- Just as in all aspects of life, for every phase of estate planning there is a season. This article will discuss the estate planning moves which should be considered in the three phases of adult life, consisting of the early years (ages 20-40), the middle years (ages 41-60), and the golden years (ages 61 and up).
- In the early years, your focus is typically on establishing a career and raising a family. Your thoughts of mortality are nonexistent and your perspective for the future is unlimited. Your resources are typically small and your ability to pay for sophisticated planning is likewise limited.
- In the middle years, mortality begins to take on new meaning, your kids are getting older and thinking of careers of their own, and your estate is building. Your health is usually still good. The future is looking a bit less expansive, but still without an identifiable terminus.
- In the golden years, mortality becomes real, your estate is as large as it is going to be and your kids are fully engaged in their careers and families.
- Accordingly, I humbly present what I consider to be the best estate planning moves at each stage of life:
PLANNING IN THE EARLY YEARS
- 1. Establish a Basic Will With Trusts for Your Children. A basic will addresses such things as spousal protection, trusts for the kids and identification of persons to handle your estate should you die unexpectedly. A young person's estate is usually not large enough to require a living trust, but basic planning is necessary in any event. The cost of a basic will is manageable at this stage of life.
- 2. Establish Educational IRAs and Uniform Transfer to Minor Act Accounts for Your Children's Education. Though funds may be limited in the early years, even small amounts contributed to tax deferred accounts will help (and possibly even pay for) children's college educations in the future. Moreover, regular savings of this nature constitute a healthy discipline and a good example for the children.
- 3. Establish a Contact with a Qualified Estate Planning Professional. This will probably be done when you get your will drafted. A good planner can work with you through each phase of your planning life and will constitute a good source of judgment and wisdom for the occasional legal issues and problems which arise in future years. He or she can also be a valuable person to assist your spouse or children should (God forbid) you die too soon from an accident or other cause.
PLANNING IN THE MIDDLE YEARS
- 1. Establish a Basic Estate Plan. A basic estate plan consists of a revocable living trust with appropriate federal estate tax planning, "pour-over" wills and durable powers of attorney for health care and property management. The revocable living trust will reduce transfer costs such as probate fees. It will also permit your planner to set up an appropriate "AB" trust arrangement to protect against federal estate taxes. Finally, it will put into place documents which will be useful in the event you become incapacitated.
- 2. Consider Obtaining Long-Term Care Insurance for Your Parents. Sixty percent of all persons over 70 years of age will spend some time in a nursing home before their death. Medicare covers the first 100 days as a general rule. After that, long-term care insurance can be obtained at reasonable costs for your parents, even if they are in their 60's or 70's, provided they are in reasonably good health. The beneficiaries of the planning will not only be your parents (who will be able to obtain better care with no guilt) but also their children who will stand to inherit more since the parents' estates will not be depleted by nursing home costs. Average private pay nursing home costs in Sacramento are approximately $3,400 per month in 1998. Long-term care insurance, especially if the cost is divided among several children, is very reasonable. However, most people won't take this suggestion, and will live to regret it.
- 3. Consider Obtaining Second to Die Life Insurance Held in a Irrevocable Life Insurance Trust. Second to die life insurance insures the last to die of a married couple. It is usually used for payment of federal estate taxes since they usually become significant only on the death of the second spouse. They can also fund business succession plans. Placing second to die life insurance in an irrevocable life insurance trust excludes those proceeds from being included in the last spouse to die's estate for federal estate tax purposes.
- 4. Get Your Parents to an Estate Planner Even if They Don't Want to Go. If your parents have not had adequate estate planning done, make efforts to get them to a qualified planner and pay for it yourself if necessary. The money they will save will far outweigh any cost. Don't necessarily direct your parents to your attorney since conflicts of interest may arise. However, there are plenty of independent qualified estate planners to go around.
- 5. Invest Time and Energy Into an Adequate Business Succession Plan. The middle years are the time to think about business succession. You will have time to cultivate potential successors. You can also start putting money into such things as business succession life insurance, retirement plans or similar structures to help pay for the succession. It also may become handy if you meet with that unexpected accident and become incapacitated.
PLANNING IN THE GOLDEN YEARS
- 1. Exhaust Retirement Plans First. Retirement plans are wonderful things, but they can be expensive if you die with one in your estate. Although Congress eliminated the 15% excise tax in 1997, retirement plan funds are still considered "income in respect of a decedent" and are subject to two taxes: Income taxes (if not rolled over to a surviving spouse) and federal estate taxes. Even though there are adjustments which reduce the bite somewhat, you still want to use up your retirement plans before your other assets.
- 2. Obtain Long Term Care Insurance. For the same reasons as discussed above, long term care insurance is advisable for estates of almost any size. Not only does it help preserve the inheritances of your children, but it will give you a better quality of life if you have to go into a facility.
- 3. Initiate Gifting Programs. If your estate is large enough to incur potential estate tax at the death of the second spouse, you should seriously consider gifting. Each spouse can give away $10,000 per donee per year to an unlimited number of recipients. Each $10,000 gift you make will be funded by Uncle Sam to the tune of $3,700 at least. Therefore, that $10,000 gift is really only costing you $6,300 (or less). If you die with that money in your estate, it will be subject to federal estate taxes and your children will receive less money. In addition, you can enjoy seeing your children's lives improved while you are alive.
- 4. For Larger Estates, Seriously Explore Charitable Gifting Options. Wonderful things can be done with charitable gifting. Congress likes to encourage people to be charitable, and has structured the charitable gifting laws in such ways as to bestow advantages on charitable givers. Through such things as wealth replacement trusts, you can not only give money to charities, but potentially do so in a way which doesn't deprive your children of the value given away. Even if it does, charitable gifting can help you establish a legacy and improve the world for everybody, including your grandchildren.
- 5. Take Advantage of Basis Adjustments. When the first spouse in a community property estate dies, the surviving spouse gets a "stepped-up basis" as to all separate and community property assets owned. Thus, when that surviving spouse sells an asset, the capital gain is eliminated (or significantly reduced) because of the stepped-up basis. Thus, before you give away assets (other than cash) to your children or grandchildren, have a competent planner review your plan so that you can maximize the effect of the gift.
- 6. Finally, Take a Long View With Regard to Planning. You worked hard all your life and used your head with regard to your planning. Even though you and your spouse are and should be the primary considerations, your children and grandchildren need to be taken into account in order to do proper planning. After all, one of the purposes of proper planning is to create a fund of wealth for succeeding generations so that their lives can be improved. Too often, the persons who inherit wealth through hard work and sweat spend that money during their lives and leave nothing for succeeding generations. Through proper planning, including establishment of motivational trusts and educational trusts, that pattern can be avoided. After all, everyone knows that the grandchildren are what really matter.
- Michael L. Hanks is an attorney who has practiced business and real estate law and estate planning since 1975. He also holds a master's degree in taxation. In his practice, he has been successful in counseling clients by applying the techniques which are discussed in this column. His telephone number is (916) 635-0302.