Clients and potential clients are often deterred from doing estate planning by a perception that the process is complicated and involved. The complexity of a client’s estate planning usually depends on where the client is on the estate planning hierarchy, which may indicate the planning isn’t as complicated as first thought.
Factors impacting a client’s position on the hierarchy include:
? The size of the client’s estate. Generally, the larger is the estate, the higher up the estate planning hierarchy the client will be.
? The client’s estate planning goals. The more things that clients want to accomplish as part of an estate plan, the farther up the estate planning hierarchy they will be.
? The client’s planning tolerance. For some clients, a simpler plan is a higher priority than saving the last penny in taxes or trying to cover every possibility. Many clients eventually reach a point of estate planning exhaustion where the benefits of additional planning do not justify the time and cost required.
The estate planning hierarchy consists of 4 levels. The number of clients on each level diminishes the higher up the hierarchy you go while the complexity increases.
? Level One–Basic. The first level consists of basic estate planning documents: a will, durable power of attorney, health care power of attorney and a living will. Almost every estate plan will require these documents, regardless of the client’s situation.
The client’s situation will impact the complexity of the will. For a single person with no children and few assets, an uncomplicated will may be sufficient. A married client with a taxable estate may require a will designed to minimize estate and generation-skipping taxes.
? Level Two–Enhanced Basic. Many clients may need to move up a level on the estate planning hierarchy to simplify the estate administration process for their heirs using a revocable trust or to give heirs the flexibility needed to take retirement plan distributions.
Most clients have heard horror stories about the time and cost of the probate process and how revocable trusts can simplify the transfer of assets. While both the horror stories and benefits of revocable trusts may be exaggerated, attorneys in many states recommend revocable trusts as part of standard estate planning for their clients.
Retirement plan assets, whether in a qualified plan, an IRA or 403(b) account, often are a client’s largest asset other than their house. The benefits of tax-deferral on inherited retirement assets can be lost if an heir decides to not take distributions over his life expectancy. Loss of tax deferral can also result if the assets are left to a trust that does not qualify as a designated beneficiary or if the trust contains provisions that reduce the distribution period. So many attorneys and advisors recommend using a separate trust designed to qualify as a designated beneficiary to receive retirement plan assets, even if a revocable trust is also part of the estate plan.