How to Climb the Estate Planning Ladder – An Estate Planning Checklist

Estate Planning overwhelms many people. Planners use their own language. As estate owner you have to choose from many strategies. The complications lead to procrastination and unfinished plans.

One way to break the procrastination and creates a plan is to use an estate planning ladder. The ladder starts with a basic estate plan. You move up the ladder adding elements to fit your goals and any complications in your estate. In this visit, we climb the estate planning ladder so you can see how a plan is developed.

First rung. The most basic estate plan doesn’t even have to consider most money issues. The plan needs basic documents we discussed in past visits. You need a financial power of attorney, so someone can manage your financial affairs when you are unable to. This person pays bills, keeps your home maintained, ensures your dependents’ needs are met, and if necessary manages your investments. You also should have a medical power of attorney. The holder of this power makes medical decisions when you are unable to.

For either document you can name one or more people as your agents, and you might want different people since the two powers are very different.

You should name guardians for any minor dependents. This usually is done in the will.

Also on this rung are the beneficiary designations for IRAs, 401(k)s, annuities, and life insurance. Your will does not determine who inherits these assets. Only the beneficiary designation forms do. Be sure these are up to date and name at least one individual beneficiary.

Second rung. You need a will that states who inherits your property. You could leave this up to state law, but the results might not be what you want. It is not unusual for a state to give the surviving spouse from one third to two thirds of the estate and the children the rest of the estate, for example. A traditional basic will leaves the surviving spouse the entire estate, with the children inheriting only after that spouse passes away.

The basic will also names the executor of your estate, the guardian of any minor children, and who inherits any special assets (such as collections and mementoes).

Third rung. The probate process passes legal title of property to the heirs. Some states now have a streamlined process, at least for most estates, that minimizes the cost and time of probate. Other states still have traditional probate that takes a lot of time and is expensive. In these states you might want to avoid probate, primarily by placing most of your assets in a revocable living trust.

The trust owns the assets, and you are the initial trustee and beneficiary. Your spouse usually is co-trustee and co-beneficiary. The trust agreement (which you draft with a lawyer’s help) names the successor trustees and beneficiaries, or sets up a selection process.

All assets owned by the trust avoid probate, and the transition to new trustees and beneficiaries is automatic. A trust is flexible but does have its complications. You must transfer legal title of all assets to the trust. That means changing the deeds to real estate, registrations of autos, and names on financial accounts. Other property often is given to the trust simply by attaching a list of such assets to the trust agreement. Many financial institutions won’t accept a successor trustee unless they have a copy of the trust agreement in advance. The living trust requires extra planning and work.

Fourth rung. We reached the levels for those who are concerned about who ultimately receives assets, how they are managed, and perhaps the estate tax burden.

A basic plan at this level leaves a portion of the estate to a credit shelter trust. The trust pays income and perhaps principal to your surviving spouse for life. Then, the trust remainder is paid to your children or other beneficiaries you named. The assets in this trust are sheltered from taxes by the lifetime estate and gift tax exemption, which is $3.5 million for 2009.

The rest of the estate goes directly to your spouse. These assets qualify for the marital deduction, and their value is deducted from the estate, avoiding taxes on them. The combination of the credit shelter trust and marital deduction eliminates taxes on your estate.

Fifth rung. This is similar to the fourth rung, except the spouse’s share is put in a qualified terminable interest property (QTIP) trust instead of left directly to your spouse. This trust pays all income at least annually to your spouse, and principal can be distributed to the spouse for living expenses. After your spouse passes away, the trust remainder goes to the beneficiaries you named, usually your children.

The qtip trust ensures the assets are managed by the trustee and also ensures the remainder ultimately goes to the beneficiaries of your choice. Another advantage of the QTIP is it qualifies for the marital deduction, so its full value is deducted from your estate.

Sixth and higher rungs. The higher rungs of the ladder are for those with special or more complicated situations. These levels are for those with substantial wealth (above the estate tax exemption), small businesses, unique assets such as valuable collections, and loved ones with special needs. At these levels are strategies such as irrevocable trusts, family limited partnerships, charitable trusts, family loans, business recapitalizations and succession plans, asset protection trusts, and a wide array of strategies for different situations. You review the options with an estate planner to determine which best meet your goals.

You don’t need to climb the entire estate planning ladder at once. Many people don’t have estate plans, because they believe they must make all the decisions together. Everyone should climb the first few rungs of the estate planning ladder. Have your powers of attorney, beneficiary designations, and basic will in place. Climb the first few rungs and get your basic plan in place. You can come back to the rest of plan later.