Estate Planning is About More Than Estate Taxes

By and
January 21, 2013

After a flurry of last-minute negotiations to avoid the so-called “fiscal cliff,” Congress passed, and President Obama signed, the American Taxpayer Relief Act of 2012. Among other things, it makes permanent the $5 million amount that may be transferred tax-free through a combination of lifetime gifts and transfers at death. For both gift and estate tax purposes, that amount is indexed for inflation. Thus, in 2013, in addition to being able to give any one recipient up to $14,000, a person may make total lifetime gifts of up to $5,250,000 before being liable for a 40% gift tax and a person’s estate may transfer up to $5,250,000 of assets (less the value of the decedent’s lifetime gifts) before being liable for a 40% estate tax. According to the Tax Policy Center, under these rules 99.9% of the deaths that will occur this year will trigger no estate tax.

A client asked last week whether we were concerned about not having enough to do as a result of the new law. The question was no doubt prompted by the common misconception that most of what estate planners do concerns planning to minimize or avoid estate taxes. While that is an important part of the job of estate planning attorneys at Ruder Ware, it is only a part. We are called upon to do many other things for our clients and their families that will not be affected by the higher gift and estate tax exclusion amounts.

The question was a good one and it caused us to sit down and make a list of the services our clients regularly rely on us to provide that are not directly related to gift and estate tax planning. The following are the top-20 items on our list:

  1. Planning for the disposition of a client’s assets at his or her death. This may include specific gifts, gifts to charities, outright transfers to children and other beneficiaries, or transfers to trusts for children and other beneficiaries.
  2. Planning for incapacity. Insurance company statistics show that we now have a six-times greater chance of becoming incapacitated before we die than at any other time in our history. Because of this telling statistic and the fact that Americans are living longer, incapacity is something that should be addressed in every estate plan.
  3. Planning for minor children. Courts have the authority to appoint guardians for minors. In making that decision, courts first consider who the parents may have nominated for that important responsibility. Parents with minor children should have wills in order to nominate their first and second preferences for who will be the guardians of their minor children. Parents also should make a provision in their wills for someone to administer a minor’s inheritance until a specified age. We find that parents are greatly relieved to learn how flexible these arrangements can be with a properly structured will or trust document.
  4. Planning for children with disabilities. Parents with a child who has a disability can protect assets, and preserve the child’s eligibility for government assistance programs, through the use of a properly structured trust. This can be a trust established during a parent’s lifetime or upon the parent’s death. Our work in structuring and administering special needs trusts for persons with disabilities has more than doubled in recent years.
  5. Planning for spendthrift children. Increasingly, parents and grandparents are deciding to leave their children’s and grandchildren’s inheritances in protected trusts so that the assets will provide an income stream for many years and be available in the event of health emergencies or other special circumstances. As one concerned father put it: “I can’t control what my children do with their money, but I can control what they do with my money and I want my money to provide long-term benefits.”
  6. Asset protection planning. This may include planning to protect assets from the claims of the client’s potential creditors or planning to protect an inheritance from the potential claims of a beneficiary’s creditors, including claims of a divorcing spouse.
  7. Business succession planning. According to research conducted by University of Iowa Extension and Outreach, the myth that the burden of having to pay the federal estate tax has caused family businesses and family farms to fail is just that – a myth. The fact is that family businesses fail primarily because of poor successor management. As the saying goes, the failure to plan for succession is a plan for succession to fail.
  8. Planning for marital and other dissolutions. Based on data from the National Survey of Family Growth, PolitiFact.com estimated in 2012 that the lifelong probability of marriage ending in divorce is 40% to 50%. While inherited assets that a child or grandchild owns outright may be subject to division at divorce, inherited assets held in a properly designed trust are not.
  9. Planning to pay education expenses. This includes work for parents and grandparents who want to establish education trusts or so-called Section 529 plans, now or in the event of death.
  10. Charitable giving. Most charitable giving techniques will still be used to accomplish specific objectives. Beyond giving for giving s sake, income tax considerations of charitable giving will still be relevant to many clients, especially those who now find themselves in a higher income tax bracket. Trusts that provide benefits to people during their lifetimes and to charities upon death will still be attractive to some clients as part of a plan to defer taxes on the sale of a business or other appreciated asset and to facilitate diversification of their assets. Our work in this area also involves helping families to create and administer their own private foundations.
  11. Life insurance planning. No one ever complains about having too much cash. Life insurance is an essential part of many estate plans where cash will be needed for things other than paying estate taxes, including paying off debts, replacing lost wages, providing for minor children, replacing a key employee and providing funds to surviving business owners to purchase a deceased owner’s interest in the business. We accomplish these objectives by working with our clients and their insurance agents to incorporate the use of life insurance proceeds into their estate plans.
  12. Retirement planning. If the topic justifies companies spending millions of dollars of television advertising to get our attention, then it’s a big topic. That includes cars, trucks, carbonated beverages, prescription drugs and, yes, retirement planning. We help clients figure out what they will need in their retirement and how to minimize income taxes on their retirement income. We also help parents and grandparents transfer their IRAs and retirement plans to minimize income taxes and protect those assets from the claims of their beneficiaries’ creditors.
  13. Medical assistance eligibility planning. If you need to go into a nursing home and do not have enough money or other liquid assets to pay for your care, no government agency comes and takes your remaining assets. That is and always has been a myth, or at least a misconception of how the Medical Assistance Program operates. Rather than taking your assets, the people who administer the Medical Assistance Program do just the opposite – they refuse to give you theirs, unless you are eligible for the program. Thus, unless you have long-term care insurance, and maybe even if you do, in many cases there is a premium on planning to assure that you will be eligible to receive Medical Assistance benefits, if needed.
  14. Using family-owned business entities to accomplish non-tax objectives. This work includes properly structuring corporations, partnerships and limited liability companies. It may involve the creation of voting and non-voting interests to obtain valuation discounts on the transfer of business interests to the next generation. It also may involve the creation of a voting trust to differentiate between children who have management ability and experience and those who do not.
  15. Planning to preserve the family cottage. Whether it’s a family cottage, cabin, compound, hunting shack or recreational land, transferring it to children outright exposes it to the risks associated with the unavoidable messiness of life – incapacity, bankruptcy, death, divorce and disagreement. Transferring ownership to a properly designed entity, such as a family limited liability company, greatly enhances the likelihood that family members will be able to use and enjoy the property for generations. The property you want to preserve and protect is owned by the entity. Members of the entity can come and go, get divorced or go bankrupt. Those events will affect the members, but they will not affect the property.
  16. Fiduciary litigation. Estimates are that trust and estate litigation will increase because with less estate tax liability, there will be more assets for beneficiaries to fight over. If there is a dispute, our experienced litigation attorneys can handle it. Better yet, our estate planning attorneys can eliminate or greatly reduce the likelihood of disagreements that lead to litigation through proper drafting of documents and clear and consistent communication with the estate’s beneficiaries.
  17. Planning for clients with real estate in more than one state. This work involves careful planning regarding ownership, asset protection, state income taxation, spousal rights, and probate avoidance issues. In the case of several states, this also involves planning regarding that state’s estate tax.
  18. Planning for clients who own property in other countries. America is still the great melting pot and many of our clients own or expect to inherit property located in other countries. As a charter member of Meritas, a world-wide affiliation of law firms across 70+ countries in seven global regions, we have access to experienced attorneys who can assist with property transfers and interpretations of local law.
  19. Planning for non-resident aliens with assets in the U.S. A non-resident alien can be a resident of a state, own property and create a will or a trust. However, some gift and estate tax rules apply differently to non-resident aliens. Without knowing those rules, planning for a non-resident alien can have disastrous unintended consequences.
  20. Administering an estate or trust. It is relatively easy to make a will or establish a trust. You can purchase standard forms at a bookstore or download them from the Internet. If you are at least 18 years old, you may complete the forms and sign them. (Of course, you also may perform your own foot surgery.) It’s one thing to draft a will or trust. It is another thing to properly administer the terms of the document when the person dies or becomes incapacitated. This work requires expertise in several areas, including the law of trusts, estates, trust accounting, real property, tax, creditors rights and business organizations. It is also very intimate work that requires a great deal of discretion, mutual trust and compassion. Some of the specific activities required for the proper administration of an estate or trust include inventorying and valuing assets, paying debts (and sometimes resolving disputes as to debts), paying expenses of last illness and administration, communicating the process and expected timetable to the beneficiaries, resolving disputes among the beneficiaries, if necessary, filing final individual income tax returns, filing income tax returns for the estate or trust, filing estate tax returns, if necessary, resolving disputes with taxing authorities regarding income, gift and estate tax issues, selling assets, making various tax elections that will affect the beneficiaries, and, finally, distributing assets outright or transferring them to continuing trusts.

Attorneys and paralegals in our Trusts and Estates practice group have been providing these types of services to clients for 93 years. Regardless of changes Congress makes to the estate and gift tax laws, we are prepared to continue to serve the needs of our clients in these important areas. If you have questions regarding the above, please contact Mark Bradley, Amy Ebeling, or Shanna Yonke the authors of this article, or any of the attorneys in the Trusts & Estates Practice Group of Ruder Ware.

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This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.

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