Quimbee logo
DMCA.com Protection Status

Introduction to Estate Planning

4.8 out of 5 Excellent(73 reviews)
JG
Presenter(s)
Start your FREE 7-day trial
Preview this course and the rest of Quimbee's CLE library for free with a 7-day free trial membership.
Buy this course - $49
Get access to just this course for $49
Play video

Introduction to Estate Planning

Estate planning is a common and needed area of legal services. The need is only growing. So are low cost and no cost non-attorney alternatives. Learn what a comprehensive estate plan is and the strategies only attorneys can provide, so that you can provide value to your clients and they ultimately leave your office with a manageable to-do list.

Presenters

Jen Gumbel
Attorney
Wagner Oehler, Ltd.

Transcript

Jen Gumbel: Hi, I'm Jen Gumbel. Welcome to "Introduction to Estate Planning" with Quimbee.

I'd like to take a moment to introduce myself. My name is Jen Gumbel. I'm an estate planning and probate attorney in the state of Minnesota. I've been doing that for over a dozen years, as well as teaching, continuing legal education classes to attorneys in Minnesota and throughout the country. In addition, I'm the host of the podcast, "Good Legacy." And I'm an online educator at the website, organizedafterlife.com.

Today's CLE is an introduction to estate planning. We will touch on a variety of topics, but of course we only have an hour. We will not discuss everything in the fullest step that we can. I hope that today will encourage you to learn more about various topics that I'll discuss today.

Let's start by talking about what the point of estate planning is. It's minimizing the legal issues that come up during death and incapacity. We're helping people avoid leaving a legal mess. But I want to emphasize, estate planning is not simply documents. People with great documents can still leave a legal mess. And a document-centric way of practicing isn't working, for lawyers or for the public. First, we have lots of competitors. The Internet has brought a lot of document generators into the industry of estate planning. These competitors are low-fee and sometimes no-fee. But that's okay, because document generation doesn't help families avoid a mess. This is because minimizing legal issues is a legal strategy. Crafting and creating the right documents is important because it puts the strategy in place. By the way, making sure those documents are legally effective, meaning that they jumped through the hoops so that they will be recognized ultimately by a court, that's incredibly important. In addition, understanding funding, or a better way to say it is financial organization, so that the assets actually follow the plan, means that the strategy can actually happen. There's a lot of thought, conversation, and education that happens in proper estate planning. Simply put, we can do better than our online competitors. We can create a strategy and educate our clients on how to make a strategy that actually happens. Ultimately, we're assisting individuals in leaving their loved ones a manageable to-do list, when those loved ones needed the most, when they're grieving the important people in their lives. The particular strategy for the individual in front of you is going to depend on three different factors.

The first factor is the law in the applicable jurisdiction. You'll be working with people who are likely residents of the state that you practice in, or at least own assets that are in this jurisdiction that you're in. So how does the law play out? What kinds of options does your state provide that allow for the transfer of assets? How do things play out? Is a probate a burdensome process, or not nearly as bad as it can be in other places? The right strategy will vary greatly for the same person when they're in one state versus another. Factor one is the law in the applicable jurisdiction.

The second factor are the legal issues the individual that you're working with will leave when they're incapacitated and when they die. If they have minor kids, an important aspect of their estate plan is helping your client determine who in their situation is best place to be named as guardian. Letting the court know who that person should be and addressing the management of the assets that ultimately should be benefiting those children. But the vast majority of issues truly boil down to the transfer and management of assets. Planning for someone whose wealth is mostly in retirement accounts versus someone whose wealth is mostly in rental properties that have to be managed pretty much immediately can call for vastly different strategies. The second factor are the legal issues that the individual in front of you will leave when they're incapacitated and when they die.

The third and final factor are the individuals involved. I call these the squirrels. How squirrely are the people likely to be? Does your client want to benefit someone who can't be trusted to manage assets? That goes back to people like minor children, but others. Maybe a child under a disability, or simply a child who doesn't have their head screwed on straight, or married someone who doesn't. Maybe there's a business or a farm that some family members are involved in, that not everyone is. This can create friction. And if your client strategizes ahead of time, they can minimize the friction that these people will have later. Again, the best strategy for a particular client will depend on three factors. The law in the applicable jurisdiction, the legal issues, the individual we're working with will leave when they're incapacitated and when they die, and the individuals involved. Next, let's talk about possible strategies.

