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Essential Estate Planning Questions

This year, resolve to get your estate in order. You can start now by reflecting on these questions.

By Burt Levitch

Thursday, May 08, 2008

1. Do you have a Will?
Make sure that you have a valid Will, directing the distribution of your assets upon your death and naming one or more Executors to carry out your wishes. Wills generally have to be signed in the presence of at least two disinterested witnesses—people who are not part of your estate plan. So it's generally not enough to just download a form or print from a software program and sign it yourself.

2. Do you have a Revocable Living Trust?
In many states, it is advisable to put your "who gets what" provisions, and your assets, into a revocable living trust. The successor Trustee named in the Trust document is in charge of (a) managing your assets if you become incapacitated and (b) distributing those assets upon your death. The main advantage of a Trust? It spares your beneficiaries from the expense and delay of a probate proceeding. In California, for example, if you own real property (including your home), or you own other assets exceeding $100,000 in value, a Trust is generally the way to go. (You'll still have a Will, but the Will simply directs the transfer into the Trust following your death any assets you didn't transfer into the Trust during your lifetime.)

3. Who are the beneficiaries of your IRA and retirement plans?
Your Will and Trust generally do not control the distribution of your retirement accounts. When you opened your IRA or enrolled in a pension or retirement plan, you probably designated beneficiaries who would receive those assets in the event of your death. Those beneficiary designations remain in effect even after you sign a Will or Trust. So, to make sure that your beneficiary designations mesh with the wishes contained in your Will or Trust, be sure to review those designations on a regular basis, and certainly whenever you amend your other estate planning documents.

Also, don't forget that distributions from IRAs and retirement plans generally are taxable income—even if the income is paid to your named beneficiary. Keep that in mind as you decide who should inherit these "tax-deferred" assets.

4. Who are the beneficiaries for your life insurance?
Life insurance proceeds are distributed to the beneficiaries named by the owner of the policy in a valid beneficiary designation on file with the insurance company. As is the case with retirement assets, your Will or Trust will not determine who receives the proceeds from a life insurance policy. Here, too, you need to coordinate your beneficiary designation with the rest of your estate planning documents.

Don't forget that the full value of a life insurance policy on your life will be included in your taxable estate if you owned the policy (or had "incidents of ownership" within three years of your death). Beneficiaries of a decedent who owned other assets valued above or even below the current $2,000,000 exemption from federal estate tax may face a rude awakening if the decedent failed to consider the estate tax consequences of owning substantial life insurance coverage.

5. Do any of your bank or brokerage accounts "pay on death" to a designated individual?
Some financial accounts are structured to automatically pay to a named beneficiary upon the death of the accountholder. A decedent's Will or Trust would have no effect on these "pay on death" designations. Be sure to coordinate any such designations with the provisions of your Will or Trust so that your assets are distributed in accordance with your wishes.

6. Do you hold any assets in joint tenancy?
It is common for couples to own their home, checking account and even investment accounts in joint tenancy. In most states, joint tenancy carries with it an automatic survivorship. So, if one spouse or partner dies, the survivor becomes the sole owner of the asset in question. That works well for the survivor, but it doesn't address the question of who should own the asset when the survivor is gone. Joint tenancy ownership also may be inconsistent with the provisions of your Will or Trust—which provisions will have no effect, because the automatic transfer of the property to the surviving joint tenant is controlling.

7. Do you have an advance health care directive or living will?
Remember Karen Ann Quinlan? Maybe not. Remember Terri Schiavo? Probably so. Would you want to be incapacitated in a hospital, with no one knowing your wishes about the nature and extent of care to provide for you? It is extremely important to make those wishes known in writing and to appoint someone to see that your desires are implemented. The typical document for these purposes is known as an Advance Health Care Directive or Durable Power of Attorney for Health Care Decisions. Get one, complete it properly, and make sure a copy is readily available.

Is a Living Will enough? That type of document can be helpful in expressing your wishes regarding health care decisions, but it typically does not appoint someone to carry out those wishes. In most states, it's best if someone has the written authority to actually make decisions for you.

8. Are any of your beneficiaries under age 18?
Minors cannot legally inherit assets. If, for example, a child under 18 is the named beneficiary of a retirement plan, the plan administrator typically will insist that a court-supervised guardianship be established—at considerable effort and expense—to receive the bequest on behalf of the child.

Even if the child has attained the age of majority, he or she may be far from mature enough to handle a sizeable inheritance. Another relative generally can be designated as custodian for a minor, but those arrangements typically terminate at age 18 and no later than age 25. For parents and others who want at least part of a child's inheritance managed until an even later age, ongoing trust provisions need to be specified for that beneficiary in a Will or Trust.

9. Do you need more life insurance?
Not everyone needs life insurance. But it can be tremendously helpful in at least two instances. Most importantly, insurance proceeds can replace lost earnings when a working parent dies and his or her contribution to household income ceases, or when a parent working in the home dies and funds are needed to replace, if that's possible, their contribution to the household. Each situation is different, and you need to really think about the financial impact of a family member's death.

Also, life insurance may help pay estate taxes. If you have a taxable estate, payment of those taxes might require the sale of important assets. But if you want to keep those assets intact for your beneficiaries, sufficient life insurance can be a critical source of funds for payment of estate taxes.

How much is enough? Do the math. How much more than the available cash will your successors need to pay the estate taxes? What sort of money would be necessary, on an annual basis, to replace the income or the value of services of a deceased spouse or partner?

10. Are you ready for 2009?
Effective January 1, 2009, the federal estate tax exemption amount is scheduled to rise from $2,000,000 to $3,500,000. This effectively will eliminate estate tax for many more families—especially when you consider that at the beginning of this decade, the exemption amount was only $675,000. Yet many clients still have documents prepared when the exemption amount was at that earlier level, and the planning reflected in those documents may have unintended consequences in light of the $3,500,000 exemption. Don't wait until next January. Make plans now to review your documents and determine whether any changes should be made prior to 2009.

- Burt Levitch, a partner at RMS Law in Beverly Hills, California, is considered one of the most respected estate planning and estate administration experts in the country. His clients include A-list producers, directors, actors, writers and those within the visual arts community such as artists, collectors, gallery owners and museum officials.

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