The Tools & Techniques of Estate Planning, 19th edition

By Stephan Leimberg, L. Paul Hood and Edwin P Morrow

In the course of a single year, estate planning has been directly affected by numerous, significant revisions to the law. When rules change, every estate planner must stay completely up-to-date with all the opportunities—and pitfalls—arising from the new legislation.

The Tools & Techniques of Estate Planning, 19th edition, applies the trusted Tools & Techniques approach to all aspects of modern estate planning, enabling you to:

• Help your clients plan every aspect of their estate, including tax, investment, insurance, and estate administration decisions
• Help your clients effectively preserve their assets under current law
• Handle a wide variety of estates and specific circumstances
• Save significant amounts of time with exclusive estate planning tools

In addition to everything that made the first eighteen editions of The Tools & Techniques of Estate Planning so effective and popular, this new edition delivers several enhancements including:

• Cover-to-cover updates to reflect changes in tax code that were enacted in the 2017 Tax Cuts and Jobs Act
• A new chapter on planning techniques that utilize the new Section 199A Qualified Business Income (QBI) deduction
• Significantly updated chapters on trust planning and income tax considerations in estate planning

This book features easy-to-understand, real-world examples from expert authors on what techniques are best suited for a wide variety of circumstances, and equally important advice on how to avoid future problems. Readers will learn the most important issues and planning techniques to help clients plan every aspect of their estate. In these pages you’ll also find reliable, practice-based analyses of hundreds of recent cases and rulings, helping you assist your clients in making the best decisions for themselves and for their families.

• Language: English
• Publisher: The National Underwriter Company
• Release date: Jan 9, 2019
• ISBN: 9781949506341

Book preview

pro.nuco.com/booksupplements.

OVERVIEW OF ESTATE PLANNING

CHAPTER 1

INTRODUCTION

Often, in order to encourage cooperation and full disclosure of pertinent data, it is necessary or helpful to explain to a client:

•    what estate planning is

•    who should be concerned with estate planning

•    how the federal estate tax laws work

•    the mistakes that are commonly made because of a lack of proper planning

This chapter is presented in plain language and in a format designed to help professionals present and highlight to the client the significance and urgency of estate planning. As part of this process, it is also important to explain to the client how assets actually pass. For example, not all assets pass by operation of the will. Many assets pass by virtue of titling or beneficiary designations. Therefore, it is important for the client to understand the importance of coordinating the disposition of these automatically passing assets with the overall estate plan.

ESTATE PLANNING PARADIGM SHIFT

The 2012 tax act changed the estate planning paradigm that had been in place since at least the 1976 tax act. The old estate paradigm was as follows:

•    During life, use the applicable exclusion amount sooner rather than later.

•    It was usually better to pay gift tax than estate tax because the gift tax was cheaper (tax-exclusive v. tax-inclusive).

•    During life, transfer wealth as quickly as possible.

•    Avoid estate tax inclusion at every generation.

•    New basis at death is less important because of the relatively low capital gain tax rates, particularly relative to the higher federal estate tax rates.

•    Income tax consequences are secondary.

•    State of residence will not significantly affect the estate plan.

Since the 2012 tax act, the new paradigm, which represents a radical shift in thinking, is as follows:

•    Estate planning is significantly more nuanced and complex and considers many more factors in the calculus.

•    Clients should consider keeping as much low basis property as possible for the new basis at death.

•    Paying gift tax doesn’t make nearly as much sense today. What if there is no estate tax tomorrow?

•    Zeroed-out transfers and freezes should be utilized instead.

•    Income tax considerations must be considered in tandem with potential transfer taxes.

•    Tax basis management will be a crucial part of estate planning-swaps of high basis assets for low basis assets in grantor trusts.

•    Estate tax inclusion can save more in income taxes and should be used if the income tax savings are greater than the transfer tax cost.

•    State of residence will give rise to very different types of estate planning, as far as how active versus passive the planning is.

This new paradigm requires much more intellectual rigor, as the new paradigm is much grainier than the old paradigm and is, in places, directly opposed to what was sound advice just five years ago. Estate planners must adapt quickly to this new paradigm-until the next so-called permanent law change is enacted.

WHAT IS ESTATE PLANNING?

Estate planning is the process of planning the accumulation, conservation, and distribution of an estate in the manner that most efficiently and effectively accomplishes your personal tax and nontax objectives. Every estate is planned – either by the individual or by the state and federal governments. By your actions now, you can strongly influence, if not determine, what will happen when…

Controlled estate planning is a systematic process for uncovering problems and providing solutions in clients’ L.I.V.E.S. Planners should use this L.I.V.E.S. acronym to illustrate the seven major areas of estate planning and emphasize the significance and urgency of action to solve them:

1.    Lack of liquidity: Insufficient cash to pay administrative costs including the costs of maintaining property, taxes, and other estate settlement expenses. A lack of liquidity can trigger a forced sale and result in the loss of an estate’s most precious assets at pennies on the dollar. In other words, if there is not enough cash in an estate to pay for the demands as they come due, the estate’s personal representative may be forced to sell the estate’s prime assets under fire sale conditions. Liquidity can also become a problem when considering retirement assets. While on a superficial level, retirement assets are both available and liquid, it is important to keep in mind that when distributions are made from retirement accounts, these distributions are taxed at ordinary income tax rates. In addition, these assets are also subject to estate tax at their full value. Therefore, if the estate and/or beneficiaries take distributions from these accounts in order to pay taxes or administration expenses, these distributions will be subject to income tax and incur a significant cost for using these funds.

2.    Improper disposition of assets: When the wrong asset goes at the wrong time to the wrong person in the wrong manner, the result is often disaster. For example, picture the proceeds of $100,000 of group life insurance or a $500,000 pension plan being paid to a twenty-one year-old child. All too many estates contain property that will pass outright to a person who has little, if any, training, experience, or desire to properly invest and manage that asset. This is particularly true where a family-owned business is concerned. Problems can also arise when trying to access these funds. For example, when distributions are payable directly to a minor, some states require that a court appoint a guardian when the assets passing to the minor exceed a certain amount. This creates additional costs and paperwork in order to access these assets.

