The relationship between a client and an estate planning attorney requires healthy two-way communication.
Just as a patient should always give her physician all relevant information, an estate planning client should fully answer all questions that her attorney asks regarding her financial arrangements and family situation.
At a minimum this means telling the attorney about all assets, liabilities, life insurance plans, retirement plans, existing partnerships and other entities, trusts the client has created, and trusts of which the client is a beneficiary. And just as a patient should ask as many questions as she feels she needs to ask in order to be fully informed, so an estate planning client should satisfy herself that she fully understands all the ramifications of a particular course of action before she commits to it. There should be nothing embarrassing about asking a question multiple times until the answer is fully understood. Ideally, an attorney would explain all relevant information to the client without the client even asking. In the real world, however, that often does not occur. The client should assume that she needs to be her own advocate.
Ultimately, both the client and the attorney should remember that the best relationship is one in which there are no surprises. The following discussion offers some questions that a client may want to ask his/her estate planning attorney.
How Much Complexities Will There Be?
Attorneys sometimes suggest estate planning techniques to clients that appear simple from the attorney’s perspective but end up being unwieldy from the client’s perspective.
A basic estate plan, the centerpiece of which will be a revocable trust, does not generally inject much complexity into the client’s life. Initially, the client will need to transfer assets to her revocable trust. On an on-going basis, the client will be transacting business through her revocable trust rather than in her name as an individual. Most clients do not find the administration of a revocable trust to be especially burdensome.
On the death of the first spouse, however, the estate plan may contemplate the creation of one or more irrevocable trusts for tax or other reasons. The creation of these trusts may require the opening of new bank and brokerage accounts and the preparation and filing of additional tax returns every year. The couple should ask the attorney just what will be required after the first spouse dies, and they should make sure they are comfortable with that plan. More sophisticated estate planning techniques usually require even more complexity. For example, the creation of a family limited partnership combined with a plan for possible future gifts of partnership interests can require that:
• annual minutes be kept of partnership meetings,
• partnership tax returns be filed each year,
• partnership funds be kept in separate accounts from personal funds,
• periodic statements be filed with the state,
• valuations be performed of the gifts that are made, which may include appraisals of the underlying real estate, and
• gift tax returns be prepared each year in which gifts are made.
In general, before the estate planning client agrees to a course of action, he/she should ask the attorney:
• What additional bank or brokerage accounts will need to be opened and maintained?
• What additional income and/or gift tax returns will be required each year?
• What restrictions will exist on the client’s ability to access funds?
• What real estate appraisals or business valuations will be needed on a regular basis?
• What continuing attorney involvement will be needed?
It is often the client’s accountant who will bear the burden of a sophisticated estate plan. Accordingly, another important question for the client to consider is whether her accountant is sufficiently familiar with the type of estate planning transaction contemplated. For example, if the attorney recommends a sale of partnership interests to an intentionally defective grantor trust, does the client’s accountant have experience with such arrangements?
What Will Be The Tax Consequences?
An attorney may recommend an estate planning technique to a client because it will save estate taxes, but fail to explain to the client other tax consequences. The client should always ask the attorney to explain to her each of the following tax ramifications of adopting a particular estate planning strategy:
• Income tax consequences
• Capital gain tax consequences
• Estate tax consequences
• Gift tax consequences
• Generation skipping transfer tax consequences
• Property tax consequences
Particularly in today’s uncertain tax environment, the client should ask her attorney what the tax consequences are likely to be under different scenarios. For example: What if the client dies in a year when there is a $5 million estate tax exemption? What if the client dies in a year when there is a $1 million estate tax exemption? What if there is no estate tax when the client dies?
It is also helpful to ask the attorney what the tax consequences will be under different market scenarios. What will happen if the value of the property dramatically appreciates? What will happen if the property declines in value?
What will the attorney’s fee include?
An estate planning client should always be clear about what services the attorney’s fee includes and what services it does not include.
