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Overview of Estate Planning

Identify goals and prepare an action plan.

Your comprehensive estate plan is the process of identifying your personal goals, ascertaining your current financial, legal, and business circumstances, projecting possible future scenarios, and then devising and implementing a plan where you and your estate planning team (i.e., all of your advisers: lawyer, accountant, insurance broker, securities broker or financial planner, and others) are working towards achieving the goals you identified. Having an estate planning team also doesn't require you to be in the multi-million dollar category, nor does it require that you spend a lot of extra money. Just make sure that each adviser you have is aware of your other advisers and that when a document is prepared or a planning step is taken, each adviser (where appropriate) is also made aware of what is being done. Each adviser should also be clearly told that you view him as an essential part of your estate planning team and hope that in an emergency he will coordinate his assistance with your other advisers.

The estate planning process thus requires four steps.

1. Identify your personal goals and objectives.

   OBSERVATION Every individual is unique and has his own concerns, objectives, and desires. Identifying your true goals and objectives is essential to assuring that your plan reflects you and is not just a "boiler-plate" from an attorney's computer.

2. Prepare financial, family, and personal background information.

3. Prepare legal and other documents indicated by the first two steps as necessary or appropriate.

4. Prepare and implement an action plan to carry out the intent of the legal documents and other goals. This could include revising your investment strategies, changing title to assets, purchasing additional insurance, and making gifts. These ancillary steps will be discussed at various points throughout this book.

PLANNING TIP Remember, follow through is important for more than your golf swing. If you don't follow through and implement the suggestions made in this book, merely filling in blank forms may not be enough to achieve your hoped for goals.

Follow Through On Your Estate Plan

Estate and personal planning is much more than a mere will as illustrated above. The scope of your plan is as individual as you and must address all your personal goals and concerns and the financial, legal, and related circumstances that affect you. Your plan can include any or all of the following:

• Planning the process of creating, managing, and eventually passing on your wealth.

• Assuring your personal preferences for medical care, burial, and so on are carried out.

• Protecting yourself and your loved ones from legal, tax, financial, and related problems.

  PLANNING TIP Don't let your concern over taxes control your estate planning.

• Planning the succession of your business.

• Minimizing the legal and financial problems of disability.

• Assuring management of your assets as you advance in age.

• Minimizing taxes. Estate taxes are not the only taxes. Income taxes, gift taxes, excise taxes (e.g., on setting up a foreign situs asset protection trust), generation skipping transfer taxes, state income taxes, corporate level taxes, accumulated earnings taxes, and other taxes must all be considered to truly protect your earnings and assets.

• Religious convictions may be important to you when faced with life's hardships like a life threatening illness or the death of a family member. If so, they must be integrated into your plan.

• Assuring maximum growth of your investments to secure your retirement, your child's education, or the care of a loved one.

• Asset protection planning. Protection from specific malpractice claimants or simply attempting to minimize the risks of living in such a litigious society.

OBSERVATION Asset protection planning is not only for professionals subject to malpractice suits or wealthy people. Anyone's assets can be put at risk by an accident, a lawsuit, or a divorce that are not covered by insurance. Asset protection steps can be achieved in many more ways than merely setting up an expensive and complex trust in a distant island country you've never heard of. As a first step, be sure your casualty and property insurance is adequate. Do you have enough coverage? If you have a home-based business (or non-home based business), have you thoroughly investigated what types and amounts of insurance you should have? Do you have an excess personal liability (sometimes called umbrella) insurance policy? Umbrella insurance provides protection when the limits of your homeowner's or automobile insurance are exceeded by a large claim.

Making Your Comprehensive Estate and Personal Plan Documents Work-Ask the Key Question: "What If?"

The key words in formulating all personal and estate plans are "what if." If you don't plan for the unexpected contingencies and if you're not sufficiently cautious, the best of plans will not suffice.

What if the stock market drops precipitously? This is why you must allocate investment assets and why diversification among asset classes is as important (or according to many, more important) than the specific investments (e.g., stocks) you select. This is also why you must make sure the most important people under your will get their share of the assets first.

What if you're sued for an injury or accident? This is why you must have, in addition to homeowner's and automobile insurance, an umbrella liability policy that covers claims over the maximum on your underlying homeowner's and automobile insurance. The proliferation of lawsuits makes everyone a target so everyone should consider steps at asset protection planning, not merely the physician in a high risk specialty. The "what if" questions should highlight your risks so you can discuss the appropriate protective steps with your insurance agent and, perhaps, other advisers.