3.    Inflation (need to both diversify and inflation-proof portfolio): Many individuals have placed all their financial eggs in one basket or have not considered the diminished and diminishing purchasing power of life insurance or a retirement fund that may have been adequate only four or five years ago. The ravages of inflation and risk of placing all of a client’s family financial security in one investment (or business) must be factored into the estate plan.

4.    Inadequate income or capital at retirement/death/disability: Planners and clients often forget that cash demands for survivors’ food, clothing, shelter, and schooling often will exhaust the funds that would otherwise be available for estate liquidity needs – and vice versa. And in an astounding number of cases, the principal necessary to maintain a given lifestyle is vastly underestimated, often because of unrealistic assumptions of long-term net-after-tax growth or the actual cost of living at the scale the client and his family wish to maintain.

5.    Value and values: Clients need to stabilize and maximize the value of their business and other assets. Clients, who own businesses should build key employee protection into their plans, establish golden handcuffs to attract, retain, and retire key employees and use their businesses more effectively to solve personal financial problems. Plans also need to be made to encourage and perpetuate core family values.

6.    Excessive transfer costs: Simply put, many clients’ families will pay a severe – and needless price – for the inaction of senior family members. The difference between an I love you – all to my spouse will and the use of a well-designed bypass and marital trust combination can sometimes be measured in millions of dollars of senseless federal estate tax payments. This is true even with the portability rules discussed in greater detail in Chapter 25.

7.    Special problems: Clients must not overlook the extreme importance of planning for the spouse or child who cannot, should not, or does not want to, handle a family business or large investment portfolio, or for a physically handicapped or emotionally or mentally troubled spouse or child. Satisfying the desire to give back and to enrich and support charity is also often a strong planning need.

WHO NEEDS ESTATE PLANNING?

More sophisticated planning than a simple will is indicated for:

1.    Individuals with estates exceeding the unified credit exemption equivalent (applicable exclusion). Currently, the federal estate, gift, and generation skipping tax exemptions are all $11,118,000 (for 2018, with such amounts being adjusted annually for inflation). The projected amount for 2019 is $11,400,000. Most clients will not have assets of a sufficient level to have to do a lot of planning to reduce or pay tax on gift, estate, or generation-skipping transfers. The planning considerations will begin for those clients who are close to the amount of the exemption. As your assets begin to exceed the estate tax exemption, it will be important to consider the extent to which you want to implement a traditional credit shelter arrangement, or to rely on the estate tax portability provisions. This is the point where more sophisticated estate tax planning starts to become warranted.

2.    Individuals in combined state and federal income tax brackets in excess of 15 percent.

3.    People with:

a.    Children who are minors.

b.    Children (or spouses or other dependents) who are exceptionally artistic or intellectually gifted or otherwise are expected to have their own wealth.

c.    Children (or spouses or other dependents) who are emotionally or mentally challenged, emotionally disturbed, or physically handicapped.

d.    Spouses (or children or other dependents) who can’t, or don’t want to, handle money, securities, or a business.

e.    Closely held business interests.

f.     Property in more than one state or persons who often move from state to state.

g.    Charitable objectives.

h.    Special property such as fine art, a coin, gun, or stamp collection.

i.     Pets that are particularly important to them.

j.     Asset protection concerns of heirs.

4.    Nonresident aliens, resident aliens, aliens about to move to the U.S., individuals considering expatriation, and U.S. citizens with property interests in foreign countries. (See Chapter 65.)

THE MOST COMMON ESTATE PLANNING MISTAKES

(And How to Avoid Them)

This entire commentary is devoted to the types of problems that can cost you and your family dearly in terms of dollars and unbelievable heartache. Since it would be a shame to have to learn from your own mistakes, this commentary is dedicated to the wise man (and woman) who can profit from the lessons so many have expensively learned the hard way.

Here are a number of areas of common (and serious) mistakes that can be easily solved with the assistance of a financial services professional.¹ While the following is addressed to clients, financial services professionals should be on the lookout for these common mistakes and periodically review clients’ plans accordingly.

Mistake 1: Improper Use of Jointly-Held Property

If used excessively or by the wrong parties (especially by unmarried individuals, or where one spouse is not a United States citizen) the otherwise poor man’s will becomes a poor will for an otherwise good man or woman. In short, jointly held property can become a nightmare of unexpected tax and nontax problems including:

A.    When property is titled jointly, there is the potential for both federal and state gift tax, particularly with non-spouses and non-citizen spouses.

B.    There is the possibility of double federal estate taxation; if the joint ownership is between individuals other than spouses, the entire property will be taxed in the estate of the first joint owner to die – except to the extent the survivor can prove contribution to the property. Then, whatever the survivor receives and does not consume or give away will be included (and taxed a second time) in the survivor’s gross estate. With non-citizen spouses, the typical rules associated with the marital deduction do not apply, and the client may need to utilize a Qualified Domestic Trust (QDOT) to avoid the immediate imposition of the federal estate tax. See Chapter 65 for a further discussion of the QDOT.

C.    Once jointly owned property with right of survivorship has passed to the survivor, the provisions of the decedent’s will are ineffective. This means the property is left outright to the survivor who is then without the benefit of management protection or investment advice or the property could be left to a person not intended to be benefited.

D.    Even when property is jointly owned by spouses, the surviving spouse can give away or at death leave the formerly jointly owned property to anyone the surviving spouse wants; regardless of the desires of the deceased spouse. In other words, holding property jointly results in a total loss of control at the first death since the surviving spouse can completely ignore (and in fact may not know) the decedent’s wishes as to the ultimate disposition of the property. Whether this is an issue depends upon the specific facts of the situation. However, this loss of control can be especially horrendous when the joint owners are not related or are clearly not in agreement as to the ultimate recipient of the property.

