Nuts & Bolts of Estate Planning – The Basics

Most discussions of estate planning, including in this newsletter, focus on discrete topics and strategies. Once in a while, especially early in the year, it is good idea to step back and look at the broader picture. There are concepts and strategies common to every estate plan and estate owner. Use these concepts and strategies whether you are drafting a new estate plan or reviewing an existing plan.

Change and flexibility. This wasn’t always a key principle, but now the estate tax law is uncertain. The current law expires after 2010 and will revert to the 2001 law if Congress does nothing. So far, Congress has been unable to agree on a plan of action. The result is that most estate owners do not want to be locked into an irrevocable long-term plan. Why give away assets or put them in an irrevocable trust if the estate tax might be repealed?

In past visits we have discussed ways to keep a plan flexible. For example, instead of naming a specific amount to be left to a credit shelter trust, a will should use a formula or a range of values so the amount will change based upon the law in effect at the time. Some estate planners recommend revising the will every time the law changes. Until Congress enacts a permanent estate tax law, most estate owners will want a plan that keeps taxes low in the worst of current plausible scenarios but can be changed when the law changes.

Organize and simplify.

Most people complain that the estate planning process takes too long and is too expensive. The estate owner can reduce these problems. The more assets a person has and the more complicated the estate is, the greater the complexity of the plan. The plan takes more time and costs more money.

The first step an estate owner can take is to prepare an organized list of the assets and liabilities in the estate. Most estate planners can help with this by providing a questionnaire or workbook as a guide. The more work you do, the less work the estate planner does.

The second step is to consider simplifying the estate. Review every asset to see if it still has a role in your estate. It might make sense to dispose of assets that complicate the plan and do not have a strategic purpose. Also, some estates have a lot of low value assets. Consider selling these, especially if they are difficult to value or sell.

Continue the organization and simplification process after the estate plan is in place. This makes periodic reviews of the plan easier. It also makes things easier on your executor and heirs. Maintain a list of your assets and liabilities. Keep the list updated. Be sure your executor and key heirs know about the list and where it is kept. This simple step saves heirs a great deal of time, aggravation, and money.

A final step is to decide how any complicated or unique assets should be handled by your estate or heirs. Many people have collections, personal mementos, and similar items. Heirs often don’t have as much interest in such items as the owner and might have no idea of their true value and how to handle or sell them. If you want to retain the items for life, be clear about what happens to them later. It is best to make a specific plan. Find out who would really like the items, even if it is someone outside the family. Either determine a value or leave instructions to the executor about how a fair value should be determined.

Make the key decisions.

Too often, estate owners say, Leave it to the kids and let them decide. Non-decisions often lead to family strife, wasted assets, and a general estate planning disaster. Estate lawyers always are amazed at the things adult children and other heirs fight over. Long suppressed issues and conflicts come to the surface. Seemingly meaningless items can have great symbolic value to someone, or at least the person claims so.

Personal property and iconic items such as the family residence or vacation home are the most likely to cause such problems. We have discussed many ways to handle these items, and those discussions are on the Archive of the web site. Estate owners need to decide these issues rather than pass them on to the next generation.

A family business or significant real estate holdings also require a detailed plan. With a business the owner should decide who will run it, who will have voting rights, and who will receive income. Keep in mind that voting rights and the right to receive income and distributions can be separated. Failure to decide these and other issues in advance almost guarantees that the business or the family or both won’t survive many years.

Be on conflict alert.

As I said, it is amazing what causes conflicts among heirs. The estate owner should know his heirs well enough to know which property and issues might trigger disputes. Develop a plan that will reduce or eliminate those conflicts. Also consider providing an alternative disposition for property that causes disputes. Some wills, for example, provide that if the heirs cannot come up with a satisfactory way of dividing personal property, then all the property will be sold and the cash proceeds distributed equally.

Your estate planning does not have to be perfect.

Every estate plan is a product of compromise and trade offs. The trade offs involve tax reduction, cash flow, protecting wealth from your heirs’ mistakes, fair distribution, and other factors. An imperfect, compromise plan is better than no plan. It is very likely, however that very bad things will happen if no estate plan is in place. Most parts of an estate plan always can be changed when a better idea is developed.

Go easy on control and favor flexibility.

This is a corollary to the change and flexibility principle mentioned earlier. Some estate owners want to control many aspects of their estates. A trend in recent years is to establish trusts that dictate distributions of income and principal under certain conditions. Unfortunately, many things change. A plan that seemed ideal when created could become very inappropriate over time. An estate owner cannot foresee all possible changes. The plan should not try to control too much. This problem is likely to become worse in the future as life spans increase. Don’t make estate planning decisions solely on the basis of today’s circumstances. Leave some room for growth, change, and unanticipated events.

Choose executors and trustees with care.

Too many good estate plans were ruined because the wrong people were chosen as executors or trustees. These decisions often are made without much thought, with the estate owner often making the easy choice for each position. It might not be the best idea to automatically name the estate planner or oldest child as executor and the owner’s bank as trustee. This is another issue we discussed in detail in past issues, and these discussions are available on the Estate Watch section of the web site Archive.

Minimize surprises.

Most estate planners agree that the greatest cause of will contests and estate disputes is surprise. One or more of the heirs was not expecting what the will or trust provided. They no longer can complain to the deceased, so they believe their only alternative for showing displeasure is to disrupt the estate plan and get mad at the other family members.

It is a not a good idea to circulate copies of estate planning documents. The owner should, however, let everyone know what in general is in the estate plan. If heirs are left unequal shares or a significant amount is left to charity, the affected heirs should know. The owner should give a brief explanation for the actions and be prepared to discuss it. Sometimes estate owners change their minds after discussing the plan with affected family members. The owner, for example, might not be aware how a family member feels about certain assets.

Every estate planning process is different. Yet, every plan must follow certain principles for it to be successful.