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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

Ten Things to Get Right When Completing Your Estate Plan

By: Kathleen Kuehl, J.D., Managing Director

The conversations around estate planning usually start with questions like "what do you want to accomplish?" and plans typically get executed based on answers to that question. But sometimes the documents themselves get completed without sufficient time and attention to certain issues, or with great technical proficiency, but lack consistency and coordination. These circumstances become the content for great articles about all the things that go wrong with estate plans. This article takes a more positive approach, focusing on ten things you can proactively do to make sure your plan succeeds in meeting your goals and objectives. Along the way, we'll highlight some of these suggestions with real life examples of well-known individuals who have gotten it right, and some who, despite access to great advisors, came up short.

1. Make sure you have a plan. 
Procrastination is not a good plan, and if you die without an estate plan, your assets will be distributed according to your state of residency (via the laws of intestacy), and this is not the distribution most individuals would choose. Second, make sure that whatever documents you execute (whether it be a will, revocable trust, power of attorney, etc.) are integrated and consistent. This is especially important in cases where there may be other documents at play, such as a buy-sell agreement which spells out the disposition of business interests or a prenuptial agreement which directs how certain property will be owned and disposed of in the event of death or a divorce. As important, make sure your documents are drafted by competent legal counsel. This really isn't an area for "do-it-yourselfers," as evidenced by the estate of Chief Justice Warren Burger who, after typing his own will consisting of a minuscule 176 words, left his family paying nearly $500,000 in estate taxes—an outcome that could have easily been avoided.

2. Don't forget about beneficiary designations for assets such as retirement plans, IRAs and life insurance. 
These should be reviewed and updated, if necessary, to be consistent with your overall estate plan and distribution objectives. Remember that the disposition of these assets is not governed by your will or trust, but that these assets pass directly to beneficiaries listed on a separate beneficiary form. An example involves the case of movie actor, Heath Ledger, who while failing to update his will to include his daughter, did name her the beneficiary of a $10 million life insurance policy.

3. Know how your property is titled.

Property that is jointly owned may pass to the survivor directly and not be subject to the provisions in your will or trust. As importantly, if you have a revocable trust, make sure that your assets are titled in the name of the trust. This is not an overly difficult thing to do but it is frequently overlooked. Two of the most significant benefits of having a revocable trust (e.g., avoidance of probate and privacy) are forsaken if the assets have not been appropriately titled prior to death. Case in point—iconic pop star Michael Jackson, who died with a well-drafted revocable trust but failed to fund the trust prior to his death. The result was a probate proceeding which provided a public forum for multiple litigation claims and a messy family dispute.

4. Review and update, where appropriate, your documents whenever there is a significant tax law change or a life changing event.
These events include a death, divorce, birth or adoption of a child, change of residency, etc. This seems pretty basic, but surprisingly many folks just don't do it. A well-publicized example includes actor Phillip Seymour Hoffmann, who failed to update his will after the birth of his two daughters. The lesson here is that estate planning, while not a favorite subject for most people, is not a one-time task, and documents need to be reviewed on a periodic basis.

5. Make sure you have the right "power holders" named. 
What is a "power holder"? This includes guardians for minor children, trustees and trust protectors for various trusts, personal representatives or executors and agents named on powers of attorney and health care documents. All too often, these roles are filled without deliberate consideration, resulting in individuals who are not fully willing or able to serve in these positions. Family members and friends may be good selections, but many times they are not. The individuals serving must be detail oriented and maintain good records. They're charged with making decisions regarding investments and distributions. Often times these duties are best handled by a corporate fiduciary, such as a trust company or bank. Sometimes it may be appropriate to name more than one agent or trustee, and if that is the case, be sure your documents specify whether they may act independently, by majority or unanimously. And don't neglect to name successors if your original nominee can't serve. This frequently happens when spouses name each other, but they fail to name a successor. This is problematic if later they are both involved in an accident or incapacitated. Finally, your documents should specify how to remove and replace agents and trustees in a manner that is clear, complete and not overly complex. Well-known author, screenwriter and movie producer Michael Crichton provides a good example of a poor fiduciary selection when he named his fifth wife as a trustee in his estate, resulting in a nasty fight initiated by his daughter from a previous marriage to have her removed for breach of fiduciary duty. With these family dynamics, perhaps neutral trustees would have been a better choice.