For example, the client should ask the attorney who is responsible for funding the client’s revocable trust.
Transferring real estate to a revocable trust will require the preparation of deeds. Transferring partnership interests to a revocable trust will require preparation of partnership assignments. The client should ask the attorney if preparation of these documents will require an additional charge.
If a more sophisticated estate planning technique is adopted, will there be an additional charge for:
• Obtaining a tax identification number for an irrevocable trust or a partnership?
• Preparation of gift tax returns?
• Preparation of deeds?
• Preparation of life insurance policy endorsements?
• Coordination with real estate appraisers?
• Phone calls to answer questions that the client may have in the future?
• What other fees will there be?
When an attorney quotes a fee to the client for the legal work associated with a sophisticated estate planning technique, such as a family limited partnership, the client should always ask what additional fees, such as real estate appraisals, business valuations and state filing fees will be needed to implement the technique. The client should also ascertain what on-going fees will be needed, such as annual state registration fees and annual accountant fees to prepare additional income tax returns.
Can Changes Be Made In The Future?
Clients often assume that a particular estate planning technique can be unwound if it does not turn out the way the client anticipated. While some entities, like LLCs and limited partnerships can be dissolved, other entities, like irrevocable trusts, often cannot. Similarly, once a gift has been completed, it usually cannot be revoked. Unanticipated circumstances often arise after the client completes an estate planning transaction. For example, the client might place her residence in a Qualified Personal Residence Trust, confident that she will not be selling the home for many years. If, however, she then decides that she needs to sell it before the QPRT term has expired, she may be very frustrated at the complexity that is involved in doing so. Before completing a transaction, the client should always ask the attorney whether and to what extent it will be irrevocable.
What Is The Client Responsible For?
Once the estate plan is implemented, it may fall to the client to keep it operational. For example, if the client has an irrevocable life insurance trust, certain procedures will be required to ensure that the desired tax results will be realized. Annual insurance premiums must be paid from certain funds and not other funds; notices must be sent to beneficiaries each year, etc Whatever advanced estate planning technique the client has adopted, the client should ask the attorney to provide her with a list of items for which the client is responsible, including:
• Gift tax returns that will need to be filed
• Income tax returns that will need to be filed
• State registration fees that will need to be paid
• Notices that will need to be sent to beneficiaries
• Other deadlines
Basic Estate Tax Information
Values-based estate planning has been the subject of much attention in recent years. The term “values-based estate planning” does not have a precise definition; it means different things to different people. Generally speaking, values-based estate planning recognizes that an estate plan does not need to be only about money.
It does not focus only on transferring wealth and saving taxes. Rather, values-based estate planning identifies personal values and priorities that can be expressed and implemented through an estate plan. A values-based estate plan tries to send a message to future generations about what their parents, grandparents and great-grandparents thought were important.
There are a couple of principles that should be kept in mind when designing a values-based estate plan:
First, an estate plan is a blank slate. The features that one places in the plan are limited only by one’s imagination. Second, it is important not to get too carried away. An estate plan should be kept simple. The more complicated an estate plan is, the greater the likelihood of unintended consequences. An estate plan also needs to be flexible. The trustee should be given the ability to adjust as circumstances evolve and change. There is danger in trying to control too much from beyond the grave.
The Mission Statement
It is becoming increasingly common for people to include mission statements in their estate plans, usually at the very beginning of their revocable trusts. A mission statement can say anything that one wants it to say.
It is generally a statement of what values are important to the person who is creating the trust, leading into an explanation of why the trust was designed the way it was. As such, it is a guide to the trustee as to how she should administer the trust and what criteria she should use in making discretionary distributions to the beneficiaries. Because trusts can last for several generations, a mission statement can be the opening paragraph in a document that will be highly relevant to grandchildren and great-grandchildren. It can thus be used to convey one’s values, priorities and philosophy of life to generations not yet born.
