The future of your assets Featured

8:00pm EDT March 26, 2008

Among estate planners, the word “intestate” is not taken kindly. Neither should it be taken kindly by high-net-worth individuals who keep putting off planning for the inevitable.

“You should plan for the future of your family now rather than later,” says Donald R. Kurtz, of counsel to Shulman Hodges & Bastian LLP. “Do it thoroughly and review it every one to three years.”

Smart Business talked to Kurtz about the tools available to secure your assets in your family’s best interest.

What are the essential elements of a coherent estate plan?

An estate planner will try to find out your objectives and goals. Some people are interested in making sure that assets go to their intended beneficiaries after their death; some are interested in establishing guardians for minor children; some are concerned about potential estate taxes; some are concerned about protecting assets from creditors.

Wills are a cornerstone. But if you simply have a will and you pass away, the family or heirs usually have to go through a probate court to secure your assets. In most states, a living trust can help you avoid the probate court if it has been properly funded. It can establish the distribution scheme of your assets upon your death; if you are injured or disabled, the trust along with limited powers of attorney can act much like a conservatorship to deal with your affairs.

Additionally, health care directives can designate someone to make decisions for you in the event that you are unable to make those decisions.

These kinds of documents comprise the basic foundation of an estate plan. Sometimes — depending on the size of the estate and the needs — there may be other direct tools, such as irrevocable trusts, limited liability companies and corporations.

If you do nothing, most states have intestate laws that let the state decide through probate which person or persons should get your assets by the state’s order of priority.

Of what significance is life insurance?

Life insurance is another estate-planning tool. If you have family responsibilities, it can fund the future financial care of family members or other dependents. If you have a large estate, life insurance also can create liquidity to pay estate taxes rather than having to use more tangible assets — like real estate — that might lose value if they’re liquidated quickly. When insurance exists, other vehicles, such as an irrevocable life insurance trust, can hold that insurance asset and yield additional tax benefits.

What are the most frequently overlooked items when developing an estate plan?

Obviously, people often put off estate planning. It is not the most pleasant subject in the world. They often plan to set up a trust, but it’s put on the back burner. They do not realize that good intentions and verbal wishes passed on to friends and family won’t accomplish what a well-drafted estate plan would. If something unexpected does happen, estate planners have to use what few remaining tools exist — usually the intestate rules of the state — that may not accomplish what the individual intended.

Even if you write a formal plan, additional factors can get overlooked. For instance, a trust situation requires the transfer of the assets into the trust. Financial accounts should be funded into the name of the trust, and real estate must be transferred into the names of the trustees. For planning purposes, the goal would be to get all of your assets transferred into the trust while you are alive, otherwise probate or other estate administration procedures may still be required.

Trusts are dynamic. Things get overlooked. Situations change. Children get older, trustees may have gotten too old to serve, and/or assets change. You may purchase a different home or have different business interests. So, as you bring more assets into the estate, you have to continually review whether they need to be transferred to the trust. For instance, you may refinance a property a year or two after establishing the trust. During that process, the real estate may have been taken out of the trust and then not put back in.

I prefer to review trusts every year, but even once every three to four years is better than just letting it sit. At a minimum, we recommend trusts should be reviewed every three years.

Can purchasing a will or trust divert enough money to reduce a large estate tax?

We’re not sure how changes in the federal tax laws in the next few years will affect estate taxes. The current law, enacted in 2001, allows for an exemption credit of $2 million in 2008, which will increase to $3.5 million in 2009. Then in 2010, the estate tax gets repealed for one year. In 2011, unless the federal government enacts a new law, the estate tax returns with a lower $1 million exemption credit.

No matter what federal estate tax laws are in affect at the time of a person’s death, tools exist that can reduce the tax bite for larger estates. Advance estate planning can eliminate or lessen estate tax by using trusts that take advantage of the then-current exemption credit and marital deductions.

DONALD R. KURTZ is of counsel to Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400.