What is Estate Planning?
goals are accomplished through the estate planning process. The best
definition for estate planning that we've discovered is "I want to plan
for me to maintain control of my estate while I'm alive and well, make
sure that I my estate is protected if I should become disabled, and
give what I have, to who I want, the way that I want after my death,
all at the lowest possible cost.
What is an estate plan?
estate plan is a strategy developed and customized through attorney
based counseling to achieve one or more goals for life events or after
death. The strategy is implemented usually through legal documents such
as wills and trusts and maintained through regular updating during life.
What is the difference between a will and a trust?
estate plans are either will based plans or trust based plans. A will
is simply a set of instructions to the court. If the probate court
accepts the will, a probate of the estate is administered by the judge.
The will may be useful in choosing a representative to administer your
affairs, choosing a guardian for minor children, and for making
distributions of your estate to named beneficiaries. The drawback of
will based planning is having to go through probate. A trust is simply
a set of instructions to your loved ones. Assets that are titled in the
name of the trust are not probated, rather a back office procedure
called trust administration takes place after death. Trusts also allow
estate control to be put in the hands of trusted people during periods
The Estate Planning Pyramid
estate planning pyramid gives a hierarchy of goals for estate planning.
This pyramid is useful in developing an estate planning strategy based
on specific client goals. At the bottom of the pyramid is the SELF. The
most important goals are centered on maintaining our estate for our own
protection and benefit. Likewise an estate plan should provide
protection and benefits for the ones that we love, our FAMILY. The next
goal is to have the estate plan structured to protect what we have or
PRESERVE WEALTH. Beyond that, our estate plan needs to anticipate
INCREASING WEALTH. The final consideration is to reduce TAXES AND
estate planning turns the pyramid upside-down. Taxes and Probate are
important goals to be addressed in every estate plan, but goals at the
bottom of the pyramid may be too important to sacrifice just to achieve
this result. Modern estate planning weighs several considerations when
developing an estate plan.
The Three-Step Strategy
planning is a process, not a set of documents. For an estate plan to
achieve all of a clients goals, a three-step strategy should be used.
- Work with a Counseling Oriented Attorney
- Use a Formal Updating System
- Assure your Successors Utilize Fixed Fee Services after death
Working with a Counseling Oriented Attorney
is the process of tailoring a plan to meet specific desires and goals.
Traditional estate planning services do not stress client counseling as
part of the estate planning process. Rather, traditional estate
planning is the creation of documents to meet general goals surrounding
probate avoidance and estate tax reduction. Important goals such as
protection for catastrophic disability, divorce protection, remarriage
protection, protections for minor children, and catastrophic creditor
protection are rarely if ever considered. In this light, much of what
passes for traditional estate planning is nothing more than glorified
word processing. Only by taking the time to thoroughly examine client
goals and tailoring a plan to meet those goals will an estate plan
Use a Formal Updating System
estate plan will have to be updated from time to time to reflect
changes that may happen during the lifetime of the client. Three types
of changes need to be planned for: 1) changes in the personal situation
of the client, 2) changes in the financial situation of the client, and
3) changes in the law that affect the outcome of the plan.
changes in the personal situation of the client. Many things may happen
during the personal lifetime of a client that will have a significant
effect on the estate plan. Individuals that have been chosen to do
certain jobs such as Trustees and Guardians may become no longer
available, making it necessary to make new appointments. Families may
be confronted with challenges such as a disability, addiction, divorce,
etc. making it necessary to build additional protections into the plan.
Clients also may desire to make adjustments in distribution patterns or
add additional beneficiaries as time goes on. Many of these changes may
warrant major changes to existing documents.
changes in the financial situation of the client. For an estate plan to
be effective, it has to conform to the types of assets that are held by
the client. Furthermore, assets have to be effectively titled in the
name of the trust instrument for the plan to have any effect over such
assets. It is rare that clients hold the same assets at death that were
held when the plan was originally created. This means that plans have
to be continually funded (transfer of assets to the name of the trust
instrument). While most asset transfers are generally simple, many
other assets provide challenges such as the acquisition of a business,
the purchase of real property, and changes in retirement plans.
Additional documents may need to be drafted or existing documents
amended to reflect these changes.
