Top Ten “Non-Tax” Estate Planning Recommendations

| Stuart B. Dorsett

Despite the uncertainty about the future of the gift and estate tax laws, meaningful estate planning goals can be achieved by paying careful attention to various "non-tax" considerations.

Even if Congress acts to stave off the impeding "Fiscal Cliff," uncertainty about the future of the gift and estate tax laws will continue.  Despite this uncertainty, meaningful estate planning goals can be achieved.  Estate planning is only partly, and only sometimes, about tax.  Whatever the ultimate exemption level, optimizing an estate plan requires careful attention to the following "non‑tax" considerations:

  1. Plan For The Possibility Of Estate Tax: The first "non-tax" recommendation is not to ignore the tax laws completely.  Given the recent fluctuations in the estate tax exemption, it is wise to provide a surviving spouse with the power to insulate assets from future estate taxation by allocating some of the deceased spouse's assets to a separate trust covered by the deceased spouse's exemption amount.  Planning might also involve purchasing a life insurance policy to ensure that liquid assets are available to offset an estate tax liability.

  2. Reassess Existing Life Insurance Policies: While most people follow the performance of their stocks, bonds, and mutual funds assiduously, they frequently ignore the economic performance of their life insurance policies.  A life insurance policy with cash value is an investment and should be reviewed periodically to ensure that the policy will remain in effect through the insured's death and that it is performing competitively with the currently available insurance products.

  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 an adult beneficiary, but outright ownership exposes those assets to any third-party claims against that beneficiary such as lawsuits, bankruptcy, and equitable distribution.  This exposure can be avoided by leaving the assets in trust for the benefit of the intended person, rather than distributing them outright.  Such a trust may be designed so that the trust beneficiary, in addition to enjoying access to the trust assets, also has managerial control over the trust assets and the ability to designate the ultimate recipients of the assets.  Such a design allows the beneficiary to retain all of the "good" aspects of ownership without any of the "bad."

  4. Plan For The Disposition Of Family Businesses: Sometimes the key component of a family's wealth is a family business.  A business owner's estate plan must 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.  A modest amount of planning can dramatically increase the chances of the business's survival. 

  5. Clearly Identify Estate Beneficiaries: The inadequate or incorrect identification of a beneficiary will complicate estate administration 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."  Consider, for example, the confusion that may result from adoption.  Under North Carolina law, an adopted child is treated the same as a natural-born child, a typically agreeable result, but if the adoption occurs in unusual circumstances (such as one adult adopting another adult), the result may run counter to a decedent's intent.  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.

  6. Fund And Periodically Review Revocable Trusts During Lifetime: Frequently, individuals will use a Revocable Trust in lieu of a Will to dispose of their assets upon their death, both to avoid probate and to preserve the confidentiality of their estate plan.  A Revocable Trust accomplishes probate avoidance only if assets are titled in the name of the Revocable Trust before the decedent's death, so 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: Beneficiary designations, not wills or trusts, control the disposition of these important assets, which are frequently the largest financial components of an individual's estate.  Unfortunately, beneficiary designations often receive scant attention.  One common problem is the naming of young children as beneficiaries.  Without an expense trust or a custodial arrangement for a minor beneficiary's share, those assets will be held by a court-appointed guardian until they are distributed outright to the child at age 18, a result most would choose to avoid.  Properly designed beneficiary designations can avoid this and other problems, and can favorably influence the income taxation of IRAs and retirement plans as well.

  8. Use Durable Powers Of Attorney And Health Care Powers Of Attorney To Plan For Incapacity: Good estate planning not only addresses the disposition of assets at death, but also anticipates the possibility of 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.  These documents should designate one or more alternate agents to account for the possibility that the initial agent may be unable to serve.  In addition, a good Durable Power of Attorney often will authorize the agent to make gifts to family members, if appropriate, for tax or Medicaid planning purposes.

  9. Generally, Avoid Joint Tenancy In Assets Or "Transfer On Death" Accounts: Often, a person will own assets such as bank accounts with a child as joint tenants with right of survivorship as a means of providing the child with the ability to manage the account on the parent's behalf and as a convenient means to direct disposition of those assets at the parent's death.  For similar reasons, people may apply transfer on death designations to their accounts.  Joint tenancy in assets and transfer on death accounts frequently produce results which are at odds with an individual's estate plan, however, and 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 incorporate flexibility into the trust provisions to allow appropriate adjustments to be made.  Provision can be made for the naming of future, as yet unidentified, beneficiaries and for the removal and replacement of an ineffective trustee, for example. 

Summary

As this brief list indicates, those wanting to optimize their legacy for future generations have vitally important non-tax considerations to address in their estate plans.  Paying attention to these non-tax issues increases the odds that an estate plan will be efficient and effective, whatever the estate tax landscape looks like in 2013 and beyond. 

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© 2014 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.