6. Plan for disability, not just death.
Numerous studies confirm that most individuals will face at least a temporary disability sometime during their lifetime. In addition to the financial challenges these situations pose, often times the disabled or incompetent individual is unable to make personal and/or financial decisions for themselves. It is crucial that the appropriate documents are in place. These include a financial power of attorney that will provide an "agent" or "attorney-in-fact" with the legal authority to act on your behalf as it relates to financial matters, including the continuation of any gifting that you may have engaged in prior to becoming disabled. It also includes the appropriate health care documents, such as a living will or health care directive, which spell out your wishes and desires concerning medical care and appoint a decision maker for health care decisions. Finally, a fully funded revocable trust that nominates a successor trustee can ensure the proper care for you and your property. Casey Kasem, best known as the voice of "American Top 40" heard on radio stations worldwide, failed to have these documents in place. Prior to his death while he was suffering from dementia and incapacitated, his adult children fought with their stepmother for control over his situation, prompting one of the daughters to seek a conservatorship in which she was court appointed as his temporary caretaker.

7. Remember that life insurance death benefits are considered part of your taxable estate.
Most people wrongly assume that there is no tax on life insurance. However, if you own or have incidents of ownership (e.g., right to change beneficiaries, take loans against the policies, etc.) in policies that have significant death benefits, you may want to consider utilizing a life insurance trust. An appropriately established life insurance trust can serve to remove those death benefit proceeds from your taxable estate, avoiding a potentially significant estate tax.

8. It is important to understand how taxes will impact your estate.
While the federal exemption currently shelters $5.43 million ($10.86 million for a married couple) from estate taxes, there may be state estate taxes that come into play, and those exemptions vary by state and may be significantly lower than the federal exemption amount. But beyond determining what estate taxes may be due, there may be issues regarding what assets will bear the burden of the taxes. This involves the concept of "tax apportionment," and it becomes very important to make sure the provisions in your documents clearly provide for the correct tax allocations, particularly when a part of your estate is left to charity or where there are significant estate taxable assets passing outside of your will or trust. Let's take the simple example of a $8 million taxable estate where the will leaves $3 million to children and the remainder to charity. The standard tax apportionment clause may provide that all taxes will be paid out of the "residue" of the estate, which would require the charity to bear the full burden of any estate taxes, thus reducing the amount ultimately distributed to charity. Is this really what the decedent intended? Perhaps, but maybe not. Tax apportionment should be carefully considered.

9. Take advantage of tax savings strategies.
These include, and can be as simple as, making annual gifts (the current annual exclusion amount is $14,000 per donee) or paying educational and medical expenses directly on behalf of a beneficiary (in which case any such amounts can be paid in addition to the $14,000 annual exclusion gifts). Another strategy to consider (assuming Congress again extends its enactment for 2015) is the IRA charitable rollover, which allows eligible individuals to make charitable gifts directly from their IRAs during their lifetimes while qualifying those gifts as part of their required minimum distributions. These may also include more complex strategies such as utilizing grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), charitable trusts, family limited partnerships (FLPs) or other more sophisticated methods of transferring wealth in a tax-advantaged manner. Two examples of well-done planning include Jackie Kennedy Onassis, who very effectively used a charitable lead trust to meet her philanthropic goals while at the same time shifting significant wealth to her family and saving estate taxes, and Bill and Hillary Clinton, who established QPRTs to effectively remove a home valued at over $2 million from their taxable estates.

10. Don't forget to plan for personal property and digital assets.
Some of the most significant disputes arise over personal property. Case in point, the estate of actor and comedian, Robin Williams. In spite of a carefully-planned estate that utilized a number of trusts as well as a prenuptial agreement between Williams and his current wife, battles over his personal property (including jewelry, awards and other tangible personal property) ensued. The dispute was ultimately settled, but not before some messy publicity, a result Williams was undoubtedly trying to avoid by establishing the trusts. How to avoid these kinds of disputes? Give property away before death (you get the added benefit of seeing the recipients enjoy it) or utilize a personal property list that specifies who gets what. Digital assets, on the other hand, include any online account you own or any file that you store on your computer, internet or on the cloud. This encompasses items such as email accounts, sites that store media files, social networking sites, domain names, gaming sites, virtual currency and electronic documents. It can also include hardware (such as a computer or flash drive) and software (such as a program like TurboTax). It is important to think about who should have access to these assets not only when you die, but also in the event of incapacity. Read Dan Meiklejohn's e.Insight article, Providing Guidance to Your Survivors, which discusses this topic in detail.

As you can see, estate planning can be a complex undertaking, but following these ten suggestions can help to simplify the process and avoid common mistakes. As always, we encourage you to work with your legal, tax and financial advisors to ensure not only that your plan is coordinated and consistent with your goals and objectives, but that you are getting the best advice and ideas applicable to your specific situation.