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Your Estate Plan: Getting Started

Ronald P. Adams

To get you started on the right foot, we provide our clients with a questionnaire to use in gathering financial information. Some of this information may be included in a recent financial statement. While we don't need exact figures, underestimating the value of assets will hinder our ability to devise the best plan for you. If an asset is valuable and appreciating rapidly, we need to know about it. We can probably work out creative ways for your family to minimize the tax liability associated with such assets while passing them on in the manner you want.

Once you have gathered your financial information, we will meet with you to discuss your estate plan. At the initial meeting, we will ask you about your family and your planning goals. We may bring up issues and questions that you may not have before considered. After conferring with you and researching possible options, we will present suggestions for achieving your goals. Once you have made your choices, we will prepare the necessary documents. At any time during the estate planning process we would be happy to work with your other advisors, such as your accountant, insurance agent, investment advisor or trust officer.

Our Fees. During our initial conference, we will give you an idea of the cost of our work. In our letter outlining our recommendations, we will provide more concrete cost estimates. Because the costs depend on the professional time devoted to your estate plan, they will vary depending on complexity. However, we provide fixed-fee estimates that will be increased only in extraordinary circumstances.

The Basic Parts of Your Estate Plan

Wills. Your will is a written declaration of how certain of your assets are to pass when you die. In your will, you select someone to gather your assets, pay your debts, and carry out your wishes. This person is called your "personal representative." If you have minor children, your will may also recommend someone to care for your minor children if they are orphaned.

Your will does not control the disposition of many of your assets, however. For example, among other things, a will usually does not govern the disposition of (a) life insurance benefits; (b) pension benefits; (c) IRA benefits; (d) assets you own jointly with your spouse or others; and (e) assets in trust for your benefit. Such assets, the disposition of which is not controlled by your will, are called "non-probate" assets. Because non-probate assets may comprise much of what you own, it is important to coordinate your will with your plans to dispose of your non-probate assets.

Trusts. A trust is a practical and flexible legal device by which one or more people you select (called your "trustee" or "trustees") manage assets for the benefit of others you designate (called your "beneficiaries"). We may recommend that you consider trusts for one or more purposes:

  • tax minimization;

  • spreading or sharing of assets among beneficiaries (for example, spouse as beneficiary for his or her life, then your children as beneficiaries, or spouse and children as co-beneficiaries according to their relative needs over time); or

  • management of assets for the convenience of beneficiaries or to protect beneficiaries from their immaturity, inexperience, claims against the assets by unintended beneficiaries such as creditors and ex-spouses, or the frailties of advancing age or impaired health.

A trust can last for the lifetime of a beneficiary or can be designed to end when a beneficiary reaches a specified age.

Trusts do not remove management responsibilities from family members, unless that it what is wanted. Family members often serve as trustees, either alone or with professional independent co-trustees. For example, you and your spouse can be the co-trustees of a trust for the benefit of each of you. You could also provide for additional trustees to serve from the beginning or upon the occurrence of a specified event.

You can establish a trust either during your lifetime or in your will upon your death. What is commonly referred to as a "living trust" is a revocable trust established during the lifetime of the grantor. A revocable trust is one that can be changed or revoked at any time before the grantor's death.

You can add assets to a living trust at your death by a direction in your will or by designating the trust as an insurance beneficiary. You can also add pension or other employee benefit rights to a trust by beneficiary designation.

Living trusts are very popular for several purported reasons, the most common of which is "probate avoidance." However, in Arizona, probate -- the court-supervised process of gathering your assets, paying your debts and distributing your assets to your intended beneficiaries under your will -- is not necessarily something to be avoided. It provides protection to your heirs and to your personal representative.

We also often suggest the creation of "irrevocable" lifetime trusts as a means of making gifts of property to family members or charities. While these trusts normally cannot be changed or revoked, they often reduce taxes. It is common to put life insurance policies (and ultimately, their proceeds) in a special irrevocable lifetime trust called an irrevocable life insurance trust (ILIT).

Selecting the Personal Representative or Trustee. A "personal representative" is a person, bank, or trust company you designate to carry out the directions in your will. You can name co-personal representatives if you wish (for example, a spouse and bank or a spouse and a child or children). In selecting your personal representative, you should consider such factors as integrity, judgment, knowledge and skill, experience, and time available to devote to the job.

The personal representative takes control of your assets at your death, pays your debts, and files required tax returns. The personal representative must settle all tax matters with the tax authorities and then distribute your assets as your will directs.

A personal representative often faces difficult decisions about what assets to retain or sell. If assets must be sold, the personal representative must determine how to sell them. A personal representative also must make critical tax strategy decisions that can affect the amount and timing of estate tax and income tax payments. Such decisions should be made with the advice and consultation of competent estate administration and tax counsel.

