Businesses: Sometimes the key component of a family's wealth is a family business.  Historically, one of the challenges for such families has been providing sufficient liquidity to pay estate taxes as the business ownership passed from one generation to the next.  With the increased estate tax exemption, many family businesses no longer face this challenge and, without the necessity to engage in legally permissible tax avoidance, many business owners overlook the need for careful business succession planning. 

It is crucial for a business owner's estate plan to address the future ownership, voting control, and management of the family business.  The business owner also needs to provide a framework for the business relationships of the children and grandchildren who will be the future owners by creating dispute resolution mechanisms and providing for buy-sell arrangements.  With a relatively modest amount of planning, the chances of the business's survival dramatically increase.

5.  Clearly Identify Estate Beneficiaries: The inadequate or incorrect identification of a beneficiary will complicate the estate administration process and may give rise to litigation.  Confusion often arises out of the identification of beneficiaries as a group or class, such as "children" or "issue."  Use of such classifications is often unavoidable if the individual making a Will intends to leave property only to persons living at the time of the individual's death and/or to persons not yet born at the time the Will is executed. 

Uncertainty and confusion also can result from two sources:  adoption and post-mortem conception.  Under North Carolina law, an adopted child generally is treated the same as a natural-born child and that result is typically agreeable if the adoption occurs in the usual way, with an adoptive parent adopting an infant or young child.  That result may not be acceptable, however, if the adoption occurs in unusual circumstances (such as one adult adopting another adult).  Accordingly, an individual may wish either to eliminate adopted issue as potential beneficiaries or to restrict adopted beneficiaries to those adopted before a certain age. 

Post-mortem conception is now a possibility due to advances in the medical sciences.  However, including in an estate or trust a child who is genetically the biological child of a predeceased parent not only can create confusion and uncertainty in the estate administration process, but also can delay completion of the estate administration for many years.  While instances of such post-mortem conception are as yet relatively rare, an individual may wish to guard against such occurrences by clearly defining "children" and "issue" as those born within a certain time period.

6.  Fund And Periodically Review Revocable Trusts During Lifetime: Frequently, individuals will use a Revocable Trust in lieu of a Will to direct the disposition of their assets at the time of their death, in order to avoid the time and expense of probate and to preserve confidentiality as to their estate plan and the nature and extent of their assets.  However, a Revocable Trust provides the benefit of probate avoidance only if assets are titled in the name of the Revocable Trust before the decedent's death.  Accordingly, it is important to review the ownership of assets periodically to ensure they are held in the name of the Revocable Trust.

7.  Review Beneficiary Designations For Life Insurance Policies, IRAs, Retirement Plans, And Annuities: Many assets pass by beneficiary designation rather than as part of the decedent's estate.  Common examples of such assets include life insurance policies, IRAs, retirement plans, and annuities.  Frequently, these assets are the largest financial components of an individual's estate, yet the beneficiary designations for these assets often receive scant attention. 

One of the most common problems is the naming of beneficiaries (such as young children) who are limited in their ability to hold and properly utilize wealth.  A minor cannot legally receive property.  Instead, a guardian must be appointed by the court to receive those assets, increasing the time and expense in administering the assets.  Moreover, the guardianship terminates at age 18, thereby providing the child with direct ownership of the assets at an age when he or she may not be fiscally responsible.  In such a case, it is important that the beneficiary designation provide a trust or custodial arrangement for the minor's share. 

A second problem is the failure of such beneficiary designations to contemplate the premature death of a named beneficiary.  For example, if an IRA owner names his three children as beneficiaries, what happens if one of the children predeceases the parent, leaving minor grandchildren?  Do those grandchildren take the share their predeceased parent would have taken, or is the IRA divided between the two surviving children?  The IRA custodian's Master IRA Agreement will provide the answer, but the answer differs from custodian to custodian and few IRA owners (and few financial advisors) know the answer.  It is far better to deal with that issue explicitly in the beneficiary designation. 

Finally, the beneficiary designation may impact the income taxation of IRAs and retirement plans.  Generally speaking, it is advantageous to stretch out the distribution of a retirement asset in order to defer income taxation.  However, only certain types of beneficiaries qualify for such stretch-out treatment, so the owner of the retirement asset needs to ensure that each beneficiary designation provides that opportunity.

8.  Use Durable Powers Of Attorney And Health Care Powers Of Attorney To Plan For Incapacity: Americans are living longer, thereby increasing the statistical likelihood of mental incapacity prior to death.  Good estate planning, therefore, includes not only planning for the disposition of assets at death, but also providing for the possibility of an individual's incapacity prior to death.  Typically, this planning takes the form of a Durable Power of Attorney, which names an agent to handle financial affairs, and a Health Care Power of Attorney, which names an agent to make health care decisions.  It is important that these documents name not only an initial agent, but also one or more alternate agents, in order to account for the possibility that the initial agent may die unexpectedly or become incapacitated.  In addition, a good Durable Power of Attorney often will provide authority for the attorney-in-fact to make gifts of assets to family members if appropriate for tax or Medicaid planning purposes.

9.  Generally, Avoid Joint Tenancy In Assets Or "Transfer On Death" Accounts: Sometimes, a parent will own assets with a child as joint tenants with right of survivorship.  This arrangement often occurs with accounts at banks or other financial institutions and is frequently a means of providing the child with the ability to manage the account on the parent's behalf.  However, such joint ownership can have unintended consequences because, at the parent's death, the child becomes entitled to full ownership of the joint account, which may give that child a greater portion of the parent's overall estate than the parent intended and may be inconsistent with the terms of the parent's Will or Revocable Trust. 

A similar problem can exist with "transfer on death" accounts, where the financial institution is directed by contract to deliver the account to a specific beneficiary at the account holder's death.  Such designations may be inconsistent with the account holder's overall estate plan and may produce unforeseen problems if the beneficiary predeceases the account holder or if the beneficiary is a minor.  Joint tenancy in assets and transfer on death accounts frequently produce results which are at odds with an individual's estate plan and those results can lead to acrimony and litigation.  Typically, it is better to deal with the disposition of these assets through a well-drafted Will or trust. 

10.  Provide For Flexibility In Trust Arrangements: Trusts can be valuable estate planning tools, providing significant tax and asset protection benefits.  However, the longer a trust runs, the greater the chance that unforeseen circumstances will negatively affect the trust's operation.  Therefore, a good estate planner will provide flexibility in the terms of the trust so that appropriate adjustments may be made. 

For example, a trust beneficiary may be given a "power of appointment" so that the current beneficiary may designate future beneficiaries.  The beneficiary or another person may be given the power to remove and replace trustees and to name additional or successor trustees.  The creator of the trust also may want to name a so-called "Trust Protector," who is an independent party with the power to make significant changes in the administrative terms or the distributive provisions of the trust in order to adjust to changing circumstances.  It is a cliché that "change is the only constant," but a smart trust drafter will take that lesson to heart. 


Increases in the gift and estate tax exemptions have provided tax relief to a significant portion of the American public.  Such tax relief has the added benefit of allowing individuals to focus on the non-tax aspects of their estate plans to ensure their assets pass to the right people in the right way.  Paying attention to these non-tax issues increases the odds that an estate plan will be efficient and effective. 

© 2011, Ward and Smith, P.A.

For further information regarding the issues described above, please contact Stuart B. Dorsett.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.