E.    Since the jointly held property passes directly to the survivor (who then could possibly squander, gamble, give away, or lose the property to creditors), the decedent’s executor could be faced with a lack of adequate cash to pay estate taxes and other settlement expenses. By the same token, since joint assets pass directly to the survivor, it is important to keep in mind how the taxes associated with these assets are to be allocated among the other beneficiaries of the estate. It is entirely possible that the joint assets can pass to one person, and the taxes associated with these assets be charged to another.

F.     A well-drawn estate plan is designed to avoid double taxation – often by passing at least a portion of the estate into a CEBT (Credit Equivalent Bypass Trust). In this manner, up to $11,118,000 in 2018, can be sheltered from federal estate tax at both the first decedent’s death and then again (since the surviving spouse has only an income interest) escape estate tax at the death of the surviving spouse. But holding property in joint tenancy thwarts that objective. Instead of going to a bypass trust to avoid a second tax, the property goes directly to the survivor and will be taxed at the survivor’s death. So the unified credit of the first spouse to die is wasted. See Chapter 13 related to disclaimers whereby with some difficulty, a planner may be able to fix the problem after death. In addition, see Chapter 25 discussing portability, where in some cases this problem can be overcome even if property is held jointly.

G.    Some clients title assets in joint names in order to increase the FDIC insurance limitations. This occurs because FDIC insurance provides for $250,000 of protection for each owner on an account at that particular financial institution.² Therefore, by titling assets in joint names, the amount of the protection is increased. However, by titling assets in joint names, these assets are bypassing the provisions of the estate documents, which can create other problems.

Mistake 2: Improperly Arranged Life Insurance

A.    The proceeds of life insurance are often payable to a beneficiary at the wrong time (before that person is emotionally, physically, or legally capable of handling it) or in the wrong manner (outright instead of being paid over a period of years or paid into trust).

B.    There is inadequate insurance on the life of the key person in a family (the breadwinner) or the key person in a corporation (the rainmaker).

C.    Often, no contingent (backup) beneficiary has been named. The Rule of Two should be applied here. In every dispositive document (any legal instrument that will transfer property at death) there should be – for every name in the document – at least two backups. So, whenever possible, there should be not only back-up beneficiaries but also contingent executors, trustees, guardians, and trust protectors.

D.    The proceeds of the policy are includable in the gross estate of the insured because the policy was owned by the insured and either never transferred, or was transferred within three years of the insured’s death. The solution is to have a responsible financially competent adult beneficiary (or a trust), acting without specific direction from the insured and using his (or its) own money, purchase and own the insurance from its inception. That party should also be named beneficiary (the insured and the insured’s estate should not be named beneficiary).

E.    When the policy owner of a policy on the life of another names a third party as beneficiary, at the death of the insured, the proceeds are treated as a gift to the beneficiary from the policy owner. For example, if a wife purchases a policy on her husband’s life but names her children as beneficiaries, at the husband’s death she is making a gift in the amount of the proceeds to the children.

F.     If a corporation names someone other than itself (or its creditor) as the beneficiary of insurance on the life of a key employee, when the proceeds are paid, the IRS will argue that the proceeds are not income tax free and should be treated as either dividends, if paid to or on behalf of a shareholder, or compensation, if paid to an employee who is not a shareholder (assuming the premiums were never reported as income or there was no split dollar agreement or no Table 2001 income reported). Worse yet, if the insured owned more than 50 percent of the corporation’s stock, he is deemed to have incidents of ownership (that means federal estate tax inclusion of the proceeds) in the policy on his life. So, for example, the same $1,000,000 proceeds could be taxed as a dividend for income tax purposes (as much as $396,000 of income tax in 2018 for those in the highest tax bracket and also be taxed as an asset in the estate for estate tax purposes (as much as $400,000 of estate tax).

G.    Whenever life insurance is paid to the insured’s estate, it is needlessly subjected to the claims of the insured’s creditors and in many states unnecessarily subjected to state inheritance tax costs. Probate costs are increased without reason and the proceeds are then subjected to the potential for an attack on the will or an election against the will. Although, in some rare cases, it may make sense for the estate to be named beneficiary of a modest amount of life insurance (e.g., an amount sufficient to pay estimated debts in an estate small enough to pay no federal estate tax), in most estate planning situations life insurance should be payable only to a named beneficiary, a trust, or a business entity.

H.    If a life insurance policy – or any interest in a life insurance policy – is transferred for any kind of valuable consideration in money or money’s worth, the proceeds may lose their income tax free status. For example, if a child buys the $1,000,000 term insurance policy owned on her father’s life from his corporation or business partner, when she receives the proceeds, the entire $1,000,000 could be subjected to ordinary income tax. These rules are usually described as the transfer for value rules with respect to life insurance, and are set forth in section 101(a)(2) of the Internal Revenue Code.

I.     Where a husband is required by a divorce decree or separation agreement to purchase or maintain insurance on his life, he will receive no income tax deduction for premium payments if he owns the policy – even if his ex-wife is named as irrevocable beneficiary. No alimony deduction is allowed on the cash values in a policy the husband is required to transfer to his ex-wife under a divorce decree. The safest way to assure a deduction is for the husband to increase his tax deductible alimony and for the ex-wife to purchase new insurance on his life, which she owns and on which she is the beneficiary. It is extremely important for each spouse recently divorced to immediately review his own life, health, disability, and other insurance situation.

J.     Failing to update beneficiary designation to reflect changes to the estate planning documents. If an individual names his estate as the beneficiary of life insurance policies, the manner in which the money is disbursed is automatically updated as the will is changed. However, when an individual maintains a revocable living trust, it is important to check if the beneficiary designation needs updating as the document is changed. For example, with a new will, the document will almost assuredly revoke all prior wills. But this is not the case with revocable trusts. If an insurance policy is paid to a particular revocable trust, it will be paid to that Trust even if the document is abandoned in favor of a new document. Therefore, when life insurance is paid to a revocable trust, it is better to make amendments to that Trust so that the beneficiary designation has a lesser chance of requiring updating. The problem with this approach is that if a person makes a lot of changes to their documents, you can wind up with a lot of amendments. At some point, it may make sense to truly start over with a new Trust; but when doing so, make sure all beneficiary designations are updated.