Directed Purpose Trusts
While most trusts exist to provide general financial assistance to the beneficiaries, trusts can also exist for more particular purposes. Such “directed purpose trusts” can specify nearly any purpose that the creator of the trust wants. A directed purpose trust not only provides the financial means to implement the creator’s vision. It also sends a message to future generations that the trust’s purpose is something that was very important to the creator of the trust.
Some examples of directed purpose trusts might be: a couple may want to provide an educational safety net for all of their descendants. The trust could direct the trustee to pay the primary, secondary, college and graduate school expenses of all of the couple’s descendants. A grandmother may want to ensure that sufficient funds are available to pay for the LDS church missions of all of her grandchildren. She could thus create a trust for the sole purpose of paying those costs. An avid amateur pilot may want to pass his passion along to his grandchildren. He could create a trust that would pay for the costs of taking flying lessons and maintaining pilot licenses for any of his grandchildren who are interested in taking advantage of the opportunity.
The matriarch of a large extended family may want the family to remain tight-knit for as long as possible. She can create a trust that directs the trustee to pay for an annual family retreat at a nice resort. Along the same lines, if the family has a treasured vacation home, the home can be placed in a trust so that it is available for future generations.
A grandfather may be determined to make sure that his grandchildren are financially literate. He could direct a trustee to pay for all personal finance and investment courses that a grandchild completes. In addition, an annual family retreat that is paid for by the trust could include a financial education seminar. Or, the trustee could be directed to set up an investment club with trust funds to give grandchildren an opportunity to learn about investing first-hand. Of course, any purpose for which a directed purpose trust can be created can also be built into a general purpose trust.
“Dynasty trust” is a generic term that refers to any trust that is designed to last for several generations. In some states, a trust can last in perpetuity. That is not true in Murray Utah, but a Utah trust can nonetheless last a very long time. A dynasty trust can be created for a particular purpose, as described above, or it can exist for the general purpose of supporting a family. A dynasty trust can also be a hybrid, designed to provide general financial support but also authorizing distributions and expenditures for particular directed purposes.
Directed-Purpose Distributions to Individual Beneficiaries
Most irrevocable trusts designate an income beneficiary who will receive distributions of the trust’s net income for the duration of his or her lifetime. Usually the trust also authorizes distributions of principal to the income beneficiary if needed for his or her medical needs, educational expenses or general financial support. In addition to these distributions, or instead of these distributions, a trust can authorize distributions for more particular purposes that express the values and priorities of the creator of the trust.
An entrepreneur may want to encourage his children and grandchildren to develop an enterprising spirit. Accordingly, the trust he establishes for a child or grandchild may authorize the trustee to distribute or to loan trust funds to the beneficiary to start a business if the trustee believes the business concept is well-developed and shows promise. A mother may want to encourage her children and grandchildren to pursue careers that are socially valuable, even if such careers are not financially lucrative, such as an elementary or high school teacher. She may therefore authorize the trustee to make distributions from the trust to provide additional compensation to such a beneficiary.
A father may expect his children to work for a living, rather than be “trust fund babies.” Accordingly, the trust may instruct the trustee to make distributions to the beneficiary only if the beneficiary is gainfully employed.
A couple may want to give their grandchildren a leg up in life by authorizing the trustee to distribute or loan a grandchild sufficient funds to buy or make a down-payment on a first home.
A couple may want to ensure that their children enjoy a comfortable retirement after working hard their entire lives. The trust could authorize distributions for this purpose.
Charitable giving is an important component of estate planning in many affluent families. Some families transmit their philanthropic values to younger generations by creating a family foundation. The family members sit on the board of trustees of the foundation and decide what grants are made each year.
A popular alternative to a family foundation is a donor-advised fund under the umbrella of a community foundation. One disadvantage to a family foundation is that the administrative responsibilities can be quite burdensome. With a donor-advised fund, the community foundation handles all of the legal, accounting and other administrative matters. All the family members need to do is determine to whom the grants will be made each year.
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West Jordan, Utah
84088 United States
Telephone: (801) 676-5506