Ten Most Common Flaws In Estate Planning And How To Spot Them

Transcription

1 Ten Most Common Flaws In Estate Planning And How To Spot Them 1

2 What We Will Cover: There are 41 points divided into 7 categories. As we go through the various points and categories you will see in bold type and red font thetenwehavenominated as the Biggest Flaws in Estate Planning. 1. Failure To Get Started. P Failure To Maintain Fresh Documents. P Failures In The Documents. P Failures In Asset Transfers. P Failure To Consider Family Issues. P Failure Through Overplanning. P Failure Through Underplanning P. 24 Owen@GivnerKaye.com 2 2

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5 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failure To Get Started 5

6 Failure To Get Started Far and away the biggest mistake we find is the couple who walks in the door and does not have any existing estate plan [Biggest Flaw #1]: no Wills; no family trust; no durable powers of attorney. In metropolitan Los Angeles, that is almost incomprehensible. Sometimes it is due to the fact that they do not wish to think about death. Sometimes it is due to the fact that they have only recently come into enough wealth to even consider the need to provide for proper distribution at death. In any event, it is the job of the advisors to motivate clients to put in place testamentary documents as soon as possible. Also, the advisors should remind clients that even adult children may need estate planning-type documents. For example, an 18 year old child needs a durable power of attorney for health care (advance health care directive). A 30 year old now working in a business may need a Will to provide who inherits the death benefit provided by the employer. That same 30 year old may need to thoughtfully complete a beneficiary designation for the corporation s retirement plan. The young couple with two children under the age of 10 may be in more need of (i) Wills to nominate guardians and (ii) an irrevocable insurance trust to own a $5,000,000 insurance policy than they are in need of a family trust. Owen@GivnerKaye.com 6

7 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failure To Maintain Fresh Documents 7

8 Failure To Maintain Fresh Documents 1. Change In Dispositive Desires. [Biggest Flaw #2] The nightmare: since the living trust was drawn up leaving the entire estate to his children, the client started giving (i) his sister $8,000 per month and (ii) his mother $4,000 per month. The client dies. The client s brother becomes the trustee and the client s children want to know why they should keep supporting their 50 year old aunt to the tune of $15,000 per month pre-tax so she doesn t have to work. The children are less irritated about supporting their grandmother to the extent of $7,000 per month pre-tax, though it does cause the trustee their uncle a bit of a problem in getting an agreement to continue the distributions to grandma (his mother). 2. Change In Fiduciaries. One of the three most common changes that occurs over the course of a 10 year period. The other two: specific bequests and manner of distribution to the children. Owen@GivnerKaye.com 8

9 Failure To Maintain Fresh Documents [continued] 3. Maintenance Programs. For every type of estate planning structure family trust; QPRT; FLP; foundation; ILIT we have a separate maintenance program designed to keep the documents up-to-date with both (i) the clients wishes and (ii) changes in the law and facts. In each program we call the client every 6 months to review each of the decisions reflected in the documents to confirm that they still reflect the clients wishes. Many changes will be made as part of the basic program without extra cost. 4. Family Counselor Program. Rather than a simple maintenance program, we also offer a Family Counselor Program. Customized for each family, this program provides two half-day meetings per year and unlimited phone access. This is designed to keep the family, its estate planning structures, and its business interests up-to-date and to give the family immediate access to our team of family and business counselors. Owen@GivnerKaye.com 9

10 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failures In The Documents 10 10

11 1. Name. Failures In The Documents Should it be simply Bruce Givner and Kathy Givner, Trustees, of the Bruce and Kathy Givner Trust dated February 4, 1994? Or should it be Howard Brand, Trustee, of the 12 th Tressa Trust dated February 4, 1994? Isn t it always better to have a fictitious name trust? Why make it easier for someone to find your assets? The beneficiary of the fictitious name trust may be your actual family trust. Is the trust document even clear as to what the name is? alternatives can be used? As to what acceptable 2. Trust Certificate. Is there one? 3. Blanket Assignment. [Biggest Flaw #2] The Heggstad case as modified by Osswald v. Anderson and In re Kucker. 11 Owen@GivnerKaye.com 11