Mistake 3: Lack of Liquidity

A.    Most people don’t have the slightest idea of how much it will cost to settle their estates or how quickly the taxes and other expenses must be paid. Worse yet, they don’t realize that a forced (and, possibly, fire) sale of their most precious assets, highest income producing property, or loss of control of their family business will result from an insufficiency of cash. (If you haven’t checked, how do you know your executor will have enough cash to avoid a forced sale?)

B.    Liquidity demands have increased significantly in the last few years and should be revisited by those who have not done a what if … hypothetical probate. Among the expenses that demand cash from the estate’s executor are:

•    Federal estate taxes

•    State death taxes

•    Federal income taxes (including taxes on pension distributions)

•    State income taxes (including taxes on pension distributions)

•    Probate and administration costs

•    Payment of maturing debts

•    Maintenance and welfare of family

•    Payment of specific cash bequests

•    Funds to continue operation of family business, meet payroll and inventory costs, recruit replacement personnel, and pay for mistakes while new management is learning the business

•    Generation-skipping transfer tax (top estate tax rate)

Most larger estates will be subjected to almost all of these taxes and costs.

Mistake 4: Choice of the Wrong Executor

A.    Naming the wrong people to administer the estate can be disastrous. The person who administers the estate must – with dispatch – often without compensation, with great personal financial risk, and without conflict of interest:

•    Collect all assets

•    Pay all obligations

•    Distribute the remaining assets to beneficiaries

Although this three step process seems simple, in reality these tasks are highly complex, time consuming, and, in some cases, technically demanding. Is the named executor capable of carrying out these tasks?

B.    Selection of a beneficiary as an executor can result in a conflict of interest. That person may be forced to choose between his personal interest and that of the other beneficiaries. This problem can potentially be solved by adding an independent third party, such as a bank trust department, to serve alone or together with a family member.

C.    Selection of a business associate may result in a conflict of interest. If the executor’s job is to decide whether or not to sell the business interest or the task is to obtain the highest possible sales price, the executor will be responsible for the course of action that will best serve the beneficiaries’ interests. Yet that may be diametrically opposed to the executor’s personal interest. For example, if the business were to be sold, the executor may be selling himself out of a job. As such, the executor may demand a higher price for the business than he would expect a buyer to pay in order to discourage the business from being sold.

D.    Sometimes the selected executor has neither the time nor the inclination to devote to the sometimes long and drawn out process of estate administration.

E.    Another consideration is whether the executor lives in the state of the testator. This can become a problem in a state such as Florida (where the executor is referred to as the Personal Representative). In Florida, the Personal Representative must be a resident, or a close family member.

F.     The appointment of executors who do not know, or get along well with, the family members they are to serve sometimes results in chaos. A similar problem can occur if more than one executor is chosen and the executors do not get along with each other.

Mistake 5: Will Errors

A.    One of the greatest mistakes is dying without a valid will. This results in intestacy, which is another way of saying that the state will force its own will upon the heirs it chooses.

B.    Too many wills have not been updated. A will should be reviewed at least:

•    At the birth, adoption, or death of a child

•    Upon the marriage, divorce, or separation of anyone named in the will

•    Upon every major tax law change

•    Upon a move of the testator to a new state

•    On a significant change in income or wealth of either the testator or a beneficiary

•    On any major change in the needs, circumstances, or objectives of the testator or the beneficiaries

Mistake 6: Leaving Everything to Your Spouse

A.    Far too many people feel that there will be no federal estate tax because of the unlimited estate tax marital deduction and so they leave their entire estates to their spouses. But upon the death of the surviving spouse, everything that the surviving spouse received (assuming it has not been consumed or given away) is then piled on top of the assets that spouse owns. It is then that the second death wallop occurs with federal estate tax starting on taxable amounts in excess of $11,118,000 in 2018. The solution can be simple: the establishment of a CEBT (credit equivalent bypass trust). Up to $11,118,000 in 2018 can be left to a trust that provides income to the surviving spouse as well as other financial security, but will not be taxed in his estate no matter when he dies or no matter how large trust funds grow. The balance of the estate can go in trust or outright to the surviving spouse. If that amount together with the surviving spouse’s own assets doesn’t exceed the unified credit applicable exclusion for the survivor’s year of death, this portion will also pass estate tax free when the surviving spouse dies. This is good planning even though the unused credit shelter amount of a spouse may be used by the survivor under the deceased spouses unused exclusion amount rules. For reasons discussed in Chapter 25, there may be technical issues with multiple marriages, lost opportunities, and lost generation skipping opportunities if property is held jointly with right of survivorship or left entirely to the surviving spouse, which makes the standard credit shelter planning still the best way to go for many taxpayers.³

B.    Some individuals leave huge amounts outright to a surviving spouse, amounts that neither they nor their spouse have never managed on their own. (Few people have ever successfully managed huge amounts of assets, let alone successfully managed a spouse.) Often the surviving spouse doesn’t have the slightest training or experience in handling and investing a large stock portfolio, real estate holdings, or running a family business.

C.    Leaving everything to a spouse also wastes an opportunity to skip generations and potentially save future generations significant taxes.

Mistake 7: Improper Disposition of Assets

A.    An improper disposition of assets occurs whenever the wrong asset goes to the wrong person in the wrong manner or at the wrong time. Leaving an entire estate to a surviving spouse or leaving a large or complex estate outright to a spouse unprepared or unwilling to handle it is a good example. Leaving a sizeable estate outright to a teenager or to an emotionally or mentally challenged person are also common examples.

