Articles

Non-Estate Tax Reasons for Planning

Whether or not an estate is to be taxed, estate planning is important for more reasons than simply avoiding those taxes. The goals and objectives for the management, preservation, and transmission of assets must be addressed. This article summarizes non-estate tax aspects of estate planning.

2010 Repeal of the Estate Tax. A companion piece on this website’s Resources tab discusses some of the issues relating to the 2010 repeal and the practical uncertainties that now exist in estate tax planning. But this article focuses on the non-tax-related reasons for individuals to engage in the estate planning process.

The Process. The most effective estate planning occurs when a client first articulates what the client wants to happen to his assets during his lifetime and at his death, assuming there is no estate tax, and then explores effective tax strategies to accomplish his goals. Therefore, even if there is no estate tax, the most important issue, namely, what the client wants to happen to his assets, still needs to be addressed.

Who Will Get the Assets? A client should clearly understand the consequences of dying without a will and without further estate planning. Many clients believe that their surviving spouse will get all of their assets if they do not have a will. Depending on the client's state of domicile, however, this may not be the case. For example, in Oklahoma, only about 50% of the assets go to the surviving spouse and the balance goes to the children. Therefore, the most basic reason for having an estate plan is to designate who will receive assets at death.

When and How They Get the Assets. An estate plan can also provide when beneficiaries get assets (for example, when the client dies or when beneficiaries attain certain ages) and how they obtain the assets (for example, outright or in trust). In addition, estate planning ensures that the people the client wants to receive the client's assets actually get them. This makes checking beneficiary designations extremely important.

Creditors, Remarriage, Third Party Influences. Before a client directs that all assets are to be given outright to his spouse and/or children, the client should consider potential problems relating to remarriage, divorce, creditors, third-party influences, and the beneficiaries themselves. Many potential problems can be avoided by placing all or part of the assets in trust for the spouse and/or children as opposed to giving them the assets outright. By placing assets in trust for a surviving spouse, the decedent will be assured that the assets will go to the decedent's intended beneficiaries upon the surviving spouse's death, as provisions in the trust can explicitly provide for that.

Preservation of Assets. To assure that the assets will be appropriately invested and administered, the decedent can appoint qualified trustees. He will thus know that the assets are protected from outside influences, because they are owned by the trust and not by the spouse. The assets may also be protected from the claims of any creditors of the spouse and the claims of a new husband or wife of the spouse, if the surviving spouse remarries. Many of these same reasons apply for placing assets in trust for children. Also, if the client has a disabled beneficiary, a trust is of vital importance; the trust can keep the disabled beneficiary from being disqualified from receiving governmental assistance.

Long Term Dynasty Trust. In addition to creating trusts to hold assets for the lifetime of a spouse or child, the client can consider creating a dynasty trust, which is a trust that can go on for several generations. By doing this, the same potential problems set forth in the previous paragraphs can also be resolved for grandchildren and subsequent generations.

Protection from Client’s Creditors. In addition to protecting assets for a spouse or child, the client may be concerned about his exposure to future litigation and creditors. A well thought out estate plan using irrevocable trusts and/or off shore protection trusts not only addresses the transmission of assets to the next generation, but also can be structured to protect the assets for the current generation. Thus, the many techniques available to protect assets should be explored with clients.

State Income Taxes. In addition to the Federal estate and gift tax, the planner needs to consider state income taxation of any structure created. In many instances, state income tax is paid unnecessarily simply because the issue was not adequately addressed.

Every Oklahoman Should Have A Revocable Trust. Every Oklahoman (and the residents of many other states) should have a revocable trust. Though revocable trusts are an important tax planning tool, simple forms of revocable trusts (also known as declarations of trust and living trusts) are created primarily for non-tax reasons, such as to avoid probate and to avoid the need to have a guardian appointed for administration of the person’s property. A guardianship proceeding is an expensive court process that lasts as long as the guardian’s appointment is in place.

Another reason to create a revocable trust is privacy. When a person dies, a revocable trust does not need to be filed with the court like a will does when it is probated, and, therefore, does not become public record. The revocable trust, not the will, sets forth the disposition of the client's assets. Third parties will not be able to determine who received the assets because they may not have a right to see the trust.

The amount of money going to children and subsequent generations has become a concern for many people. They are concerned that the money can cause their descendants to lack motivation. In order to avoid this, trusts can be created which provide that a descendant will receive money from the trust to a limited extent, for example, equal to the amount they earn. Of course, certain circumstances and careers may be given special consideration. The trust can also provide that unless a descendant is gainfully employed, he or she will not receive anything from the trust. There are many variations on this theme. Only the client’s imagination and personal family circumstances limit the variety of problems and plans that can be addressed. Ultimately, the client will need to articulate his or her wishes, which in turn can be put into legally binding terms.

Philanthropy. Another reason to create an estate plan is to ensure that the client's philanthropic dreams and desires for the future are accomplished. An outright bequest in a will or trust to a charity or specific charitable program that the client has been supporting throughout the client's lifetime will help assure the charity's ability to continue its work. Another option to ensure the client's charitable legacy is to create an endowment, the income from which will continue to support the charity's programs well into the future.

Aside from being important tax planning tools, charitable vehicles can also instill charitable giving as a legacy in children and subsequent generations by involving them in the grant-making process. The client may also do this with the hope of keeping the family together by requiring them to meet to decide which charities will get funds from the charitable vehicle. Donor advised funds and private foundations are examples of charitable vehicles that will allow children and subsequent generations to participate in the client's legacy of philanthropy. In addition, if these vehicles are set up during the client's lifetime, the client may receive a charitable income tax deduction. If set up to take effect at death, the client's estate may receive a charitable estate tax deduction in the years an estate tax exists.

Business Succession, Continuation or Liquidations. If the client has a family business, planning the succession of the business among family members is crucial to its survival! Most businesses fail when transitioned between generations, not because of taxes, but because family issues were not effectively considered. Further, if the client has partners, it is crucial to address what will happen to the client's and partners' ownership interests upon death or incapacity.

In summary: While consideration of and planning for estate taxation is a strong, logical motivation for doing estate planning, as this article points out, there are non-tax reasons to do carefully directed estate planning, as well.