12 Failures In The Documents [continued] 4. SP. vs. CP. [Biggest Flaw #3] Are there separate schedules for separate property vs. community property? 5. Assets. [Biggest Flaw #4] Is there a comprehensive financial statement dated as of the date that the trust is created that lists the assets which belong to the trust? 6. Family. [Biggest Flaw #5] Does the document spell out the names and dates of birth of the heirs? Is there a family tree in the files which lists heirs who must be notified at death, including their relationship and address? 7. Incapacity. Has the client considered alternative ways to establish (to avoid a conservatorship)? 12 Owen@GivnerKaye.com 12

13 Failures In The Documents [continued] 8. Survivor s Powers. Can the survivor change the trustees for both halves? Does the survivor have a general power of appointment over the bypass trust? Over the marital trust? 9. Successor Trustees. Can a majority of children remove the trustee and name a new one after the survivor dies? Or is it a majority of the adult beneficiaries? Or are they limited to corporate fiduciaries? Can existing trustees also name successors? 10. IRA Trust. Are the retirement assets so significant and the beneficiaries so numerous and of the right ages so as to make a separate living trust for the retirement assets appropriate? 11. Non Pro Rata Allocations. rata)? May the trustee fund the subtrusts on a non-pro rata basis (more flexible than pro 13 Owen@GivnerKaye.com 13

14 Failures In The Documents [continued] 12. Personal Property. Is the disposition of tangible personal property detailed enough to avoid post-mortem disputes? Is a failure to agree handled by a hypothetical auction? Is the recipient of personal property subject to debt responsible for the debt? 13. Memorandum Regarding Tangible Personal Property. Is the handwritten memorandum in the Will limited to $25,000 in value (no one item over $5,000)? Probate Code Section 6132(g). If there is a memorandum, is there a copy in the lawyer s file? Has it been updated? 14. Pot Trust. In smaller estates, is there a pot trust until the youngest beneficiary attains age, for example, 25 or graduates from college or graduate school? 15. Asset Protection. [Biggest Flaw #6] Have the parents been offered asset protection alternatives for distributions to heirs? 14 Owen@GivnerKaye.com 14

15 Failures In The Documents [continued] 16. Special Needs. Are special needs provisions part of the boilerplate? 17. Ultimate Beneficiary. Have the parents knowledgeably considered alternatives to the intestacy laws in case they are not survived by children and/or grandchildren? 18. Trustee s Discretion. Is there a video conveying wishes to the successor trustee? Is there a letter describing what the parents view as the appropriate standard of living to be maintained? Remember that the trustee is acting in loco parentis, so the more the trustee knows about the parents wishes, the easier it will be for the trustee to make decisions in the parents absence. 19. ILIT. trust? Is there enough insurance so that it should be owned by a free-standing irrevocable 15 Owen@GivnerKaye.com 15

16 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failures In Asset Transfers 16 16

17 Failures In Asset Transfers 1. Younger People And Living Trusts. Of course, it is always best to actually transfer all of the assets. However, with younger people we do not have a good faith belief that they are going to own the same assets when they are in their 80s. So we tend to (i) transfer the real property into the trust s name and (ii) rely on the blanket assignment of assets for the personal property. We do the latter because the time and expense spent transferring bank accounts and partnership interests is usually not worthwhile given the wide acceptance of the blanket assignments. 2. Older People And Living Trusts. With people in their 70s or older, we try to change the name of each and every asset into the name of the trust. 3. Qualified Personal Residence Trusts. People tend to refinance their homes, take the homes out of the name of the QPRT, and forget to transfer title in after the refinance has been completed. This is a big mistake. This is an advantage of the QPRT maintenance program. 17 Owen@GivnerKaye.com 17

18 Failures In Asset Transfers [continued] 4. Family Limited Partnerships. It is important to transfer assets to the FLP as soon as the FLP itself is formed. Delays have been cited by judges in cases striking down FLPs as estate tax planning vehicles. In addition, it is important to monitor FLP assets over time to make sure that they remain in the FLP s name. Likewise, it is important to be sure that inappropriate assets are not transferred to the FLP. Inappropriate assets include (i) personal residences of any family member and (ii) loans to family members. Also, the parents should not be reliant on FLP income to maintain their standard of living, and the children should not need the FLP assets to pay the estate tax. For all of these reasons, asset transfers must be scrutinized and monitored, and the maintenance program is highly recommended. 5. Intellectual Property. [Biggest Flaw #7] We use a separate checklist to get the client to list all types of digital assets. There are two main categories: online accounts that require a username and password; and files stored in places (computer, mobile phone, server, local DVD or CD-ROM) or at online storage sites. There are files you create and files you buy. Make a list of all of them; who is to get them; provide access; provide copies to counsel, CPA, successor trustee; update. 18 Owen@GivnerKaye.com 18