Now, to understand the possible strategies, you need to understand a fundamental concept about how assets move when people die. Most people will leave both kinds of assets, but what those assets are will determine what kinds of legal issues their loved ones will have to deal with in order to get those assets to move. The first kind of asset is an automatic transfer. The asset says, "Who steps in the owner's place when they die." In law school, these are commonly referred to as will substitutes. And I think that's a poor method of conceptualizing this. It seems like things like a beneficiary designation, or a co-owner who has a right of survivorship is an afterthought. And continuing to think of those things as an afterthought is leading to individuals, leaving a legal mess when they die. Wills are not the driver of what will happen. The assets are. A life insurance policy with a beneficiary listed, it's not going to care what a will says. Let me say that another way, because giving human attributes to legal documents is kind of a silly thing to do. The life insurance company who has an individual listed on a beneficiary designation is not going to care who the personal representative in the will is. They don't care if there's a probate or not. They're simply waiting for the person listed on the designation to show up, fill out some paperwork, give them a death certificate, and they'll start processing the life insurance policy. If we don't recognize these things as the driver of what will happen, our clients may leave a mess. think of an individual who gets a life insurance policy and they're married. And that person does what most people would do, and should do. Name their spouse as a beneficiary on the life insurance policy. And then they get a divorce. And maybe their divorce attorney suggested, or maybe they're just pretty knowledgeable themselves and know that they need to update their estate plan because of the divorce. They don't want their ex to get anything. But they forget about the beneficiary designation, and that the naming of a person in that life insurance policy will trump what a will says. And so when they die, the life insurance company is ready to write the check out to their ex. That's a mess.

Some states have recognized this problem. In fact, my state of Minnesota has. But in some ways, they made it even more complicated. In my state, after a divorce, there is a presumption that unless a new beneficiary designation has been put in place, naming that ex, then the ex should not receive. This created a problem in a situation where the ex thought they should get and the rest of the family didn't. In fact, in 2018, it went all the way up to the United States Supreme Court. Notice, I didn't say the Minnesota Supreme Court. This was a question for the United States Supreme Court under the contracts clause. The Supreme Court upheld the Minnesota statute, but you can see how complicated this can get. It's extraordinarily important for you to know, and for you to educate your client, that there are things that need to be updated in an estate plan when things change far beyond the legal documents that you prepare. We'll talk about this more later in our hour together. For now, just be aware of that things like beneficiary designation should not be thought of as an afterthought.

Ownership and designations are truly the driver of the legal issues that will come up. Now, of course, the legal documents are incredibly important. And we'll talk through the kinds of documents you should be putting together, or at least thinking about, and what they can do. But ultimately it is the assets that will determine if your strategy will actually happen. By the way, that court case is Sveen, S-V-E-E-N versus Melin, M-E-L-I-N. And the cite for that is 138 Supreme Court 1815. Almost everyone will leave the other kinds of assets. Probate assets, these are assets that are stuck in their name. The asset reflects that they are the owner, but it has no indication of who should own it next. This is the default plan for most people's assets. The amount of assets and the nature of it that are stuck will determine the legal proceeding necessary to transfer those assets. So let's talk that through again. When an asset doesn't say where it goes next, it's stuck. By default, it goes into the owner's estate, that again is the default plan for assets that don't already have a beneficiary designation, or maybe another owner. The value of the total assets that are stuck, or the nature of any of them, will determine the legal proceeding necessary to transfer those assets.

And I'll use the example here in Minnesota. For us, we need a court proceeding. When the probate assets, the assets that are stuck, exceed the value of $75,000, or include any amount of real estate, this could be as little as a minor interest or a fractional interest that is only really valued at something like $5,000. Now, why do we need a court proceeding? Well, it boils down to what a probate really is and what you're practically looking for when it comes to dealing with the asset after a death. You're looking to move it on to either the beneficiaries or to put someone in charge to sell it, and then split the proceeds among the beneficiaries. You need someone with authority. And, in Minnesota, when you hit that $75,000 threshold on the total assets that are stuck, or any of it involves real estate, then the only person with the authority to do anything with those assets is a personal representative who is given that authority by the court. Of course, a will tells the court, we'll get to this in a bit, who should be put in place as personal representative. But in those cases of the value of $75,000 or more, or real estate, the only person with authority is a personal representative put in place by the court, whether the deceased person had a will or not. So the notion of avoiding probate isn't so much that everything will transfer automatically. But that enough of it will transfer automatically, that whatever's left over won't meet the thresholds to require a court-appointed personal representative. Or, at minimum, if there's a probate necessary, the amount of assets subject to the probate administration is low enough to avoid high-cost potential litigation and placing all of the financial information of the deceased person online and open to the public.