WARNING If you have any significant or unusual risks, don't try to develop an estate plan by yourself. Get professional help. Start with an estate planning attorney who is experienced and knowledgeable with asset protection planning concepts.

"What if" questions must be asked in preparing your estate planning documents as well. What if things change? What if children mature faster/slower than anticipated? What if your estate grows/shrinks? Your documents should be drafted as flexibly as possible to avoid an unintended result. A problem with protecting yourself and your loved ones is that there is tremendous uncertainty. So the way to plan is to ask "what if?"

When your will is drafted, be careful to consider what will happen to your distributions under different scenarios. If your estate declines substantially because hazardous waste is found on your business plant, or the stock market crashes, what happens to the distribution scheme of your will. In many cases assets will not end up where you want. One approach is to consider drafting provisions so that maximum and minimum amounts and percentages of your estate are used for each bequest.

EXAMPLE Assume that you want to leave $10,000 to a close friend, your estate is worth $400,000, and you're not concerned that the $10,000 gift could significantly affect your children's inheritance. However, if you're faced with a financial calamity, you might be very disappointed if your friend received $10,000 and your children not much more. If a loss of a job, a major illness, a lawsuit, or another problem reduced your total estate to $100,000, your friend would be getting a full 10 percent of your assets instead of the relatively nominal gift you intended. A safer approach would be to have your lawyer use language like: "I leave $10,000 to my good friend Joe Smith, who resides at 123 Main Street, Anytown USA, not to exceed 2 percent of my adjusted gross estate." This can protect your children in the event of a change. If your estate did decline to $100,000, Joe would only get $2,000, and your children would not be as adversely affected.

EXAMPLE A simple "what if" example can illustrate why most short (ten pages or less and double spaced) wills may not serve you well. These simpler wills may not include any trust provisions for minor children. If your children are all adults, why would you need a trust? Simply because they are adults doesn't mean that you shouldn't consider whether they are mature enough to handle money in the event something happened to you. Would you want them to inherit your money outright, or would you prefer that it be held in a trust for their benefit? Even if your children (or other heirs) are models of financial sophistication, the divorce rate is over 50 percent. What about law suits? A trust can protect against these risks. Even if your children are at such an age where they don't need a trust, what about a trust for your grandchildren? This can be important even if you are leaving your estate only to your children (i.e., you're trusting your children to take care of their own children). Why? Consider the following. What if one of your children is doing very well financially and may not need the money. If your will is set up properly with a contingent trust for minors, your well-to-do child can disclaim (file papers in court stating that he does not want some portion or all of the inheritance) and those assets would then go to the well-to-do child's own children in trust. The well-to-do child could even be a co-trustee in charge of the money. What if one of your children should predecease? That child's share may then go to the deceased child's children, your grandchildren. But if you do not have a trust, where is it going to go? What if one of your children is a doctor concerned about malpractice and lawsuits? Instead of the doctor accepting the inheritance, he can execute a disclaimer saying to the court that he does not want any of the money from your will. If your will is written properly, the money would go to that child's children (i.e. your grandchildren) in a trust. If you leave money to an heir, what if that heir is being sued? You don't want the money to go to a creditor. If you build in the flexibility for the "what if," you will enable your child to protect the money.

None of this is complicated or even out of the ordinary. It just requires some "what ifs."

Flexibility Is Key

If there is more than one way to achieve a goal, use the most flexible approach possible. What you expect to happen, often doesn't. The best approach to extend the usefulness of your estate plan and documents is to use the most flexible options. Wherever you can build flexibility into a document, try to. For example, when you name trustees under your will, name several alternates. If you have minor children, you will want to have a trust in your will (the sample form will includes a trust that will apply when any beneficiary is under age thirty-five). But should you always have a trust? No. Consider the following example.

EXAMPLE When providing for trusts for minor children in your will you may wish to provide that if the amount involved is less than some specified figure (say $20,000) the trust will not be funded. Instead, the assets will be distributed outright to the beneficiary, to the guardian, or to a Uniform Gifts to Minors Act account (a custodial account). While trusts are an important tool to protect minor children, a beneficiary who is disabled, and others, if the amount is too small the costs of running the trust (trustee fees, accountant fees for the annual tax return, and so on) will be too large in comparison. Thus, it may hurt the person you were seeking to protect.

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