April 2007

WHAT IS THE STATUS OF YOUR ESTATE PLANNING?

BY JOHN E. DAWSON, ESQ.

When I think about lawyers and their own personal estate planning I am reminded of the old proverb - the shoemaker’s children always go without shoes.  As lawyers, are we guilty of not having our estate planning in order?  Why is it that lawyers tend to put off their estate planning?  Could it be that coming up with an estate plan requires the contemplation of an uncomfortable certainty: one's demise?  This prospect is as unpleasant to lawyers as it is to everyone else.  As lawyers we are so vigilant about making sure our clients' affairs are in order we tend to overlook our personal legal matters. 

To understand what is meant by the term "estate planning," let's start with a definition.  Estate planning is not financial planning.  Financial planning is the process of meeting your life's money goals through the proper management of your finances.  Estate planning is specific planning to ensure your assets pass in an orderly and efficient manner to designated individuals.  Estate planning includes writing wills, setting up trusts, establishing powers of attorney, and planning ahead to avoid unnecessary taxes at death.

To determine the status of your estate planning you need to ask yourself the following questions:

1.  Do you have estate planning documents, i.e. will, living trust, power of attorney?

2.  Have your estate planning documents been reviewed within the last five years?

3.   Have your estate planning documents been updated as a result of major life changes,        i.e. marriage, divorce, birth of a child, etc.?

If you answered no to any of these questions, you need to read the rest of this article.  If you answered yes to all the above questions, your estate planning is more than likely in good order.

                                                        Last Will and Testament

A Last Will and Testament is the most basic form of estate planning.  A will is a legal document that explains how you want your property and assets distributed after you die.  It allows you to nominate a personal representative to carry out your wishes and gives you an opportunity to name a guardian for your minor children.  More than half of all Americans die without a will.  When you die without a will, you die intestate.  If you die intestate then Chapter 134 of the Nevada Revised Statutes controls distribution of your assets.

Is a will enough?  I recall a newspaper clipping, given to me by a client, about U.S. Supreme Court Justice Warren Burger.  The article, which was written after Justice Burger's death, was critical of his estate planning.  Chief Justice Burger's estate planning consisted of a simple holographic will.  As a result, his estate was subject to probate.  In addition, his estate ended up paying estate taxes.  The estate taxes and probate could have been avoided if Chief Justice Burger had used a trust as part of his estate plan.

                                                       Revocable Living Trusts

Living trusts can be either revocable or irrevocable.  The most common type of trust used as a will substitute is a revocable living trust.  You should still have a last will and testament with your trust.  Generally these wills are referred to as pourover wills.  A revocable living trust is an arrangement you make for management and distribution of your property.  Like a will, the trust is "revocable," meaning that you can modify or terminate it at any time.  Revocable trusts are established by a written agreement or declaration which appoints a "trustee" to administer the property, and which gives detailed instructions on how the property is to be managed and eventually distributed.  If you want your trust to be a substitute for probate and guardianship, you must give the trustee detailed instructions about how to handle these situations, and you should legally transfer your assets to the trust.

 The process of transferring assets to a trust is called "funding the trust."  Many people, including lawyers, create trusts but fail to fund the trust.  If you fail to transfer assets to the trust those assets may end up being subject to probate.  How do you transfer assets to the trust?  Real estate is transferred by deeding the property to the trust.  Financial assets are transferred to a trust by opening an account in the name of the trust or by switching the ownership of the account to the trust.  After the account is opened in the name of the trust you can deposit cash or register securities in the name of the trust.  By doing this, the financial assets become part of the trust.  A membership interest in a LLC is transferred by assigning the membership interest to the trust.  Life insurance can be transferred to a trust by changing the owner and beneficiary of the life insurance policy to the trust.

                                  Beneficiary Designations vs. Revocable Trusts

One common question I am always asked is, why do I need a trust if I can designate beneficiaries on everything?  The answer is simple: designating beneficiaries only avoids problems associated with probate.  In the event of incapacity you are still the owner of the assets and, as a result, a guardian needs to be appointed to manage the assets.  Another reason why a trust is more beneficial is the flexibility of retaining assets in the trust and distributing those assets out over time.  You can create a distribution plan that is tailored to each specific beneficiary, i.e. staggered age distributions, percentage of distributions over a certain period of time, or special needs language for an individual with disabilities.  A third reason that trusts are superior to beneficiary designations is that married couples can take advantage of two applicable estate tax exemptions.  The current applicable estate tax exemption amount is $2 million.  Loss of claiming both spouses' applicable estate tax exemption amounts means that your heirs could pay up to an additional $1 million in estate taxes.

                                              Other Estate Planning Documents

Durable Power of Attorney for Asset Management:  A power of attorney for asset management is a document that gives someone the authority to manage your financial affairs if you become incapacitated.  The person you name to represent you is usually called your agent or attorney-in-fact.  Important provisions which should be included in this document include the power to handle tax matters, manage retirement accounts, cancel credit cards, transact financial matters, and deal with social security.

Durable Power of Attorney for Healthcare:  A power of attorney for healthcare allows you to designate a person to make healthcare decisions for you if you are unable to do so.  NRS 449.830 provides a form that must be substantially followed.  Section 6 of this statutory form allows you to add additional statements or desires.  It is highly recommended that you put a HIPAA release in Section 6.  A HIPAA release gives authorization for disclosure of an individual’s protected health information and medical records of all kinds.  Without this release a major hurdle is created for your family or loved ones seeking to obtain information about your healthcare situation.

Directive to Physicians:  These directives are generically referred to as "Living Wills."  A directive to physicians allows you to instruct your physician to withdraw or withhold artificial methods that extend the natural process of dying.  There is a sample form set forth at Section 449.610 of the NRS.

Life Insurance Trust:  One common misconception is that life insurance is not subject to taxation.  While it is true generally that life insurance is not subject to income taxation, it can be subject to estate taxation.  A way to avoid the estate taxation of life insurance proceeds is to make a life insurance trust the owner and beneficiary of the insurance policy.  An irrevocable life insurance trust (an "ILIT") is an irrevocable trust created for the primary purpose of owning a life insurance policy and distributing the insurance proceeds upon the death of the insured.  The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created.  Once the grantor contributes the insurance policy to the trust, he cannot later reclaim ownership of the policy or change the terms of the trust.  One of the reasons for using a life insurance trust is estate tax considerations.  If an ILIT is properly structured, the death benefits paid to the trust will be free from estate taxes.  In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without causing the insurance proceeds to be taxable in the surviving spouse’s estate.

Keeping Your Estate Planning Current

Life is a never-ending cycle of changes.  As changes take place in your life, your estate planning documents may need to be reviewed and revised.  For example, if you get married, divorced, have children, or heirs pass away, your documents should be reviewed to determine if they need to be updated.  Absent any of the foregoing changes, the general recommendation is that your estate planning documents should be reviewed at least every five years.

Conclusion

Do not be like the shoemaker who fails to provide his family with shoes.  Instead be a lawyer that provides his family and loved ones with an estate plan.  If you do not practice in this area, get the help of a lawyer who practices primarily in the area of trusts and estates.  Do not end up being one of the majority of Americans who have no will.  Make it a goal to get your estate plan done before the end of this year.

John Dawson is a shareholder with Lionel Sawyer & Collins, where his practice focuses primarily in the areas of trusts and estates and asset protection.  He is the co-author of Asset Protection Guidebook for Attorneys and Accountants, and has taught various Continuing Legal Education courses on probate, estate taxation, and related topics.