19 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failure To Consider Family Issues 19 19

20 Failure To Consider Family Issues 1. Living Trust: Naming A Child As Trustee While You Are Alive. If it comes to a choice between spending $5,000 per month for you on a nursing home vs. $15,000 per month to keep you in your own home, will your child choose the former so that there will be more left in the trust when you are dead (and will that choice make the inheritance occur more quickly)? 2. Living Trust: Naming A Child As Trustee When There Are Other Children. Will naming one child over the other children make for bad relations after you are gone? Will naming both children together create an unworkable mess? Isn t an independent third party, e.g., the long-time CPA or business lawyer, the best way to avoid post-mortem litigation or just plain unhappiness? 3. Living Trust: Rich Children, Poor Relatives. You leave your children $20,000,000 and your sister, who is a waitress, is the trustee??! 20 Owen@GivnerKaye.com 20

21 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failure Through Overplanning 21 21

22 Failure Through Overplanning 1. Failure To Establish Parents Standard Of Living. [Biggest Flaw #8] Unless you know how much they need to maintain their standard of living, you cannot determine if they can afford to do a GRAT. Or even a QPRT. This should be a part of the file, a part of the due diligence, prepared by the CPA or financial planner. 2. Failure To Consider Increased Needs As They Age. Even if you know what it takes the parents to maintain their standard of living now, what happens if one or both of them get ill? One study showed that seventy-five percent (75%) of all healthcare costs are incurred in the last decade of life. Do the clients have long-term care insurance? Should they? 3. Failure To Consider Inflation. Even if you know what it takes the parents to maintain their standard of living now, and even if they have long-term care insurance, what will be the impact of Jimmy Carter-like hyperinflation due to the massive budget deficits we are undergoing? 22 Owen@GivnerKaye.com 22

23 Failure Through Overplanning [continued] 4. Failure To Consider Interruption Of Income. [Biggest Flaw #9] The parents largest investment asset a single tenant industrial building - may lose its only tenant and be empty for an extended period of time. Therefore, a GRAT based on that asset may be a disaster. Also, leaving that asset in a QTIP trust may force the trustee to sell it to provide income to the surviving spouse. It can be even worse in a second marriage situation. 5. GRATs Instead Of Private Annuities. [Biggest Flaw #10] A GRAT as a way to transfer wealth to the next generation may be a mistake since the income back to the parents terminates at the end of the GRAT term. By contrast, a private annuity provides income for life while still achieving estate tax exclusion. 6. QPRTs instead of Private Retirement Plans. A QPRT for the residence means that at the end of the term the parents must pay rent to continue living in the residence. (Note: since June, 2008, the availability of reverse (or return ) QPRTs have made this less of a factor.) An alternative way to protect a residence is to (i) sell it to a children s trust for a note; and (ii) burden it by a lien in favor of a private retirement trust. 23 Owen@GivnerKaye.com 23

24 Everything Ten Most Common You Always Flaws In Wanted Estate To Planning Know And About How Family To Spot Trusts Them Failure Through Underplanning 24 24

25 Failure Through Underplanning 1. Advisors Don t Advise. The advisors see that the clients have a family trust, pourover Wills and durable powers of attorney and do not describe alternatives available in advanced planning, e.g., an irrevocable trust to own the insurance policies; a separate trust to be the beneficiary of the retirement plan assets; vehicles (LLC; FLP) to own investment assets for both estate tax and creditor protection; structures to transfer interests in investment assets (private annuities; GRATs; QPRTs; installment sales; part-gift, part-sales) to trusts for the children; clean-up planning (T-CLATs and family foundations). 2. Parents Are Afraid. The parents feel that they will lose control in any planning. The single biggest fear. (The next is the cost. Another: it s irrevocable. ) 3. Parents Don t Understand. That they can retain virtual control, and can change their minds. 25 Owen@GivnerKaye.com 25

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