• What's Your Estate/Game Plan?
  • October 24, 2013 | Author: Sean T. Donovan
  • Law Firm: Day Pitney LLP - Boston Office
  • Fall in New England brings with it the most bittersweet time of the year. We trade the splendor of warm, long summer days for the chilly gray of the impending winter and, of course, the glorious return of football season. Football is America's sport, and football season provides its loyal fans with 17 weeks (before the playoffs) of unparalleled excitement to be shared with family, friends and the community alike.

    So what, if anything, does football have to do with your estate plan? To start, success in football involves crafting a thorough game plan, coupled with the satisfactory implementation and execution of that plan. Further, every successful game plan requires the utmost flexibility, whereby adjustments can be made in different tactical situations to put the team in the best position to succeed. As this article aims to demonstrate, approaching your estate planning as if you were the coach or quarterback of a successful football team might provide a helpful understanding of the various planning techniques you should be thinking about throughout the game.

    First Play From Scrimmage: Your Basic Estate Planning Documents

    As NFL Hall of Fame coach Vince Lombardi once said, "The only place where success comes before work is in the dictionary."

    On the first snap of the game, the players' legs are fresh, their eyes are open, their adrenaline is pumping and they are ready to get to work. Likewise, at the start of the estate planning process, new families are often forming and successful careers may still be at their humble, modest beginnings. This is the perfect time to address the most significant area of your estate plan -- the making of your (first) last will and testament, revocable inter vivos trust agreement, and incapacity documents.

    Lining up the right players to execute this play, however, takes a high degree of foresight and coordination. It requires the realization that the game will be played with or without you, and that it is far better to be the quarterback of the team than to watch from the sidelines. And participants will quickly learn that this early investment pays immediate dividends, as the making of your will and revocable trust helps to (1) identify guardians for your minor children; (2) maximize the use of your federal and state estate tax exemptions; (3) decide who will be in charge of managing your estate and trust (e.g., personal representatives and trustees); (4) minimize your estate's exposure to the probate process; (5) take advantage of available federal and state estate tax marital deductions; (6) protect the inheritance of your heirs; and (7) most important, make sure your property goes where you want it to go at your death. In addition, executing your incapacity instruments, namely your health care proxy and durable power of attorney, affords you (as opposed to the probate court) the opportunity to select those individuals whom you trust to make health care and financial decisions for you in the event you are unable to make them yourself.

    Tackling the preparation and execution of these documents as early as possible is the smart, conservative play that every adult individual should consider. Having accurate documents in place sets a solid foundation for a successful, tax-efficient transition of your property at your death -- in other words, it is the most reliable play in the playbook.

    Second Play From Scrimmage: Asset Division and Beneficiary Designations

    An often-overlooked and underemphasized area of an initial estate plan -- and, thus, the suggested second play from scrimmage -- should occur immediately after the execution of your estate planning documents. This play involves updating beneficiary designations for all financial assets (think qualified retirement plans, IRAs and brokerage/bank accounts), retitling your assets (where advisable) to avoid probate, and dividing marital assets to ensure that each spouse can fully utilize his or her federal and state exemption from estate taxes. These actions are the natural complement to your recently executed will and trust and are most often necessary to achieve the desired result of the plan as a whole. If the first play from scrimmage is a deep completed pass down the sideline, imagine the player is tackled one yard short of the goal line. This second play represents that hard-fought last yard. The team may be tired from the energy expended on the first play, but they must find the will to come together and push the ball across the goal line, realizing that the huge gain could be lost without this extra effort.

    Halftime Adjustments: Estate Reduction and the Annual Gift Tax Exclusion

    As time goes on, ample opportunities arise to improve upon and add different elements to the existing game plan. Similarly, as individuals age and develop in their careers (and perhaps even inherit wealth from others), their net worth generally increases, and the process of transitioning wealth to their own heirs naturally begins. Transferring property to your next generation opens up a world of estate planning options. It is the ultimate halftime adjustment.

    Generally, a continual increase in your net worth, if left unchecked, increases the chances that a larger portion of your wealth will be exposed to estate and generation-skipping transfer taxes. As an easy and manageable defense against this possibility, a plan should begin to take shape that focuses on minimizing the size of your taxable estate by way of annual gifts to loved ones valued at or below that year's annual gift tax exclusion amount (currently $14,000 per donee or $28,000 per donee for married couples). These "annual exclusion gifts" can be achieved in a number of ways, including (1) outright gifts to individuals, (2) gifts to 529 plan funds, (3) gifts of interests in family limited partnerships (FLPs) and realty trusts, and (4) gifts to irrevocable life insurance trusts (ILITs) utilizing Crummey withdrawal powers, to name a few. Each annual gift of property reduces the donor's taxable estate but does not expose the transfer to the federal gift tax regime. This approach, while considered modest for donors with larger estates, can over time achieve a significant tax-free transfer of wealth to future generations. This relatively simple addition to your estate planning process can become a key component to success in the second half of the game, which for many involves moving as much wealth as possible to future generations as tax efficiently as possible.

    Fourth-Quarter Considerations: More Sophisticated Estate Reduction Techniques

    As the game approaches its inevitable conclusion, more sophisticated techniques are often employed to secure a victory for the team. One very popular grouping of these techniques, known in the industry as split-interest gifts or "freeze" techniques, includes grantor-retained annuity trusts (GRATs), Qualified Personal Residence Trusts (QPRTs) and various charitable remainder trusts (CRTs). Generally speaking, these gifting techniques permit the donor to continue to use and benefit from gifted property (or the income therefrom) for a fixed term of years before the property is transferred to the donee, allowing for maximum use and enjoyment of the property as well as substantial gifting at little or no gift tax cost. The ability to substantially reduce an individual's taxable estate makes these techniques an attractive tool for high-net-worth individuals; however, the risks are not something that should be ignored. The property gifted may not appreciate over time and, thus, the gift could fail to produce any true estate tax savings. Also, in the case of QPRTs and some GRATs, the donor is required to use a portion of his or her lifetime gift tax exemption, which may reduce the ultimate estate tax savings. Gifts of this nature often carry with them potentially adverse income tax consequences to the donee recipient upon sale of the gifted property, and the risk always exists that the donor will die during the fixed period, causing the property to come back into the donor's estate for estate tax purposes. These strategies can be likened to the flea-flickers and Hail Marys of the estate planning world, coupling great potential reward with some underlying risks.

    Two-Minute Warning: Final Review

    With the clock winding down and the game coming to a close, there is no better time to review all of the hard work that has been done over the years and to make any final adjustments to shore up areas of obvious concern. These concerns may include the removal of deceased or untrustworthy fiduciaries named in your will and trust; the inclusion or exclusion of a child, grandchild or longtime friend as a beneficiary of your estate; or the implementation of the first and second plays discussed above, if you have been reluctant to enter the game to this point. The end game, much like marriage and the birth of children and grandchildren, often provides individuals with perspective and additional motivation to organize themselves and their affairs. Seizing these opportunities can provide you with the peace of mind that you met the game head-on and that you did what you could to strengthen the team for years to come.