All of my examples are going to come from Minnesota, but two great examples that you can compare this, is the estate of Walter Mondale, a famous Minnesota politician who ran for president against Ronald Reagan in 1984. He recently died. And like anybody else who has a probate administration, you can find the pleadings for that easily online on the Minnesota Judicial Branch website. But he had a good estate plan. And, yes, while some things didn't follow the plan, enough of the things did that we don't know very much about what's going on. We only know a little glimpse. But compare that to the Prince Rogers Nelson estate, the most famous estate we will have in Minnesota ever. He did no planning. And all of his assets were stuck in his name when he died, even his real estate, even though the real estate was owned by LLCs. But since he owned the LLC interests and there was no direction about where those were supposed to go after he died, they're administered through the probate process by the court. And I can find out everything about his financial affairs. If you want to see more about this, head over to the Minnesota Judicial Branch website. You can pull case records by name. And you can compare the two estates. One, you will find very little about. And, one, you will find pretty much anything you wanted to know. So the name of the game, and again, depending on the state that you're in, may be simply getting enough assets to transfer, that anything that might be stuck won't need a court proceeding to put in place the personal representative, or at least we'll keep quiet much of their financial affairs.

Let's finish up this section of possible strategies by talking about the categories of estate plans you could be preparing. The first is a will-based plan planning for probate. You may be confronted with a situation where your client is just not likely to be able to get their assets to follow any sort of plan. And so you simply want to tell the court what they want. Many states probate proceedings are not the nightmares that you can hear about. Some states are why we have the nightmare stories. You need to understand how probate proceedings work, where you're at, where this is likely to happen. What's the filing fee? Is it a set amount, or is it a percentage of the estate? Are probate attorneys compensated for how much time they put in, or can they ask for a percentage of the estate? Are probate proceedings public? Is it easy to access those documents online? How long does it take the court to process a probate proceeding? When you factor that versus the expense of the kinds of estate planning you can do ahead of time, as well as the likelihood that your particular client is going to be able to get their assets to follow the plan, well, that's how you strategize. Again, the base plan is simply a will planning for probate, telling the court what should happen. By the way, the difference between that and doing nothing is that if there is no will, then the state is going to guess. It's called intestacy laws. They'll fill in the blanks of what they think the person wanted based on their family situation. It's very rare that the state would actually take the assets because there was no will. But in many situations, what the state presumes simply will not work for them or could create a massive controversy. So simply doing a will can bring a lot of good to the situation. We'll talk a little bit more about why you would do wills for other types of planning. But you may do a will-based plan when your client wants to avoid probate and they're extraordinarily likely to be organized. But what they're looking to do is to simply transfer assets to individuals. They don't need any long-term rules in place. Maybe the likelihood is that the individuals won't have a controversy. Maybe the assets are things that can be easily administered. Maybe your client has no need for estate tax planning that might call for more complicated plans. In that case, you might be guiding them on how to get their assets to move automatically. But as far as the documentation goes, you're still simply doing a will and some related documents, but you're not yet going to a trust. That's a final option, a trust-based plan. You're planning to avoid probate. And for whatever reason, you need to put some rules in place. Because you want to put rules in place, you need the trust. And because you want to avoid probate, you need the trust to be around now, created while they're living, a living trust. You may have also heard of a testamentary trust. That's a trust built into a will that plans for probate. This is very common when you have a couple with small children, but maybe they don't have any other need for a trust. In the case of them dying while their kids are little, before they can set up automatic transfers to them, that they know will ultimately be put in place by the probate court. To summarize, your three basic plans is a will-based plan planning for probate, a will-based plan where you're planning to avoid probate and using other methods for assets to say what's going to happen to them next, or a trust-based plan, a trust made while they're living, planning to both avoid probate and to put rules in place when you need to do something more complicated than simply say the individuals where those assets are supposed to go next.