B.    Equal but inequitable distributions are common. If an estate is divided equally among four children who have drastically different income or capital needs, an equal distribution can be very unfair. Consider, for example, four children, the oldest of which is a brilliant and financially successful medical doctor and the youngest of which has serious learning disabilities and is still in junior high school. Think of a family with a physically handicapped child and three healthy children with no physical problems. Obviously, their needs and circumstances are not the same. Should each child receive an equal share? The proper solution may be a sprinkle or spray provision in a trust that empowers the trustee to provide extra income or additional principal to a child that needs or deserves more or who is in an unusually low income tax bracket in a given year.

C.    Obvious examples of improper dispositions include the gift of a high powered sports car to a child, or to a senior citizen who no longer drives. That can’t happen in my estate, many people would be tempted to say. But upon the death of a primary beneficiary at the same time or soon after the testator, quite often there is no secondary beneficiary named, or the second beneficiary who is named shouldn’t receive the asset in the same manner as the primary beneficiary. The solution is to consider a trust or custodial arrangements and to provide in the will or other dispositive instruments for young children and legally incompetent people. Consider also the importance of a well-planned common disaster or simultaneous death provision, so that the asset avoids needless second probates and double inheritance taxes and goes to the right person in the right manner.

Mistake 8: Failure to Stabilize and Maximize Value

A.    Many business owners have not stabilized the value of their businesses in the event of the disability or death of key personnel. What economic shock absorbers have been put in place to cushion the blow caused if a key employee dies, becomes permanently disabled, or is lured away by competition at the absolutely worst possible time? Who will pay for the fixed expenses of the practice or business if the key employee is not there to generate income? Key employee life and disability insurance, coupled with good business overhead coverage, will certainly help.

B.    Buy-sell agreements are essential to a business that is to survive the death of one of its owners. Yet many businesses have no such agreement. Or the agreement isn’t in writing. Or the price (or price setting mechanism) doesn’t reflect the current value of the business. Or the agreement isn’t properly funded. So there is no guarantee that the heirs will receive the price they are entitled to – or no assurance that the surviving owners will have the cash they need to buy out the heirs (especially the dissident ones who want to tell them how to run their company).

C.    Wills, trusts, life insurance contracts, qualified plans, IRAs, and tax deferred annuities without backup beneficiaries mean that money that could otherwise pass outside of the probate estate may instead be subjected unnecessarily to such costs and risks. The value of all those instruments and wealth transfer tools can be enhanced at no cost by merely naming secondary beneficiaries. It can also be a problem to name a minor child as the direct beneficiary of an asset. Since a minor cannot legally own assets, this may result in needing to have a guardian appointed for the minor child to help manage these assets. The guardian may have to be someone other than the minor’s parent. The solution to this problem is to make sure that beneficiary designations are properly coordinated with the estate plan.

Mistake 9: Lack of Adequate Records

A.    It can drive your executor crazy – and cost thousands of dollars of expenses – if estate and financial documents are difficult or impossible to find. Too many people hide assets such as cash in books or drawers, or even under mattresses. Take out a safe deposit box. Tell your executor where it is and make sure your executor has or can get the key and has access to it. Put all your important documents in that box. Each year, put an updated list of the names, phone numbers, and e-mail addresses of advisors your family can count on in the box. Check with your attorney on the rules that apply at death: some safe deposit boxes are frozen (the state requires that the bank seal the box from entry until the inheritance tax examiner can inventory the contents) and there can be lengthy delays in getting to the papers in the box. It is also advisable to maintain a personal inventory of important information such as account information; and insurance policy schedules.

B.    It is possible for an executor to obtain new copies of old income tax returns from the IRS – but why put the executor to the trouble and expense? Be sure to keep tax returns and records at least six years.

C.    Many survivors have never been told what the decedent’s goals were, what assets they can rely on for income or capital needs, or how best to utilize the available resources. Most widows or surviving children never had a meaningful discussion with the decedent about their financial security if…

Mistake 10: Lack of a Master Strategy Game Plan

A.    Do-it-yourself estate and financial planning is the closest thing to do-it-yourself brain surgery. Few people can do it successfully. Yet, even do-it-yourself planning – from taking courses, reading books, or listening to radio shows on the subject – is sometimes preferable to no planning. Actually, an intelligent layman can learn and do quite a bit if the time is taken at least once a year to quantify in dollar terms financial needs and objectives (here’s what we must have and here’s what we’d like to have), current financial status (here’s where we are), and a game plan for getting to the goal in the most efficient and effective way. Using the right team of CPA, attorney, life insurance agent, trust officer, and other financial services professionals to conduct an annual Financial Firedrill to help formulate and execute that plan can make all the difference.

Mistake No. 11: Failure to Complete and Implement Estate Plan

⁴

A.    The best estate plan ever devised is worthless if it is not completed and implemented. This seems rather self-evident, many people walk around with incomplete estate plans. In other words, these people have started the estate-planning process but have not purchased the necessary life insurance, signed wills or trusts, or otherwise put their estate plans into effect. Estate planners must accept a part of the blame for this resistance; perhaps the documents and explanations were not sufficiently clear to give the client confidence that this estate plan was right for them or impressed them with the urgency and significance of action. Some estate planners are better at persuading clients to finish their estate plans than others. Many clients blithely say mañana and have done nothing at all but think about estate planning without coming to any conclusions. Too often, tomorrow comes earlier than anticipated.

B.    Estate planning is a matter of inertia: Once the client starts, the client needs to keep going until it is finished. Unfortunately, we see an inordinately high number of blended family estate plans go uncompleted. It is suspected that this is because some tough choices have to be made that require forthright communication.

Mistake No. 12: Failure to Provide Complete and Accurate Information to Estate Planners

A.    It is axiomatic that clients must provide complete and accurate information to their estate planners. However, the simple fact is that many people neglect, withhold or refuse to turn over key pieces of information that, had the estate planner been apprised of that information, would have changed the advice or recommendations given. The estate planner should maintain a healthy skepticism about the information that the client gives to them. Is it all of the material information?