A "trustee" is a person, bank or trust company (or a combination) named in a will or trust agreement to manage trust assets on terms you specify. The trustee must manage the assets prudently (deciding when and what assets to buy, hold, or sell), account for the assets to your beneficiaries, file income tax returns and develop income tax strategies, and distribute income and principal as you direct. Your trustee's conduct is governed by a well-developed and logical body of law based on a duty of undivided loyalty to your beneficiaries. Because no one can foresee what the future may bring to his or her family, trustees are often given discretion in using or distributing money to benefit family members. For example, you may grant your trustee discretion to make trust distributions for the education, support, and health needs of beneficiaries, just as you would make the decisions if you were there to make them.

Family members often make suitable trustees, either alone or jointly with professional trustees. The nature of your assets, the relationships among members of your family, and the degrees of mutual confidence among your beneficiaries all have to be considered in selecting your trustees.

Durable Power of Attorney. A durable power of attorney is a revocable written declaration by which you authorize someone else (called your "agent") to act for you in financial matters. It is "durable" because it remains in effect even if you become legally incompetent. Alternatively, a power of attorney may be created which only comes into effect if you do become legally incompetent.

A general durable power of attorney contains a broad list of things that your agent can do for you, such as paying your bills and managing your investments. If it so specifies, powers of attorney can also allow your agent to add assets to a trust you have already created, or to make gifts to members of your family. It is important that a durable power of attorney be properly prepared, initialed, witnessed and notarized if the agent may personally benefit from his or her actions under the power of attorney. The failure to do so may lead to unintended consequences, including possible criminal proceedings against the agent and the agent's disinheritance under your will.

In the event of disability, durable powers of attorney eliminate the expense and inconvenience of a guardianship proceeding, in which the court appoints a guardian to manage the financial and/or personal affairs of an incompetent person. Spouses often give durable powers of attorney to each other, and provide that one or more of their adult children will be successor or alternate agents under the durable power of attorney. A durable power of attorney terminates when you die.

Health Care Power of Attorney and Living Will. These two legal documents, which often are combined into a single document, protect your right to refuse medical treatment you do not want, or to request treatment you do want, in the event you lose the ability to make decisions yourself.

The Arizona Health Care Power of Attorney lets you name someone to make decisions about your medical care -- including decisions about life support -- if you can no longer speak for yourself. The Health Care Power of Attorney is especially useful because it appoints someone to speak for you any time you are unable to make your own medical treatment decisions, not only at the end of life. It becomes effective when a physician you designate or your attending physician determines in writing that you are unable to make or communicate decisions about your medical care. For mental health decisions, Arizona law also provides for the creation and implementation of a Mental Health Care Power of Attorney under which your agent can make decisions regarding your mental health care and treatment.

A "living will" lets you state your wishes about medical care in the event that you become terminally and incurably ill or enter a persistent vegetative state and can no longer make your own medical decisions. It provides guidance regarding your wishes to your designated health care agent.

We recommend that you complete both of these documents in a combined Health Care Power of Attorney and Living Will to best ensure that you receive the medical care you want when you can no longer speak for yourself.

Special Assets

Pension Plans and IRAs. Nearly everyone has been an employee or self-employed and has a pension plan or an Individual Retirement Account (IRA). All IRAs and many pension plans have death benefit features. They must be considered in your estate plan. They suffer greater tax erosion than other assets because they are subject to estate tax in the estate and income tax in the hands of the death beneficiary. The estate and income tax impact on these assets can be minimized by careful lifetime planning, often ultimately resulting in allowing you to pass on to future generations thousands or millions of dollars more than you otherwise would have been able to pass on.

Life Insurance. We can also advise you about your cash needs at particular times (for expenses such as taxes). We can assess the role of life insurance in meeting these cash needs, and can objectively analyze life insurance products you may be considering. We encourage clients to see us before purchasing a life insurance policy to allow us to review the policy and the policy illustrations.

While most people understand that life insurance proceeds are generally not taxable as income, many do not realize that insurance proceeds from a policy that you own on your life is taxable in your estate at death. What you thought would provide a 100% payout of proceeds to your family may be reduced by as much as 55% by estate taxes. This result can usually be avoided through the use of an irrevocable life insurance trust (ILIT).

Jointly Held Property. Some joint ownership between spouses can be appropriate and practical. For example, many married persons own their home jointly as "joint tenants with right of survivorship". To place other family assets in joint ownership, however, can have disastrous tax consequences. We will review with you the way your assets are titled and advise you on possible modifications and the asset protection and title insurance ramifications, if applicable.

Keeping Your Estate Plan Up-to-Date

Keeping your estate plan current is obviously of utmost importance. However, we cannot guarantee to keep your estate plan current. Changes in your assets, your family situation, and the law can all cause your estate plan to be outdated. We therefore encourage you to participate in our formal updating and maintenance program to ensure your plan is kept current.