Let's turn to the actual planning that you will do with your clients. And, yes, legal documents do not guarantee that your clients won't leave a legal mess, but they are the thing that will put in place, the strategy that you come up with. So they are incredibly important. Again, just remember that they're not the only thing that your clients need to do to leave a manageable legal to-do list when they die. The legal documents can be broken down into two categories, planning for incapacity and then planning for death. The first set of documents addresses what happens if your client is around, but they aren't able to make decisions for themselves. The state has a default. If someone hasn't made any plans and they are unable to make decisions for themselves, or the decisions that they can make put them in danger, these are guardianships and conservatorships where the court intervenes and determines whether or not they should take one of the most significant steps that a court can take, removing someone's authority over themselves, someone's autonomy. Typically, a guardianship or conservatorship is a extended legal process. Many of the layers of complexity are there to protect the individual. And sometimes it can just be a nightmarish trap. Whatever you think about guardianships or conservatorships, planning ahead of time can prevent the need for them. If other people are able to take action regarding your finances, then there may be no need to ask a court to remove your ability in order to play someone else in that role, or in healthcare decisions. If the hospital is told who to talk to, there may not be a need to intervene and have the court put someone in that role. For the most part, these tools are not removing any level of power away from your client. They're simply adding people on, but from a practical standpoint, when other people are able to act, then when an emergency comes up, then there is no need to go to court. And in that court process, the court's only option is to remove that autonomy.

These documents can be incredibly useful, and in fact can support the autonomy of your client.

The first kind of document addresses financial issues, who can sign off for someone else's finances. And we find these in a lot of different areas of the law, contracts, and real estate. Sometimes it's just more efficient for other people to be able to sign off when you want to go ahead with certain projects. But for our purposes, we want documents that will be effective if someone is incapacitated. These are what are called durable power of attorneys. They continue to be effective if the principal, the person who granted the power, is incapacitated. In our world, that's the whole point. We are trying to minimize legal issues that come up when someone is incapacitated. Your state may have suggested forms. In my state, Minnesota, we do. It's called a statutory power of attorney. The upside with using the form that the state provides, at least here, is that we can hold third parties liable for not following them. But we have to follow their rules. That means that we can't bake in a springing power. Remember what that is from law school. That's a power that waits until something triggers it, like incapacity. If we want to have the teeth of that statutory power of attorney form, it's good the day you sign it. Be very aware about how your state lays out their suggested power of attorney forms, what the benefits are, and what the downsides are. Most states recognize what's called common law power of attorneys, documents that don't follow the statutory forms, but they might not have the enforceability of what is laid out in statute. Give some thought. Again, remember, you're here to strategize. The second type of documents that address incapacity are healthcare documents. Quite frankly, I find these to be some of the stickiest documents for me to draft. I have a pretty good guess of what the courts will do. And I know what statute says. What I don't know is what a medical institution will do when my documents tell them to do something. In almost every instance, these are going to be interpreted and enforced by a medical facility. Of course, follow the statutory guidelines. Be aware of what they are. Read the chapter. Know what it takes to make an enforceable document that names a healthcare agent and communicates what the wishes are. Consider also adding a HIPAA waiver within the document. While the federal HIPAA guidelines exempt healthcare agents, not every medical provider is aware of all the details and ins and outs of this federal statute. From a practical standpoint, it's just easier to have a clear statement waving HIPAA restrictions. And that can be a very practical help when there's an emergency.

Now, let's talk about the main documents you'll be dealing with, the documents that plan for death.

The first type of document is a testamentary document, a will. Keep in mind that a will does one thing. It communicates to the probate court. That's it. That's all it does. And importantly, understand that most people think that wills avoid probate when it's actually for probate. In fact, you might have this misconception. But a will is not a magic wand of getting out of the legal issues. It's simply a tool. And this tool is for the court. As you're drafting a will, it's important to understand the local probate proceedings and how they work. Provisions in your will can greatly reduce the complication in a probate proceeding. Here are some examples from my local court system. Our courts are hesitant to allow more than one personal representative to act at least independently from one another, unless the will says that that's the testator's wish. The testator, of course, is the person who wrote the will, who is now deceased. The court is also starting to like something that is known as bonds. This used to be very common, essentially an insurance policy on the personal representatives actions. Sounds great, but they can be expensive and overwhelming. And in fact, I think is a barrier to justice. If there's any likelihood that my local court might require that the individual asking to be personal representative might be required to post an expensive bond, then maybe it's something that makes sense to tell the court to waive. A will is an effective and the primary document to communicate to the court, your wishes about who will care for your children. If there are minor children without parents, well, there's not really a chance of avoiding probate. A court is going to be involved and ignore some of the marketing out there about what a will can do, because, remember, a court is just communicating to a court. So a will does not avoid the court deciding who a guardian is going to be. But it gives the court important information. The court's going to decide anyway, but the court really wants to know what the parent thought. And in many cases, and in most cases, we'll give that the heaviest weight in their decision.

