Preserving and Transferring Wealth: Nontax Considerations in Estate Planning

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Chapter 10
Nontax Considerations
in Estate Planning
A Quick Overview

state planning involves both tax and nontax considerations. This chapter focuses on some of the nontax considerations.

Changing Circumstances

Preserving and Transferring Wealth focuses on protecting the value of your assets.

To get an overview of estate planning, see our Estate Planning Guide for tips on wills, recordkeeping, probate and more.

Changes in your family’s personal and economic circumstances will affect the appropriateness of your plan. If any of the following events involving a family member occur, you should review your financial plan with your advisers: marriage, birth of a child or a grandchild, adoption of a child or a grandchild, serious illness, change of residence to a new state, divorce, retirement, receipt of an inheritance, or vesting of a major corporate benefit, such as a survivor pension.

Evaluating Assets

Proper estate planning relies on comprehensive factual data on your holdings. You should compile a detailed list of your assets, along with current values, cost bases for tax purposes, precise title holding arrangements, balances and options under all company benefit plans, and all relevant beneficiary designations on life insurance policies and benefit plan payments. All debts and receivables, including the terms of any loans and collateral agreements, should be included in the list.

Liquidity Needs

After an individual’s death, a certain amount of cash or liquid assets may be needed to cover the tax and other costs of transferring property at death. In addition, surviving family members may have short-term support requirements, and you may want to leave a number of cash gifts in your will. Proper planning will eliminate the need for a "forced sale" by providing sufficient insurance, cash, or cash-equivalent investments.

Your will should allow your executor flexibility and discretion in handling estate assets to meet liquidity needs. He or she should have authority to sell or distribute (preferably on a non-pro rata basis) any assets or to borrow funds, if it is in the estate’s best interest.

Living Trust

It may be beneficial to transfer the ownership of certain assets into a living trust or an inter vivos trust. Under this arrangement, you can continue to manage the trust assets as trustee during your lifetime. You may also reserve the right to alter, amend, or terminate the trust at any time.

One of the primary reasons for establishing a living trust is to avoid probate and reduce or eliminate some of its negative features, such as expenses, delays, publicity, and the formalities of a court proceeding. However, you can also use a living trust as an effective planning device during your life. If, for example, you are no longer willing or able to manage your financial affairs, the successor trustee you have designated can step in without any unnecessary delay, expense, or court proceeding.

Although the terms of a living trust permit maximum flexibility, you will need to observe the formalities of the trust’s ownership of assets and, in some cases, file income tax returns for the trust in addition to your personal returns. The trust may also incur trustee’s fees. Over long time frames these requirements can become burdensome. Consequently, living trusts may be most appropriate in your later years.

Durable Power of Attorney

In most states it is possible to execute a durable power of attorney to facilitate the management of your assets if you become disabled. In a typical marital situation, each spouse designates the other as attorney-in-fact and someone else as an alternate or successor attorney-in-fact. The power of attorney is designed to remain valid even if the person creating the power becomes incompetent; thus, it is durable to assist in the management of personal and financial affairs such as

Funding trusts
Executing disclaimers
Making retirement plan elections
Borrowing funds
Executing trust agreements
Making gifts
Preparing and filing tax returns

Some states permit the use of "springing" durable powers of attorney. In these states, the document may be drafted so that the attorney-in-fact’s powers do not "spring" into action unless the principal becomes incompetent or disabled. In states that do not recognize springing powers, the attorney-in-fact can perform the specified powers immediately upon execution of the document.

Living Will

You may want to prepare a living will. A living will is a document in which you express your desire that no extraordinary life support measures be invoked if you are terminally ill and grant another person the power to terminate this treatment after you can no longer make such a decision.

Specific Bequest of Personal Property with Sentimental Value

You may have heard of cases in which certain personal items with no significant monetary value, but considerable sentimental value, were not distributed to the individuals the decedent may have intended because the intent was not documented in his or her will. This kind of oversight probably resulted because the decedent believed that whoever received the item would surely give it to the right person. Another possibility is that the issue was not addressed during the estate planning process. In some states you can maintain a list of personal items and the names of the individuals whom you want to receive those items. This list should be stored separately from your will, and it generally must be referred to in your will to be enforceable.

Naming Advisers in Addition to Executors

The practice of naming advisers in addition to executors is becoming increasingly popular in certain situations. For example, if you have valuable collectibles, you may want to specify in your will that an expert is to be consulted before your executors or trustees make any final decisions concerning such assets. Advisers may also be added to oversee investment management results.

Selecting a Trustee

An important consideration in the creation of a trust (whether during lifetime or at death) is the selection of a trustee -- the individual or institution that will be responsible for the management, investment, and distribution of funds. While professional trustees may not be the only ones capable of investment management, individuals selected to perform in such a fiduciary capacity may not have adequate experience and business judgment. Moreover, a corporate trustee exists perpetually, while an individual trustee may die or become incapacitated, thereby negating the advantage of continuity of trust administration. The cost of employing a corporate fiduciary can, of course, weigh on the other side.

One of the advantages of a trust is its flexibility to adapt to changing circumstances. Although a trust is generally irrevocable following the death of the individual who created it, a provision can be included in the trust that gives the beneficiary the ability to replace the trustee. This authority can be granted to any individual, but is typically reserved to an adult beneficiary, such as the surviving spouse. In other instances, the authority can be exercised by a majority of the beneficiaries. In any event, a successor trustee may be appointed on the basis of one of several considerations, including the geographic relocation of the beneficiary, dissatisfaction with the trustee, or other changing circumstances.

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Disclaimer: This guide is not intended to be a substitute for specific individual tax, legal, or investment planning advice, as certain of the described considerations will not be the same for every taxpayer or investor. Accordingly, where specific advice is necessary or appropriate, consultation with a competent professional adviser is strongly recommended.