B.    Why would someone intentionally withhold important information? Perhaps the client thinks that the information is too embarrassing or will give too much financial information that will alert the taxing authorities. Perhaps the client does not trust the estate planner enough. Whatever the reason, it is the wrong approach because it has been our experience that all of the information comes out after the client is dead. Just like you cannot take your property with you when you die, you can rarely take everything you know about your affairs to your grave and bury it, especially if it affects someone still living. We also see a higher than average number of blended family estate plans fail due to withheld information, and we suspect that some of this is due to a number of different factors, including the following:

•    There may not be enough trust and transparency between two partners who choose to use only one estate planner.

•    The complexities of the estate-planning process get the couple bogged down, and they choose what they believe is enough information as a way to try to streamline the process instead of digging up all the information and data that is needed.

•    There may be sufficient shame and guilt about past choices and decisions that have one or both partners unwilling or unable to openly share all their sordid details with their advisors.

•    The estate planners may not have asked enough of the right questions in the right manner and at the right time.

C.    The individuals may not know what to do about aspects of their estates so they end up not talking about it because they do not know where to begin.

Mistake No. 13: Failure to Coordinate Estate Plan

A.    People often try to do piecemeal estate planning (e.g., a life insurance policy here, a will there) but have no coordinated estate plan. Here is an example of a failure to properly plan in a coordinated way. Suppose the clients’ wills are drafted to pay estate tax at either death, but their life insurance policy is a second-to-die life insurance policy, which does not pay its benefits until both insured parties die. Another example of failure to properly coordinate is an elaborate will structure in an estate where most of the value of the estate passes via a beneficiary designation or via joint tenancy. A client’s estate planning documents need to be coordinated with all of the client’s other estate-planning, whether it’s life insurance, lifetime trusts, retirement plans or buy-sell agreements. It is imperative that all of this estate planning be coordinated.

Mistake No. 14: Failure to Communicate about Estate Plan

A.    It may not be evident exactly why communication of estate-planning intentions with a client’s loved ones is so important, but our experience and research has shown us unquestionably that it is. The research from Roy Williams and Vic Preisser in their book Preparing Heirs showed that the number one reason why 70 percent of estate plans fail is lack of communication and trust among family members as it related to the family’s wealth, assets, finances and estate plan.

B.    Family members and perhaps others have expectations about inheritance from the client, whether or not they should. When these expectations are not met after the client’s death, many of them leap to some conclusions that may not be true and they may take some actions that were unnecessary. These actions can run the gamut from challenging the estate plan in court to simply cutting off communication with certain family members that are perceived to be on the other side.

Example. The estate planner probably has had very wealthy and powerful clients break down and cry in their offices when telling them that they did not receive an equal share of their parents’ estates — even in situations where the beneficiary clients were several times wealthier than their parents. Their conclusion: Their parents did not love them as much as the other children, as if the relative inheritances of the children was the barometer of the parent’s love for each child. Had these parents simply told these clients either during their lifetime or by a letter at death (or inclusion in a will or living trust) what their reasons for the amounts or terms of the bequests were, the clients might not have been left for years wondering why their parents did what they did. One simple communication could have staved off years of, not only heartbreak, but possible resentment of their siblings, neither of which the parents probably intended.

C.    Other possible unnecessary actions that people take after a person’s death include resenting some or all of the receivers of power or property as well as litigation in contesting or simply prolonging the matter. We firmly believe that good communication can prevent or at least minimize these types of actions by reducing animosity and creating buy-in with all family members so that everyone is clear about what to expect at the time of the client’s death.

D.    When we say communication, we mean exactly that. The clients do not have to ask their loved ones for their input, although we have found that – at least the solicitation of some limited input – is a good idea in many cases. The clients’ estate plans are theirs alone. It does not have to be a democracy. However, communicating why the clients are doing what they are doing in their estate plans can prevent broken relationships after their death as well as costly litigation where no one wins but the lawyers. In blended families, because of the complexity and tenuousness of some relationships to begin with, communication is even more encouraged because, again, more blended family estate plans seem to fail on this score. Communication can be made during the client’s lifetime or shortly after the client’s death. It can be in writing, recorded, or merely oral. The big thing is to just encourage clients to do it.

E.    The estate planner may have experienced pushback from clients when they enthusiastically encouraged communication. Some clients thought that it was simply none of their heirs’ business. Others were scared at the prospect of confrontation. However, after relating some horror stories of the things that can happen if they do not communicate the reason for the estate-planning decisions, the overwhelming majority did so, and most of them actually found the experience to be pleasant and gave them significant peace of mind. We also have seen that with a few key strategies to effectively open up a sense of safety in the communication process, couples learn things during the process that they were unaware of that had them re-evaluate and adjust their estate planning in ways that worked even better for all concerned.

Mistake No. 15: Incomplete or Incorrect Beneficiary Designations

A.    It cannot be said too much that deficient or even missing beneficiary designations are the culprits for many failed estate plans. Too often, people do not give a lot of thought to the ramifications of their decisions about beneficiaries of life insurance, retirement plans, tax deferred annuities and IRAs, even though these constitute the majority of the wealth of most people. The beneficiary designation forms often are hurriedly completed without a lot of thought. The first step is to gather up all of the beneficiary designations that are on file with the company or plan provider. One cannot work from memory here.

B.    Estate planners have experienced some horror stories where companies lost the original beneficiary forms, which caused some serious and unfortunate chaos. Or the beneficiary designations had not been reviewed for years and a named beneficiary has died (without a back-up being named), the client no longer wants that person as beneficiary, the beneficiary no longer needs the wealth, or the beneficiary is no longer married to or is estranged from the client.