 Wills, of course, says where your assets should go. But remember, that's only for assets that are stuck. So here's a practical tip to think through, as you're strategizing. If you have a client that's charitably minded and they decide they want to give a quarter of their estate to a particular charity, that's great. That's wonderful. And you can put that in your will. But if the vast majority of their wealth is in an IRA going to their sibling, well, their wishes really aren't going to happen. So really think about the assets that your client has, what the wealth is likely to look like when they pass away, and how will these things transfer, and to whom? Maybe a charity should be listed as a beneficiary on one account. But, of course, think through the practicality of that. Will the charity know to go contact the organization? Will they even be aware that this thing is out there, or that this very charitable person has passed away? This is something that you can't get online, but you can provide. Finally, a will tells the court who should be responsible, or at least who you would like to be responsible for getting assets that are stuck to where they're supposed to go.

Another tool that is useful for many people is a trust. But keep in mind that a trust is not always the answer. Again, it's a balance of what are the rules in your estate. If you have a situation that simply calls for getting assets to transfer automatically to other people, and you don't need a whole lot of rules or management over any long-term situation, then maybe a trust isn't the right fit. But a trust can be extremely useful for many situations. Keep in mind that a trust is simply a set of rules. It's not an entity like an LLC. It doesn't hold anything, but it lays out rules for when the trustee owns something, the person responsible for managing the assets on behalf of other people. Keep in mind, that trust will only apply to assets that say are following the rules of the trust. You can sign a very complicated and lengthy trust document and it mean nothing. In fact, we joke, in my neck of the woods, about five grand binders, very lengthy and expensive trusts that are sold and have no followup, no funding, no financial organization to back it up. I'll talk at length about what all of that means and how to do that in a few minutes. But trust can address many different issues. Things like immediate management, if you have a client whose wealth is primarily in rental property, then it can be a nightmare, if there's no one with authority after their death, until a court is able to appoint a personal representative. That might be a situation where a trust is useful. Or if you have competing interests between people, if you have the wealth primarily in farmland, and you have a farming kid and a non-farming kid, and you want to set some rules where everyone benefits, but in different ways. What's rent going to be? How is that going to be set between someone who wants to maximize the rent and someone who wants to minimize it? It's useful when you want minor children to benefit from an asset.

If minor children are simply given assets, that's probably going to call for a court proceeding. That can simply be avoided if you direct the asset to a trust and then lay out the rules for the benefit of the children and the management of it by an adult. In fact, this is a type or a use of a trust that sometimes won't be set up during someone's life, because hopefully you live long enough that your kids become old enough to be able to manage these assets on their own. Let's set up a trust if it makes sense situation. And in that case, it might make more sense to actually bake the trust into a will. That's called a testamentary trust. Rather than setting up the trust, now, which is called a living trust. But for most issues, especially when you, the idea is to avoid probate, you need to set up the trust separately, and of course have enough assets directed to the trustee, either now or at the person's death so that a probate process isn't necessary, or at least very few things apply. Some other ways that a trust can be useful is addressing issues in a blended family, allowing for rights for a spouse while retaining the benefits of the wealth for your family. Trust can manage assets long-term that don't generate income. Minnesota is known for their Family Cabin Trust. What do you do when eight cousins own a cabin together? What happens when the roof needs to be replaced, and the tax bill paid? What happens if someone doesn't have the funds to contribute? A trust can address all of those things. A trust is also a useful tool to deal with estate taxes. I'll talk about estate taxes later. And you might be in a state where you will rarely run into the issue, or at least only run into the issue on the federal level. But here in Minnesota, we run into it.

And importantly, we don't have portability. We can create it with trust. Again, remember, if you're setting up a trust during someone's life with the idea that you would prefer not to be stuck, or at least have any assets stuck in probate, then you need to set it up now and you need to have assets direct themselves into the trust or to the trustee, better said. Think about the drawbacks and the benefits, and importantly the likelihood that your client will be able to keep up on the situation. You can set up a great trust and assist your client in getting it properly funded at the time you set it up and still have a probate. The trust may still bring value in that situation. But again, it is not a magic wand. The financial organization, and ongoing organization, is incredibly important.

