Estate Tax Planning 101: ‘Call to Action’

Estate planning 101 applies to all clients. Guiding clients to get the right counsel is an important conversation to have and another reason for clients to value wealth managers’ services

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Estate planning is not just for the high-net-worth (HNW), or ultra-high-net-worth (UHNW). While the changes to estate and gift taxes in late 2010 that reunified these two taxes—and ways of transferring wealth—enabled some very dramatic savings for the very wealthy, (see “Estate Tax and Gift Plans Can Greatly Reduce Tax on Wealth Transfers,” and “Estate Planning Demystified, and Saving Millions in Taxes on Gifts to Grandchildren,”) there’s a “call to action at every level,” according to Benjamin Ledyard, director of wealth strategies at Silver Bridge Advisors.

While the new tax laws rejoined the estate and gift taxes, and provided for a $5 million exclusion from estate and gift taxes for individuals ($10 million for married couples), before doing anything else, help clients understand “Estate Planning 101,” Ledyard advises.

Look at the client’s life plan and estate plan, says Ledyard. “Ask clients how they’d like to distribute their wealth, to heirs, taxes, charitably and to family.” He uses what he calls a “map” with boxes for each of the above and maybe a “family tree” under family. Once they’ve done an inventory of assets, ask them, if they “walk out of here today and get hit by a bus, how will the assets pass today—and will that hit your objectives,” he advises. Then the planning can begin.

First, “explain how property is passed: by contract, by tenancy, or by will or estate planning documents, such as arevocable trust,” Ledyard explains. One of the basic goals here is to keep property out of probate upon the owner’s death. Property in a person’s name or in their will goes through probate, but that which is passed via a contract or through joint ownership does not, he says.

Joint Tenancy

“Clients often overlook joint tenancy,” in titling property in the way that is most advantageous for estate and gift tax planning, Ledyard explains. These are some of the joint tenancy options:

  • Joint Tenants (JT)   
  • Joint Tenants With Rights of Survivorship (JTWROS)
  • Joint Tenants by Entirety
  • Joint Tenants in Common

These all apply to different client situations and it is vitally important that the titling is correct. “Fancy documents don’t always coordinate with property titling,” Ledyard says, and clients’ intent “can be totally extinguished” if the titling is not properly done.

By Contract

“IRA’s, life insurance and private contract notes, are passed on by contract,” says Ledyard. Designating the beneficiary correctly, and whether an individual or a revocable trust can make a difference in whether the outcome is optimal.

By titling correctly, more property can pass without being included in probate. Ledyard looks at it this way: for a married couple with $10 million in assets you might divide it into thirds when looking at arranging it for optimal estate and gift planning. So if you are looking at clients with a house; IRA; and another house or other personal property, two of those three can be passed with joint tenancy.

Checklist for Estate Planning 101

Ledyard has several suggestions for Estate Planning 101 that apply to every client:

  1. “Check their will, and create a revocable trust “to avoid probate, a nasty, long time-consuming process,” says Ledyard. In a revocable trust, assets pass similarly to a will but it avoids probate.”
  2. “When meeting with an estate-planning attorney with a client, anticipate that this could change in two years,” as the tax laws expire.
  3. Assets should be “titled in the name of the revocable trust—personal investment accounts, maybe the house. For IRAs, use the beneficiary form and name the revocable trust, because revocable trusts get funded immediately. The revocable trust is flexible—can be changed until the person creating the trust becomes disabled or dies.”
  4. Make sure the will and revocable trust “documents reference the new tax law.”
  5.  “Everyone should have a general power of attorney,” says Ledyard, “so if a client gets into a car accident someone can write checks,” on their behalf.
  6. “Everyone should have a health care directive—how you decide (and direct) how you want to spend your last days.”  
  7. “Wills: should include a limited power of appointment (LPA), so that somebody lucky enough to benefit from a trust can decide where that goes when they no longer need that income.” And, it’s important to remember, Ledyard says, that, “old LPAs can be stale.” 
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