Third, changes in the
law that affect the outcome of the plan. There are several areas of law
that effect an estate plan. Income tax law, estate tax law, property
laws, and community property laws are a few. These areas of law are
highly susceptible to the political winds of change and have changed
drastically over the past few years. This is an area that also puts the
client in the most vulnerable situation. Because most clients do not
study these laws and would never know of major changes, they may never
come back to get the much needed amendments that are necessary.
speaking, clients can use one of two methods for updating a plan. The
first can be referred to as pay as you go. This means that clients
must initiate changes themselves and pay each time that the documents
are altered. This system has a few drawbacks. The client may not know
of legal changes that warrant amendments. Also, if plans are not
updated regularly, larger amendments or a complete re-do of the estate
plan may become necessary, this could become expensive over time. The
second method is to use a formal updating system. We is type of updating. Clients
pay an annual maintenance fee to have the plan updated regularly. This
involves annual changes in the documents to reflect all of the changes
in law that occurred the previous year. Some of these changes in the
law may require minor amendments, in other years even more drastic
changes may be warranted. Also, clients may make as many changes to
their plan as desired to reflect changes in a personal or financial
changes. All changes to the plan are covered under the annual
maintenance fee. In addition, trust administration fees will be lower
because the maintenance reduces the amount of time needed to wind up
the affairs of the estate (see Fixed Fee Services Below). The average
estate planning client will pay far less through annual maintenance
fees over lifetime than they would normally pay for pay as you go.
The greatest benefit is that a client with formal updating will always
have a plan just a current as the newest plan created by the firm, and
always have the piece of mind that the plan will work just the way it
was originally designed to do.
Assure your Successors
Utilize Fixed Fee Services after death. Most estate planning does not
take into consideration the services that are needed upon the death of
the client. While it is generally possible to avoid probate with a good
estate plan, the trust settlement or trust administration process is
necessary to wind up the affairs of an estate after death. This process
takes far less time than probate and is significantly less expensive.
Probate fees nationally average between 2 and 7 percent of the gross
estate value, trust administration fees average about one percent. By
using a formal updating system, the reduced work needed to administer a
thoroughly updated plan can reduce these costs down to one-half of one
percent. Utilizing fixed fee services means that clients may lock in
this fee before death by agreeing to update the plan through the use of
formal updating. This is a milestone in the estate planning field.
Reducing this back-end fee will, on average, make the overall costs
of an estate plan less than they would be under the traditional
approach of pay as you go updating and paying market rates for trust
administration. Furthermore, administration fees are not paid until
death, but the client is assured the lower fee upon inception of the
Revocable Living Trusts
living trust is a contract. The document will state the management
terms for property owned by the trust. Initially, the trustees of the
trust will be the Trustmaker. Thereafter, the successor trustees will
typically be family members or friends. The job of the Trustee is to
manage trust property on behalf of the beneficiaries. Successor
trustees take over the job of the initial trustees upon disability and
death. Trust terms will instruct trustees of their duty with regard to
particular assets and specific events. Restrictions on distributions
contained within a trust add protections for the beneficiaries. Some of
these protections include disability issues, guardianship issues,
catastrophic lawsuits, keeping the estate in the bloodline, and
remarriage issues. In addition, trust property passes free of probate
and can be instrumental in reducing estate taxes.
Durable Powers of Attorney
Financial Powers of Attorney
financial power of attorney allows a client the ability to appoint an
agent to make financial decisions on behalf of the client upon
disability. Disability in this context can be defined as the inability
to manage ones own financial affairs as determined by two physicians.
These powers are used most often to manage assets that are not titled
in the name of the trust. These assets usually include vehicles,
retirement plans, and life insurance policies.
Medical Powers of Attorney
medical power of attorney is sometimes called an advanced physicians
directive or a living will. It will allow the client the ability to
appoint an agent to make medical decisions on behalf of the client when
the client is unable to so based on medical reasons. These decisions
include the power to remove life support when death is eminent with no
hope of recovery. It also includes decisions with regard to anatomical
gifts, preferences for disposal of final remains, and the choice to use
professional caregivers for a long-term care situation.
SOURCE: Strategic Wealth Legal Advisers