Let's turn to financial organization, or what's commonly referred to in estate planning circles in the situation of trust as trust funding or will substitutes. But I call all of these things, financial organization, understanding what assets are out there, understanding where they go when the person dies, and making sure that the assets follow the plan. Again, I think that considering things like beneficiary designations, and transfer on death designations, joint ownership, as simply will substitutes as afterthoughts to the legal documents is the wrong way of viewing it. The documents are not the drivers of what happens at death. The assets are. And the education and assistance that you can give your client in this area is something the Internet cannot provide. The Internet can generate great documents at a low cost, but that is no indication of whether or not the individual is going to leave a manageable to-do list. Financial organization, quite frankly, is the biggest factor. Are the assets doing what they're supposed to be doing?

Here are some of the different types of documents that dictate how assets will move. Some of these, you will be involved in drafting as part of a complete estate plan. Some of these, you'll be educating your client to do on their own. Some attorneys offer a full concierge service dealing with all of these issues, but that can be spendy. In addition, that attorney has to have the authority with every third party to go in and make these changes. You'll have to decide for yourself if it makes sense for your own business and your own practice. But let's run through the types of documentation and actions that you or your client can take to get your assets to follow the plan and decide for yourself which of these you'll provide as part of your services and which of these you're going to educate your client on to be able to do themselves. I generally think of two categories.

The first category is deeds and titles, just the documents of ownership. With real estate, it is all about the deeds. And here's a tip I learned early on in my practice. Double check the deeds between a married couple. Whether they want the asset to transfer automatically to each other at death, or if there's some reason that they don't, verify that it's the case. If it's not, then you can simply have them sign a quick claim deed to change the ownership.

Now, of course, various states set up the rights between a married couple on a real estate deed differently. In my state, the marital status really doesn't mean a whole lot between the rights of co-owners. A co-owner is only the owner of the other person's interest at death, if the right of survivorship is reflected on the deed. The language for us is as joint tenants or in joint tenancy. If we don't have that language, we don't have that right of survivorship. And so there are instances where surviving spouses co-own with the estate of their spouse, an estate that they have full right to. But they still have to go through a court process to get authority to sign a deed over to themselves. That's a legal mess, completely unnecessary. And it could have been avoided with a couple of simple words on the deed. I always check. To me, that is part of estate planning. And of course, something that is not provided by online competitors. Other types of assets can be like this, too. Of course, joint bank accounts, co-ownership of vehicles in whatever way your state's vehicle services department wants to see that on the registration. But the idea is thinking through, what do I own? Where do I want it to go? And is it doing that?

And here's an example from my own life. I wasn't able to go and purchase our two most recent vehicles. My husband had time off in both cases. He's on the title and I'm not at all. So technically speaking, if something happens to him, these vehicles will be stuck. Now I'm aware of what other assets we have and what's going to be involved in transferring those vehicles. But really that is something that is out of whack in our estate plan. Do you see how financial organization is an important piece of estate planning? Again, not just simply having documents, but thinking through the legal to-do list that will come up at death. In the case of an estate plan that is utilizing a living trust, deeds and titles are incredibly important, to get an asset, to follow the rules of the trust. And remember, since a trust isn't an actual thing, it's just a set of rules, you're not really transferring it to the trust. You're transferring it to the trustee. But if my home is not set up in a deed to transfer to my trustee, then it's not going to follow the rules. It'll be stuck in my estate. In fact, this is why if you make a living trust, or if you have a trust-based estate plan for a particular client, you also need to be doing a will, just in case an asset is stuck in their name.

These are called pour-over wills. They're very simple, even in a very complex situation, because all they do is point to the living trust. It's a safety net, a backup plan, for things that aren't coordinated with the plan at death. But you should talk through with your client about how your trust is funded, the financial organization. When you create a trust, think about if you want their real estate to follow the rules of the trust now, or if you're in a state with the option at death. If you make trust, if you draft them, you should also be well-versed in drafting deeds, because in most situations you want the real estate to follow the rules of the trust.

Another category of documents are designations, pay on death designations, transfer on death designations, beneficiary designations. Most of these are things that your client will do with the particular company managing the asset. Things like tax-deferred retirement accounts, or any sort of retirement accounts, life insurance policies, financial instruments like mutual funds, or simply checking and savings accounts. However, these are set up and whatever the designation say, the intent and the documents should match. This is where many people do their own DIY. And sometimes it works. And sometimes it creates a bigger mess. Here are some issues. Naming a potential guardian of your minor children as the beneficiary of a life insurance policy, with the idea that, "Okay, they'll get this money and use it for my children." But there's no reference to a trust agreement, or any duty that this person might have to those minor children while the documents are not matching the intent, or listing the child that you trust as a pay on death beneficiary of your checking account, with the idea that they're going to pay the funeral bills and split the rest with their siblings. Well, in some families, that'll work. But the documentation is not matching the intent and things can go haywire. Talk through these things with your client. Make sure they have these set up in the appropriate way. There are actually some types of assets that you can take care of.