C.    After gathering all of the client’s beneficiary designations, the estate planner needs to sit down with the client and coordinate their beneficiary designations with their overall estate plans. Clients also should also have contingent beneficiary designations in case the original beneficiary dies before they do or disclaims the interest. The client needs to spell out with specificity what is to happen if, for example, one of their beneficiaries dies but leaves children. Who gets that share? The surviving beneficiaries (which is what most plans provide)? Or do the children of the predeceased beneficiary, who often are grandchildren, get the share? There should always be not one but two or more tiers of back-up beneficiaries – including perhaps a charity.

Example. Suppose that Bill has three sons, Moe, Larry, and Curly and Moe dies before Bill. Moe has a son, Shemp. When Bill dies, it is discovered that he has not changed his beneficiary designation to reflect Moe’s death. What happens to Moe’s share? Is it simply divided between Moe’s surviving brothers, Larry and Curly, or does Shemp step in and take Moe’s share? Bill’s beneficiary form should describe his intentions in this regard, or the terms of the retirement plan will govern. The bottom line: Discover and specify what the client wants to have happen in given contingencies, and do not leave it to chance.

D.    The client must give this significant thought and seek competent professional advice with these matters. As is the case with most of estate planning, this is not a do-it-yourself task. Unfortunately, blended family estate plans are more deficient in this area than most, again because of the complexity and often torn and highly emotionally charged agendas with yours, mine, and ours to look after.

Mistake No. 16: Failure to Keep Estate Plan Current

A.    Even the best estate plans can go stale if not revisited regularly, sometimes it is due to law changes. Usually, though, it is due to life and business changes – both of the client and client’s partner – and in the life or lives of the beneficiaries. In blended families, we have seen many situations where a former partner received a large share of the deceased partner’s estate (i.e., the decedent), life insurance, or retirement plans because the decedent failed to update the estate plan after the separation. Some jurisdictions have laws that automatically drop a spouse as an heir (and also a personal representative) on divorce, but these laws may not apply to life insurance or retirement plans unless the statute specifically covers those assets.⁵ In the case of qualified retirement plans, such a state law is probably preempted by federal ERISA law.⁶ However, these laws only apply to married partners. Unmarried partners who separate are at a greater risk of having a former partner share in their estates without affirmative action on their part to change their estate plans on a split.

Mistake No. 17: Elections against a Will

A.    This section applies to legally married partners only. It is especially relevant for those spouses who cannot agree on how to divide the estate in ways that feel fair to both of them. Depending on the client’s jurisdiction, a surviving spouse may be able to claim rights in up to one-half of the client’s estate unless that right has been properly waived in a valid marriage contract. The client will have to ask their estate-planning attorney the ins and outs of this area (e.g., how much the spouse can get, how he or she can get it, and what is covered in the estate that is potentially exposed to a spousal election). It also is imperative that the client get good advice from an expert in marriage contracts, since these often are challenged at death if, at the time of the marital agreement, there was not full and fair disclosure of the deceased spouse’s assets, the parties were not represented by separate counsel and the surviving spouse does not get what he or she expects or thinks that he or she deserves.

Mistake No. 18: Post-Death Will and Trust Challenges

A.    Few things delay the administration of an estate longer than post-death challenges to the estate plan. As we have discussed at several points in this book, it has been the estate planner’s experience that a significant amount of post-death challenges almost always arise from a failure to meet the suing person’s expectations of inheritance. However, there are some people who, out of pure spite, will challenge an estate, will or trust. The estate planner sees far more of both categories in blended family situations.

B.    The vast majority of post-death challenges fall into two basic categories:

1.    Challenges based on a claim that the decedent was not in his or her right mind when he or she made his or her estate plan.

2.    A claim that someone unduly influenced the decedent to make the estate plan the way that it was made.

C.    It is the latter category that more blended family estate planners have to be concerned about due to the frequency of discord between stepparents and stepchildren. This is one reason why many partners in blended families choose to do their estate planning independently of each other and their children. While this choice may cause the undue influence cause to be seen as unfounded, it does not preclude a disgruntled heir from suing anyway. As shown already, in addition to well-considered and drafted pre-relational agreements, effective communication before death to temper expectations often is the key to mitigating litigation in the end.

Mistake No. 19: Too Much Joint-Tenancy Property

A.    Joint tenancy can be the prime enemy of estate plans because property that is titled as joint tenants automatically passes to the surviving joint tenant on the death of the first joint tenant to die, irrespective of the deceased joint tenant’s will or trust. In situations where this may not be the client’s intention, or if it conflicts with what the client’s other estate planning documents provide, it will override them and they become irrelevant where those assets are concerned. This is why it is imperative to review the titles to all real estate and accounts and the latest beneficiary designations in life insurance and retirement plans. In the estate planner’s judgment, it could be negligent to fail to do so during the estate planning process.

Mistake No. 20: Failure to Properly Plan for Disability

A.    Just because the client has a living trust or a property power of attorney does not mean that the client is adequately prepared for disability. It is important that the power of attorney document, especially if it is a springing power of attorney, clearly describe a procedure for springing the power of attorney into effect. The same thing is true for the activation of a successor trustee in a living trust. If the document does not do that, the client’s loved ones may have to go to court to open a conservatorship or guardianship and having to incur that expense and time delay. Additionally, if the client has a revocable living trust, the property power of attorney and the revocable living trust must be coordinated with each other.

Mistake No. 21: Overfunding of the Marital Deduction Portion

A.    If the client has to worry about the federal estate tax and is married, overfunding what effectively passes to the surviving spouse could cause the client to underutilize the client’s $11,118,000 (in 2018) estate-tax applicable exclusion amount. Of course, the new law of portability, which allows spouses to transfer unused estate-tax exemptions to the surviving spouse, may save the day, although the law of portability has a number of traps for the unwary. One of the biggest traps is what happens in the event that the surviving spouse remarries; this law is somewhat complicated. We believe that it is strongly advisable for married partners in blended family relationships to each utilize separately their respective estate-tax applicable exclusions because their families often are different.

