Estate Planning

By Bob Wood

Any article focusing on life insurance, such as the one published in this column last week, should be followed by one covering another major end-of-life issue–estate planning. Unfortunately, this subject is one that most prefer to avoid–many times until it’s too late. But thinking and planning, before that final event happens will make the transition much easier for those you leave behind.

As with life insurance, people seem to focus on the cost of implementing these sound strategies and ignore the benefits realized by their survivors. Those who fail to plan for the inevitable leave survivors who will wonder for many years why such planning wasn’t done when time was plentiful and costs were a relative bargain–when compared to having done nothing.

Seeing an attorney and discussing wills, health care surrogates and trusts are hassles that take time, something we all find in short supply. And some of us just don’t want to think about dying. And, yes, the right attorney will charge what seems like a very high price for setting up those instruments. But failing to have your own plan in place when your time comes will cost far more money, time and hassle for those you leave behind.

Maybe the best thing to do first is schedule a consultation with an attorney specializing in estate planning. Have the attorney first walk you through what would happen to your survivors with your “current” estate plan. And if you are thinking that you don’t yet have an estate plan in place, you are wrong. Everyone has a “fall-back” plan!

For those who don’t take the time and pay the costs of setting up their own estate plan, or directives for the disposition of their assets, the “fall-back plan” set up by your state government becomes effective. The “default estate plan,’’ lays out what will be done at the discretion of people you don’t know and who have little time to consider what’s best for your family.

Oh, the good part of these default plans is that they don’t cost anything–up front. But the cost to your family could be huge if this plan becomes effective upon your death! As with any estate plan, these “fall-back” plans become effective at the moment of your death. Your attorney can describe the particulars of your state’s plan and how it would apply to your particular situation. Be sure to bring along your pain medication!

For a man survived by his wife, the results are much better. The wife will automatically inherit his assets and liabilities. A possible snag in the plan could be misunderstandings that surviving children might have about their entitlements. Also, for those who are married, other directives, such as for health care and living wills, should be put in writing. Who doesn’t remember the case of a Florida woman, Terry Schiavo, which made national headlines last year? Anyone wondering how intrusive a state government can be in what we assume are personal matters should refer back to that case.

Those who think that estate planning is a method for saving money on taxable distributions to heirs would only be partially correct. In many cases, larger issues often dominate your surviving family’s concerns. For example, leaving large assets to younger children presents obvious problems.

What would your younger children do with a large amount of money suddenly theirs to spend as they wish? Would the money be managed as you have managed it? Would the work and sacrifice you made in the amassing those funds be respected by your children–or might they be tempted to spend them foolishly? How long would those funds last in hands that are less disciplined and less wise than your own?

If you happen to die at an early age, and your spouse happens to be in the wrong place at the wrong time along with you, who would be the designated guardians for your children? Your state has methods to implement in such cases, and they may not match your own desires.

Setting up a good estate plan now allows you to retain control of your affairs after your death. Apportioning funds to younger children over time is a popular option with many. And protecting those assets from potential divorce proceedings in the future is another point to consider. For example, your child could potentially marry the wrong person and lose half of his or her inheritance in a divorce.

In the words of author Ted Kurlowicz in the text book, Estate Planning Applications, ‘’The planning process should include answering the ‘who, how and when’ questions; that is, the client must establish goals for who will receive his or her wealth, how or in what form the wealth will be transferred, and when the wealth will be distributed to the intended beneficiary.’’

In other words, will the transfer of your assets occur in the way you would most prefer? And will having your own planning documents mitigate potential family squabbles after your death, rather than exacerbate them through lack of a plan?

Of course, if your assets are large enough, taxes will become an issue. And some assets, such as tax deferred accounts like an IRA, can be hit with the dreaded double taxation. That means that those assets become part of your taxable estate but are also considered income when taken as distributions by your heirs. If your children decide to take their inheritance share in a lump sum as soon as possible, those funds can be hit badly with taxes.

You might consider another great application for permanent life insurance policies, as discussed in this column last week. An insurance policy that might seem unneeded at your current age and with accumulated assets could be great for providing ready assets at your death, while other assets are tied up in the probate process. And if most of your invested assets reside in tax-deferred accounts, insurance proceeds can be used to offset income and estate taxes. Also, your children may not have access to your ready assets, like your checking account, for paying bills due in the very short term.

Congratulations to those who do have an estate plan in place, in writing with the help of an attorney. But, when we consider the ever-changing tax laws and circumstances involving your family, such as children who are now older than when the plan was first written, timely reviews and adaptations of the plan are necessary, too.

If your children are too young to make financial decisions on their own, who would you prefer to make those choices for them? How should their assets be managed, and by whom, should they be under the legal adult age in your state? These considerations also illustrate the benefits of using trust documents.

In basic terms, trusts come in two forms–irrevocable and revocable. The irrevocable trust is just that–irrevocable. You forego control of assets in the trust, and the terms are set. On the other hand, a revocable trust allows you to retain control of the assets, but it increases your taxable estate–just in case you were wondering why anyone would cede control of substantial assets. Your revocable trust becomes irrevocable at your death, so again, frequent reviews, perhaps every three years, are important considerations when using trust documents.

But a trust, if your estate is large enough, can also serve as a great tool for controlling and protecting your assets–and your family–when you are no longer able to provide guidance and decision-making for them. Not having your express desires in legal, written form can be disastrous for your survivors to endure. And since we don’t know when we will die, setting these plans in place now is the only rational choice we have. If you are one of the few who have saved and invested wisely for many years, what a shame it would be to see all of that hard work and patience seriously eroded in the absence of another form of planning!

Plan now–and have a great week,

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc.,


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