Business interest, if they have an LLC or a corporation, or at least have membership interest in an LLC and shares in a corporation, if it's closely held and confirming that your great plan is something that's acceptable under any sort of shareholder agreement or bylaws or any governing document of the company, you might be able to put together an assignment of the interest to a trust or to individuals. Again, just make sure that it's an assignment that is acceptable to the company. Make sure that the company is aware of it. But this is an often missed part of proper estate planning. And sometimes these interests alone will be enough to trigger a probate, even though the plan is to avoid it.

Finally, tax-deferred accounts may be the exception to your general rule with a particular client. What you want most accounts to do and say might not work very well for tax-deferred account. I'll speak about this a little bit more when we talk about income tax issues. But for now, just be aware that tax-deferred accounts mean that the IRS has given these accounts a tax break. They've grown tax-free. Because of that, the IRS has an opinion about who should get the assets. In addition, they're going to be income generating and the IRS will classify at different tax brackets that income, depending on who the taxable person is, or the taxable entity, like an estate or trust.

To summarize, the legal documents that will make up a comprehensive estate plan include documents planning for incapacity like a financial power of attorney, and healthcare documents like an advanced directive, other legal documents, plan for death. Wills are the primary document, but keep in mind, they only communicate to the court. Trusts are another document that can set up rules, but the documents that will dictate what happens are funding documents, things like deeds, and titles, and designations. Some of these documents, you'll take care of. But some of these documents, it may make more sense for your client to take care of. This emphasizes the importance of educating your client about the importance of financial organization. In the remaining minutes, I want to touch on advanced issues. Of course, this is an introduction to estate planning, and I'm only simply bringing up these issues. I hope that in hearing them, you'll want to learn more and take further classes on these complex issues. But you need to be at minimum aware of them and be able to identify them when it comes up with particular clients, so you can be aware of when you need to learn more.

The first issue is transfer taxes, taxes that are imposed by the federal government or the state government when assets transfer, either during lifetime or at death. The federal government has an estate tax. By the way, my state of Minnesota is known as one of the worst tax to estates because it also has its own estate tax. But of course, every estate has an exemption. And for the federal estate tax, that exemption is in the millions of dollars. You may run into very few clients who have a federal estate tax issue. If your state imposes an estate tax, you might run into that far more often than you do the federal estate tax. Some states have an inheritance tax, a tax that is calculated based on who receives the inheritance. Is it a family member, or is it someone who's further extended in the family, or not even related? The rates vary depending on the relationship. Transfers during lifetime, at least uncompensated transfers, are gifts. And if you give more than a certain amount, this year at $16,000 per person per year, then that is a federal taxable gift. Federal taxable gifts might have lots of different consequences.

One of the big ones is on income taxes. I'll hit that in a second.

But bear with me as I get through the transfers taxes. With the federal gift tax, your client may have to report it, but they do have the option of taking their estate tax exemption, their federal estate tax exemption, to cover the taxes. In some situations, your client might have to report, but ultimately it has no impact on them financially. The final type of transfer taxes is, quite frankly, a rare tax to run into. It's generation-skipping. It's when someone with a taxable estate is skipping generations, giving to their grandchild. Just be cognizant that it exists so that when your very generous client, who wants to pay for their grandchild's tuition, wants to set that up, you can explore what the tax consequences are. Now, income tax issues, which for the most part really isn't an estate tax thing or an estate planning thing. But the choices you make will impact estate taxes. And you should be aware of a few of these issues enough so that you can balance that against some of the other benefits of the estate planning that you're considering. Again, we're strategists. One income tax issue is basis. If you give a gift at lifetime, you also give a basis. That's called a carry-over basis. What's even a basis? Well, when you sell an asset that generates value over time, like a stock in a company or real estate, when you sell it, you don't report the total gain on the sale. The taxable gain is the difference between the gain on the sale minus your basis. How much did it cost you to get it? So here's an example. If I buy a $100,000-house that I'm renting out, it's not just you're generally exempt homestead. And I sell it the next year for $120,000. Then what I reported my income taxes is not $120,000. It's only $20,000 because my basis was $100,000. Well, when I give a gift, I give my basis so that if the person who received the gift sells the property, their taxable gain is the difference between the value or the sale minus what might have been a very low basis. We get this with farmers all the time. A farmer who bought acres during the farm crisis in the 1980s. Well, when they give their farm to their kids and the kids sell the farm land, there is going to be a lot of gain because there's a lot of difference between the sales price now and the basis. But when someone dies, the basis is stepped up to the value at the date of death. Stepped-up basis is a massive way to minimize the taxes on the next generation. And so the difference between giving a gift now versus waiting until death, well, there's a very real economic impact to the family members or the recipients. If you're a proper estate planner, basis should be part of your calculation. Also be aware when taxable events might happen. If you're creating LLCs to hold a cabin, are you setting up a situation where, if it needs to be undone, it might create a taxable gift? Another income tax issue is on tax-deferred retirement accounts. Remember those, because it grew tax-free, the IRS has an opinion. And so if you have a living trust, that's fairly basic, but is addressing issues for your client. If their IRA is set to go to that trust, well, the IRS might kick the tax rate up to the highest rate. Whereas, if they simply listed individuals to receive it, the tax rates could be far lower. Be aware of those issues. Options like conduit trust and see-through trust can help minimize those issues. But those provisions are extraordinarily complex. Be well versed if you are drafting trusts that hold tax-deferred retirement accounts.

