Move Your Estate Plan into Action Today

Physician's Money DigestFebruary15 2004
Volume 11
Issue 3

Like most people, you probably don't enjoythinking about your own death and/or incapacity.Unfortunately, a sound financial planrequires that you consider both events.Whether you are concerned about the distribution ofassets upon your death, the control of your financialaffairs should you become incapacitated, or the minimizationof estate and inheritance taxes, estate planningis a process that you need to embark on.

A well-drafted estate plan should give you the abilityto transfer your assets whenever and to whomeveryou want. Your estate plan should save every tax dollar,professional fee, and court cost that is legally possible.Keep in mind that without proper planning, the dispositionof your assets will be determined by state law.

Creating Wills

The cornerstone document of your estate plan isthe will, also known as a last will and testament. Yourwill is a statement that directs the distribution of yourassets when you die. It names who you want to handleyour final affairs and who will receive your assetsin the manner you desire.

Most Americans are aware that they need a will,but the majority, about 70%, don't have one. Peopleprocrastinate for many reasons, but it's important toknow that writing a will doesn't have to be complicatedor expensive. Once it's done, you can rest a littleeasier, knowing that your wishes will be followedand your loved ones taken care of after your passing.

Did you know that your will only controls theassets that are titled in your name? Your will does notcontrol assets that are titled in joint ownership. Theseassets legally pass to the other person named on thejoint account when you die. The will also doesn't controlassets with beneficiary designations, like yourIRA, retirement benefits, or life insurance policies. Tobegin with, your will does not give you total controlover all of your assets. When going through the estateplanning process, you should check all of youraccounts to make sure the beneficiaries are the peopleyou want to receive a particular asset. There are otherdocuments that, when properly combined with yourwill, can distribute your assets as intended.

Utilizing Trusts

There are many different types of trusts that canbe used in a variety of ways to preserve and growassets while protecting your estate. The trusts' creatorcan be referred to as the grantor, settlor or trustor inthe trust declaration. Once the trust is created, it ismanaged and administered by the party referred to asthe trustee, who is appointed by the grantor. Thetrustee then manages the trust to conserve and/or protectthe assets for the beneficiaries.

A trust creates an arrangement, called a fiduciaryrelationship, with respect to the property that is heldin the trust. In a trust, the trustee is obligated to performspecific fiduciary duties to deal with and managethe property in the interests of the beneficiaries.Trustees—except for grantor trusts where the grantoris the acting trustee—are accountable for their actionsto the beneficiaries.

Initiating Agreements

Many people believe trusts are only availablethrough a bank. This is not true. Anyone can createand manage a trust, with or without the assistance ofa bank or trust company. It is important to note thatin certain cases, trusts may necessitate the use of aprofessional corporate trustee, which could be a bank,a trust company, or an accredited individual trustee.The following conditions are required to establisha trust agreement:

  • An expression of intent, verbal or written, bythe grantor to create a trust
  • The recognition and adoption of the trust terms,bylaws, and provisions
  • An appointment of the primary, alternate,and/or contingent trustee
  • The identification of the trust beneficiaries andtheir ability to access proceeds
  • The specific property that is to be transferredinto the trust
  • The term or duration of the trust

Two of the more commonly recognizable trusts arethe revocable trust and the irrevocable trust. The typeof trust you use depends on your financial situationand your estate planning objectives. Irrevocable trustsare ideal vehicles when coupled with a specific purpose.They are commonly used as a repository forinsurance policies as a means of removing them fromthe estate of the insured and also for presenting valuegifts to charities.

Using a Gifting Program

One way to reduce your estate taxes is to minimizethe amount that is in your estate. This sounds simpleenough, but how can your plan be developed toaccomplish this objective? The government allowsindividuals to gift up to $11,000 to whomever you seefit. By doing so, you can remove assets from yourestate. The annual gift tax exclusion allows thisamount to be given away without any gift tax.Married couples together can provide gifts of up to$22,000 to each gift recipient.

In the following example, note the enormousadvantage of gifting money to your loved ones todayand removing it from your estate instead of waitinguntil you pass away. In 1999, with an estate value of$7 million, Dr. and Mrs. Jones began an annual gift-givingprogram of the maximum allowable tax-freegift ($10,000 in 1999 through 2001 and $11,000 in2002 through today) to each of their three childrenand four grandchildren. By 2005, they will have successfullyremoved over $500,000 from their estateand simultaneously reduced their estate tax burden.

Given such factors as asset appreciation andincome, the savings are potentially far greater, makingthe annual gift tax exclusion one of the morecommon and popular strategies for reducing estatetax liability.

Establishing a Living Will

Thinking about and discussing terminal illness andincapacity is never a simple or pleasant task.However, failure to provide loved ones with guidanceand direction may cause them to second-guess whatyou would have wanted done. Deciding how youwant to be cared for in the event of a serious illness orincapacity is an extraordinarily difficult and emotionaldecision. It is, therefore, essential to formally communicateyour desires through the creation of a livingwill. A living will is one of the most important documentsyou will ever sign.

Even if your family members know your feelingsand desires, without a living will, they may face manydifficulties in carrying out your wishes. The living willgives them the legal authority to do so. Otherwise,health professionals, courts, or others may take stepsthat are the opposite of your intended desires.

A well-crafted estate plan will allow you to communicateyour wishes and desires, protect your family,transfer your assets, and minimize your estatetaxes and probate costs. Planning now is the mostthoughtful gift you can provide to your survivors,ensuring that they are secure—financially and otherwise—in your absence.

Michael G. Paregian is a financial advisor with Tycor AssetManagement, Inc, headquartered in Malvern, Pa, and a registered representativeof NFP Securities Inc. He develops and implements comprehensivefinancial plans for high-net-worth individuals. He welcomesquestions or comments at 610-251-0670 x25 or Tycor is not an affiliate of NFP Securities, Inc.

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