by Catherine E. Bright
How often do you prepare wills? Monthly? Annually? Less often? If you occasionally prepare wills for clients but do not consider yourself to be an expert, this article may help you identify a few important issues to keep in mind when helping clients with their estate planning.
Minors do not have the legal capacity to manage property, so assets generally should not be left directly to them unless one desires an expensive and burdensome guardianship proceeding. To avoid the need for a guardianship, specify that inherited property should be held in an Uniform Transfer to Minors Act (UTMA) account, (if letting the child receive the property by age 21 is acceptable) or in a trust until the child reaches an appropriate age or meets other criteria specified by the client. Consider recommending to the client that the inheritance be distributed in phases to allow children to learn to handle money responsibly. Help the client designate UTMA accounts or trusts for the children as beneficiaries of the client's nonprobate assets as appropriate. Name a trustee and successors in the will and provide a mechanism for others to be selected if the named trustees cannot serve. Do not forget to name the client’s choice of guardians of the persons and estates (in case property passes to minors despite the planning) of the children.
Clients often have difficulty making decisions how to handle a family business.. Numerous issues (more than can be mentioned here) arise that require careful planning before the business owner's death to make sure that the client's goals – whether tax-related, control-related, or otherwise – are achieved. Clients who own interests in S corporations and who use trusts in their wills should utilize QSST or ESBT provisions to avoid jeopardizing the S corporation election. Clients should consider including a devise of controlling/voting interests to (or a purchase option with financing provisions for) the heirs who the client wants to assume management of the business. Legal restrictions on who can own a business (e.g., a law or medical practice) should be addressed. Much of the planning for business owners extends beyond the will, so prepare for additional complexity! Review the governing documents (especially any buyout provisions) to avoid surprises. If the estate could incur a Federal or State estate tax, consider how recent tax cases on ownership of family businesses at death affect the planning and whether the estate will have any difficulty meeting tax burdens if the business is not sold (if so, plan for the necessary liquidity).
Nonprobate assets are sometimes overlooked in the planning process. It is necessary to include them because it is common for clients to have significant wealth in the nonprobate category and these assets do not pass under the terms of the client’s will. Common examples of assets in this category include IRAs, 401(k)s and other pensions, nonqualified plan assets, life insurance, annuities, joint tenancy, or community property with rights of survivorship assets, POD and TOD accounts, and assets transferred during life to a living trust. Another example is property passing according to the new transfer on death deed (available in Texas as of September 1, 2015). Because the will provisions do not apply to these assets if a beneficiary designation is in place, be sure to help the client update beneficiary designations to align the disposition of these assets with the estate plan to the extent it makes sense to do so. It may make more sense for income tax reasons—and to make it easier to qualify for the marital deduction if that is important—to leave a qualified retirement asset to a surviving spouse outright rather than leave it in trust for the spouse, even if the will includes spousal trust planning. If nonprobate assets comprise a significant part of the estate and the estate could incur a Federal or State estate tax, make sure that the tax allocation clause in the will allocates the tax burden between the recipients of probate and nonprobate assets in the desired manner. Finally, if disclaimer of a nonprobate asset is likely, consider how that should affect the beneficiary designation form.
Estate tax planning is generally beyond the scope of this article, but one “hot” estate tax topic worthy of discussion is how the recently “permanent” portability of Federal estate tax exemptions between spouses affects estate planning choices. Portability allows both spouses’ exemptions from Federal estate tax to be used without needing to include a so-called “bypass trust” in the will or living trust, though a complete Federal estate tax return (Form 706) must be filed to make the portability election. Assets held in a properly structured bypass trust cannot benefit from a second basis adjustment at the later death of the surviving spouse, whereas qualifying assets that are included in the spouse's taxable estate at death can. The capital gains tax avoidance opportunity provided by relying on portability rather than a bypass trust for estate tax planning—assuming the surviving spouse will still own at his/her death assets having a higher value at that time than they had at the death of his/her spouse—raises the question whether a bypass trust is still the optimal tax planning strategy for a married client. In addition, a decision must be made in the estate administration context whether to port a decedent's unused exemption (if any) to the surviving spouse, even if a bypass trust is used.
If you are not confident that you will identify, understand, and be able to address the key issues in your client’s estate plan, seek help from an expert who can mentor or serve as co-counsel with you.
Catherine E. Bright is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. She can be reached at firstname.lastname@example.org.