Another advanced issue to be aware of is clear title to real estate. You don't want your greatest state plan to be creating title issues. Here's an example. I am inactively licensed in Florida, which means I am dangerous. And I was working with an individual real estate in Florida. But we were working with an attorney licensed down there. And it was a good thing that I did, because I made the suggestion of setting up a deed to transfer the real estate upon death. We have this in Minnesota and it is not a title issue. Our statute clearly says that you do not need the recipients to sign off on any sort of transaction during lifetime. Well, according to the attorney that I worked with, that is not how it plays out in Florida. And so when I had this great idea of setting up a deed for the real estate to transfer at death, he explained to me that that is in fact a title issue, and any time the owner wants to do anything, well, they're going to have to have the recipient or the grantee on that deed sign off and approve it. That was too much of a mess. Understand title issues. Your state bar association may have a real estate section that provides incredible resources to help you evaluate title.

The final advanced issue I want to introduce to you is the rights to take against the will, or the rest of the estate plan, who has the ability to say, "I don't like this plan of my husband's or my father's, or my wife's or my mother's. And I don't like that." And even though it's valid, the state lets me do something else, or at least ask for something more than what this plan gives me. For the most part, this is only available to spouses. And this is an incredibly important thing with blended families. These rights can be waived through a valid antenuptial agreement, A-N-T-E, meaning before, a prenup. Prenups are just as much for estate planning as they are for divorce. But in any case, be aware of the options to waive these rights, what these rights are, and the effectiveness of the plan you're putting together.

Okay, we covered a lot of ground. Let's summarize. An estate plan is thinking through the legal to-do list your client will leave if they become incapacitated and when they die. And thinking through the steps that they can take now to avoid leaving a legal mess. The document-centric way of simply creating a will or a trust simply is not working. People with great legal documents can still leave a legal mess. But this is good news for us because we face immense competition in simply generating documents. But when we add strategy and guidance in the financial organization step of estate planning, we bring immense value that only attorneys bring to the table. Possible strategies include a will-based plan planning for probate, or a will-based plan that plans to avoid probate where most of the assets will transfer to individuals through the ownership documents. In cases where you need more complex rules, maybe about governance or paying for assets that will be held onto long-term, or at least paying for the expenses of them, or managing assets for minor children, or dealing with taxes, that may call for a trust-based plan, planning to avoid probate, but putting rules in place for a longer term. The legal documents that are part of many estate plans are financial power of attorneys and healthcare documents. These plan for incapacity. Wills plan for the legal issues that come up with death, but remember their limitations or their role. They simply communicate to the court. That's all that they do. Wills are for probate. Trusts are a method to get assets to transfer automatically with long-term rules in place, and funding documents, or financial organization. Getting the assets to line up with the plan through things like deeds and titles, ownership documents, and designations on accounts. Some of these, you will do. And some of these, your client might have to understand how to follow up and get in line themselves.

I'm Jen Gumbel. It's been a pleasure to be with you this hour to introduce you to the practice of estate planning.

Start your FREE 7-day trial
Preview this course and the rest of Quimbee's CLE library for free with a 7-day free trial membership.
Buy this course - $49
Get access to just this course for $49

Course materials

Supplemental MaterialsHandout

Practice areas


Course details

On demand
1h 00s

Credit information