Mistake No. 22: Relying on Someone to Do the Right Thing

A.    Believe it or not, there is a good percentage of people who simply wish to leave it up to someone else to determine who gets what out of their estates. For example, they leave their estates to their partners or to one of their children with nonbinding instructions as to how they wish the estate to be divided. Most of the time, these people truly believe that the designated person will do the right thing and divide the estate either equally amongst their heirs, or that they will know and do what the person wanted them to do with the property and simply follow those directions. Sadly, this rarely happens, so the designated person often ends up keeping (and sometimes then losing to creditors or a divorcing spouse) the entire estate. This type of attitude can be particularly dangerous in blended families since there is less incentive for the designated person, be it a child from a prior relationship or a surviving partner, to share property with their stepfamily. In the estate planner’s experience, the happy ever after expected, rarely happens.

The Bottom Line

A.    A key principle in estate planning is that you can’t eliminate the big mistakes in your estate plan until you’ve identified them. Every family (and single person) – every year – should stage a financial firedrill. Become informed. Educate yourself now. Educate your survivors – before they are the survivors! Teach them how to handle money and make decisions. Show them, by example, how to read the bottom line on where their financial security stands.

B.    A financial firedrill means that, with the assistance of competent financial services professionals, you annually measure your needs. Establish an order of priorities and then develop and put into effect plans to make certain that you are on target to meet your financial security needs.

WHAT ARE SOME COMMON ESTATE PLANNING GOALS?

The first step in the estate-planning process is identifying what the client wants to accomplish–their estate planning goals. This step often befuddles people, and they almost always ask: What do other people in our situation do? It is not that easy. Every family is different, especially blended families.

In order to help the client along, we have included a laundry list of possible estate-planning goals for the client to consider, many in the context of a blended family. These potential goals are not in any particular order. Many of these goals can conflict with one another. A client will not have all of these goals either. The following sections are intended to give you some idea of possible goals and concerns so that you can have the client consider all of the possibilities. The clients also may even have a goal that is not discussed here, so it is important to include a catch-all blank for them to consider.

1.    Retain control over assets and business and health care decisions.

First and foremost, most people want to retain control over their lives and their property as long as they possibly can, and decide who will be in control when they are no longer capable or want to do so. The goal of control is a particularly important one in estate planning for the blended family because there are people whose interests can be widely divergent (e.g., children from a prior relationship and a current partner) and who are (or who seem to be) vying for that job. Therefore, a carefully thought out durable power of attorney, provisions for backup trustees for those who use revocable living trusts, and advance health-care directives are a must, even more so in the blended family.

If the client owns a business, the estate planner may also want to pay very close attention to the corporate documents to see what they provide regarding succession in offices. Failure to coordinate business documents with estate-planning documents can ruin or negatively affect the estate plan.

Example. If the client is being paid a salary by their company and becomes disabled, will the client’s salary continue to be paid, and, if so, for how long? Who will make that determination? Who will succeed the client in their office in the company if the client is unable to serve? Will it be a child of the client, who may be adverse to their stepparent? Can the new person in charge fire someone in the client’s family, such as a child? These and others are all very critical questions that need to be answered in advance of disability.

2.    Provide support for children and the surviving partner.

Providing support for children and the surviving partner is not as easy to achieve in a blended family for many reasons, not the least of which could be conflicts between children, stepchildren and the surviving partner. Many people have a goal of wanting to provide support either for a period of time or through an endeavor such as the education of a minor child. The goal of providing support to someone in a blended family can conflict with other estate-planning goals, such as giving your children an inheritance. For instance, the client might want to provide lifetime support to the client’s partner (who may be depending on it), even if it means that the client’s own children must take a back seat and possibly even get nothing from the client. There are no easy answers here. That’s why the estate planner and the client really must give this one some serious thought.

Sometimes, there are conflicts between older children, for whom the client already provided an education, and younger children, whose education may not have even started yet. This often is compounded in the blended family situation because the younger children might be with the client’s current partner, whereas the client’s older children are from a prior relationship. The client may feel obligated to support a child of another union even though their current partner might also need (and expect) support. This situation would clearly be a conflict for the client. However, do not allow these potential or actual conflicts to cause the client to stop or procrastinate on their estate planning; remember, intestacy or an incomplete estate plan is far worse.

3.    Protect loved ones from predators and themselves.

Loved ones who are young or vulnerable may need protection to ensure that their inheritance stays intact and is not reached by creditors or those who would unduly influence them and rob them of their money. In addition, with the high divorce rate, spendthrift trusts (a clause added to a trust that is intended to protect the beneficiaries from their creditors) may help otherwise capable loved ones from the ravages of a divorcing spouse even if they may not otherwise require trust protection.

In a blended family, this goal could be even more important because of the polarization that frequently occurs in these families after the death of a parent partner. Some children are too young or immature to handle responsibility or money. There may also be a child who has special needs that requires management of that child’s property. Other instances that suggest the possible need for financial management, via a trust vehicle, are when a child has a drug or alcohol addiction or who has financial problems.

4.    Keep certain property in the family.

Some families own property that has been in the family for a long time, and others own family businesses that they wish to keep in "the family". This requires special planning and can involve buy-sell agreements (discussed in Chapter 42) or co-tenancy arrangements, the latter of which can provide a method of sharing property use, revenues and expenses.

Some estate-planning goals may have to be changed to achieve keeping property in the family as opposed to being sold. This is particularly true when estate or capital gains tax will be owed. In the context of a blended family, this type of property, more often than not, consists of antiques, art, heirlooms or family vacation homes that have been passed down for generations. The estate planner has seen lots of problems and litigation over such assets, even family pictures or other items with little intrinsic value, especially in blended families. Sometimes, it is more important in a blended family to specifically provide who will receive the emotional assets (e.g., grandma’s silver baby spoon)—which often have more sentimental value than actual value— than it is to provide for the financial assets. People will and do fight each other in court over items of very little marketable