A Checklist of Estate Planning Issues to Remember

Estate Planning discussions tend to focus on the big picture, big money issues. Who receives what? Should we use a living trust to avoid probate? If estate taxes are a possibility, the menu of estate tax reduction strategies is considered.

There are a host of other issues that often are overlooked. Sometimes the estate planner decides how to deal with them and simply inserts his conclusions into the will or other estate planning documents. Other times, the issues simply receive little or no consideration. Let’s take a look at these important, but often forgotten, estate planning issues.

Is there enough cash? An estate has operating expenses. It must pay the regular expenses of the various assets in the estate. It often pays the living expenses of the surviving spouse or other loved ones until the estate is settled. There also might be attorney’s fees, court costs, probate fees, debts, and various taxes. Good estate planning estimates the cash needs of the estate and identifies where the cash will come from.

Unfortunately, it is not unusual for an estate to be asset rich and cash poor. In those cases, assets have to be sold in a hurry or borrowed against to pay expenses. These actions diminishes the inheritance, because the assets often are sold at less than full value or are encumbered with debt. In some cases, the best solution is for the owner to have a permanent life insurance policy that will pay taxes and other cash needs of the estate. In other cases, the estate owner should sell illiquid assets when the market offers a good price.

Who pays the taxes? There are several types of taxes imposed on estates. Do not think there are no tax issues when you are avoiding the federal estate tax. There might be state death taxes imposed at a lower level than the federal estate tax. The estate also has to pay income taxes on earnings while the estate is being settled.
The income taxes will be paid from the estate’s liquid assets. There is some discretion, however, over who pays the other taxes.

The death taxes can be paid either from the estate or from the inheritance of each beneficiary. One option is to have the residuary estate (the part left after specific bequests of property to people) pay all the taxes. There are several considerations with this strategy. The residuary estate must have enough liquid assets. Some estates need life insurance to meet these needs. In addition, the taxes will reduce the inheritance of whoever was to inherit the residuary estate. In other words, the heirs of the residuary estate will pay the taxes for all the heirs. The other option is to have each heir pay the taxes on his or her share. This could cause problems when assets are illiquid or cannot be divided to use a portion to pay the taxes.

What is in the estate? This is a simple question for the estate owner, but not always for the executor and others processing the estate. Ideally, the executor is left a notebook or other document listing all the major items owned, where they are located, and identification information such as account numbers and passwords.

Beneficiary designations. There are a host of assets that are not affected by the will. These are known as non-probate assets. The inheritor of most of these assets is determined by the beneficiary designation form. If no beneficiary is named, state law or the policy of the asset’s custodian determines the beneficiary. Assets in this category include life insurance, annuities, employer retirement plans, and IRAs.

Be sure you know which of your assets are in this category. Keep the beneficiary designations up to date, maintain a file of the beneficiary forms, and be sure your executor or heirs know about these assets and forms.

The creditors. An estate cannot be settled until the creditors have been identified and paid. There always is the potential for someone to step forward and claim to be a creditor. You need records on which your executor can rely to validate or refute these claims.

Asset values. Most estate planning is based on the asset values at a fixed point in time. There are two potential problems.

The executor needs to value the assets to file the estate tax return. If you have illiquid or hard-to-value assets (a small business, real estate), leave a discussion of how you determined their values and suggestions for the executor.

The other issue is the values of different assets will change at different rates. At the time you wrote the will, the inheritances of your children, for example, might have been of equal value. But each child was given different assets in the will, and the values changed at different rates and perhaps in different directions.

What would you want done in that circumstance? Consider if the distribution should be changed if values change. You might be able to incorporate a change formula in the will instead of having to update the will each time values change. For example, a standard will leaves an amount in a credit shelter trust for the adult children and the rest of the estate to the surviving spouse. You might want the will to state that the amount left in the credit shelter trust should be no more than a set percentage of the estate or that your spouse will receive a minimum amount before any of the estate goes into the credit shelter trust.

Executors and trustees. Too many good estate plans were ruined because the wrong people were chosen as executors or trustees. These decisions often are made at the end of the process, 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. In past visits we have had some detailed discussions, especially about the choice of trustees, and these discussions are in the Archive on the web site.

Gift planning. Estate planning often include some planned giving to children and grandchildren. The amounts to give are considered carefully, but which assets to give do not receive as much thought. This is another issue we discuss regularly and that is included in the web site Archive. For example, it is good to give assets you expect to appreciate over time, instead of cash, so the future appreciation is out of your estate. But do not give assets that have current paper losses. You can sell the asset and deduct the loss. But if you give the loss asset, no one deducts the loss.

Finish the living trust. Many people set up living trusts to avoid probate but do not fully implement them. There should be successor clauses for both beneficiaries and trustees. The trustee succession clause determines who controls the trust after the initial trustee is unable to. The beneficiary succession clause determines who inherits the assets if the first beneficiary does not. The clauses should be carefully written and updated as needed.

Remember to transfer legal ownership of assets to the trust. Only the assets legally owned by the trust avoid probate and are controlled by its terms. Many people do not transfer the legal title of homes, vehicles, and financial accounts to their trusts, making their trusts useless.

Also, ask your financial institutions if they need a copy of the trust on file. A number of financial institutions are hesitant to recognize succession clauses in a living trust unless a copy of the trust agreement was filed with them by the trust creator or they have other proof of the creator’s intent.