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/ Categories: By George H. Gray

The Basics of Estate Planning

1. The Estate Planning Process

1.1 Necessary Information.

Since the Estate Plan is only as good as the information upon which it is based, you should gather, write down and share with your advisors (insurance, financial and legal) the essential information about the nature and extent of your assets, your family background and your wishes upon your death. This information, besides providing a record of the essential information for the Estate Plan, is a good jumping off point for discussing the Estate Plan basics with your advisors.

  • Family Information – The logical first step in the process of gathering information is to gather your personal and family information. This information is the basic building block of the Estate Plan. For example, the number and age of your children will determine whether a trust is appropriate and, if so, the terms of the trust. If you have been previously married, to what extent do you wish to protect children of a previous marriage and is a so-called "Q-TIP" Trust appropriate? The family history anticipates what is required to probate the Will. In order to do so, your named Executor, as the proponent of the Will, may need to provide a family tree and some of the blood relatives may be necessary parties to the probate proceeding. Information about your family also helps to determine the relationship of certain fiduciaries, (i.e., the Executor, the Trustees or the Guardians), to you, your spouse, your children and other beneficiaries of your estate.

  • Selection of Fiduciaries. – You should consider and articulate your choice for the fiduciaries (i.e., Executor, Trustee, Guardian) named in your Will. Generally, your spouse is the natural candidate to be named Executor. Since a good Estate Plan should plan for the deaths of both spouses, you should name an alternate Executor in the event your surviving spouse can’t serve. A well executed Estate Plan will anticipate that the Trustee and/or Guardian may serve a number of years. As such, the persons named by you to serve in those positions should be your age or younger to allow longevity and continuity in the position. If you wish to be especially cautious (or the person named is of advanced years) you should consider who will serve as successor Trustee or Guardian.

  • Disposition of Property. – The heart and soul of the Estate Plan is your plan for disposition of your property at death. In the typical family situation the plan is obvious: everything to the surviving spouse; otherwise to the children in equal shares. Note, however, that not everything passes by your Will. Some property passes by virtue of joint ownership (i.e., the family home owned as husband and wife) or according to a beneficiary designation. So, do not be lulled into thinking that the Estate Plan is complete with the signing of a Will. You should consult with your advisors to insure that: (i) all of your "probate property" is disposed of under your Will; (ii) your beneficiary designations for retirement plan assets, life insurance and annuities are consistent with the plan you articulate; and (iii) your plan for disposition of your property accounts for all contingencies.

  • Inventory of Property Owned. – Of great importance is the inventory in which you list the nature, value and extent of the property you own. This will determine the basic structure of your Estate Plan and what types of trusts are appropriate to minimize the Estate Tax. It is this financial information that will give clues to property which pass outside the Probate Estate and for which your advisors will be expected to render advice on beneficiary designations.

1.2 Beneficiary Designations.

As a typical American, a substantial portion of your property will pass at your death according to a beneficiary designation, and not under your Will. Typically, the largest asset a person owns into retirement and at death is his/her retirement plan account. Another potentially large amount may be paid at death in the form of life insurance or as a death benefit under an annuity contract. These three types of assets pass by virtue of a valid beneficiary designation delivered to the insurance company or retirement plan administrator during your lifetime; and not as you direct in your Will. It is for this reason that you should gather, along with the information noted above, copies of your current beneficiary designations to share with your advisors as they assist you to prepare your Estate Plan.

For example, assume that a widower of "modest" means died owning: (i) the personal property in his apartment (value $20,000); (ii) a modest bank account (value $10,000); and (iii) $200,000 in a retirement plan account. Assume further, that the widower owned a policy of life insurance paying a $200,000 death benefit. Of the $430,000 he owned at death, only $30,000 passes under the Will. The bulk of the Estate ($200,000 Retirement Plan account and $200,000 life insurance death benefit) pass according to the beneficiary designations he completed and filed; perhaps many years prior to his death. It is therefore essential that the widower bring copies of the beneficiary designations to the attention of his advisors as he prepares his Estate Plan. It is only if these beneficiary designations are reviewed (and perhaps corrected) that the Estate Plan will be complete.

Even though a small portion of your property may pass under your Will, there are many good reasons for a well drafted Will. For example, if your spouse predeceases you, the Will is essential to name a Guardian for your minor children and to establish a trust for their benefit until they reach suitable age and maturity. Even if your spouse survives you, the Will can establish a "by-pass" trust for tax planning purposes in the event Congress does not modify the Federal Estate Tax before 2010. The provisions for the "by-pass" trust must be carefully coordinated with, for example, the beneficiary designation on the life insurance, to insure that all or a portion of the proceeds of the life insurance are paid to the "by-pass" trust, and not your spouse at your death.

1.3 Health Care Proxy.

A well structured Estate Plan must consider the possibility that you will be alive but incapacitated and unable to make your own financial or health care decisions. A Power of Attorney (discussed in another Current Article contained in this web site) is the document that allows another to deal with your financial affairs in the event you are unable to do so. A Health Care Proxy is the document in New York that allows you to select a person to make your health care decisions in the event you are unable to do so.

Most important in the decision of a Health Care Proxy is who will serve as the person to make the health care decisions in the event of your incapacity or incompetency. The person you appoint is called a "health care agent". Typically the health care agent is your spouse or life partner and a person most knowledgeable about your wishes related to health care. When your spouse is unavailable or an inappropriate choice, you should appoint the closest person: (i) who is calm and able to make a decision in a stressful environment; (ii) who is most knowledgeable about your wishes; and (iii) who has your implicit trust. This may be a child or a close relative; and, it may not be the same person whom you would select to handle your financial affairs.

You should discuss the Health Care Proxy with the health care agent and to go over with him/her your personal preferences, values and beliefs as they relate to medical treatment. If not contained in the Health Care Proxy itself, you should discuss preferences regarding the administration of artificial nutrition and hydration because if those views are not known to the health care agent or cannot, with reasonable diligence, be ascertained, the health care agent will not have the authority to make decisions regarding these measures.

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