A ‘Typical’ Estate Plan

I recently met with a client—let’s call him Joe Plumber—who did not have a ‘typical’ estate plan in place, but rather had the majority of his assets held jointly with his wife. When I raised the issue of establishing a ‘typical’ estate plan, Joe’s response was that he had somewhat of a bias against an estate plan with numerous trusts because he simply did not understand the complex setup. My goal, then, was to provide an explanation of a ‘typical’ estate plan and its benefits, in an easy to understand format. For clients who turn glassy-eyed during the estate planning discussions in review meetings, this explanation is intended to help you understand more easily the ways of the estate planning world. Believe me, I recognize that this is a very complex subject, one which can be difficult to understand short of spending three years in law school. I would also like to point out that a good estate plan should be tailored to fit your needs, wishes and desires, and the “typical” estate plan may be only a starting point.

For the purpose of this article, I consider the ‘typical’ category to include married couples with assets nearing $2 million (or the expectation that assets will reach that level in the future). However, even if you and your family don’t fall within this category, many of these planning ideas may apply to ‘non-typical’ plans.

A ‘typical’ estate plan for relatively affluent married couples advises that each spouse establish a revocable trust which, at death, first distributes some assets to a Residual Trust in an amount allowed to pass free of estate tax (i.e. the Unified Credit Exemption Equivalent), and second, with the remaining assets passing outright or to a Marital Trust. Assets passing outright or to the Marital Trust qualify for the unlimited marital deduction, and thus are not subject to estate tax until the death of the surviving spouse. The other trust assets (in the Residual Trust) have even greater benefits: they are not taxed for estate taxes at either spouse’s death. Generally, the Residual and Marital Trusts are set up to benefit the surviving spouse for his/her life, with the assets passing to the children at the death of the surviving spouse. (Note that the beneficiaries named in the trusts should be reconsidered regularly to take into account changes in the family, for example, children from a previous marriage.)

The best way to describe the current estate tax law is that it is in flux. However, this should not deter clients from creating a thoughtful estate plan. As you already may know, currently there is no estate tax for 2010, and the tax is set to be reinstated in 2011, with a Credit Exemption Equivalent of $1 million and a 55 percent tax rate. If nothing happens to change that in the interim, estate planning will be more important than ever, as a husband and wife will only be able to shelter a combined $2 million of assets from the estate tax. While we think legislation may be passed reestablishing the Credit Exemption Equivalent to $3.5-$5 million, the future is uncertain.

A good estate plan should also include a Last Will and Testament, as well as Financial and Health Care Durable Powers of Attorney. For families utilizing the trust setup, outlined above, the Last Will and Testament should include what are known as “pour-over” provisions. A pour-over will is designed to work in conjunction with the trusts. Should you forget to re-title any assets into your trust, the pour-over will transfers those assets into the trust, to be distributed in accordance with the provisions of the trust document. The downside is that the assets ‘pouring’ into the trust must first go through the probate process, which can be expensive and time-consuming process. Nonetheless, the documents will pass according to your plan as outlined in the trust document.

The financial durable power of attorney gives authority to a representative to act on behalf of the donor of the power (i.e. person executing the document) in legal or business matters. The health care durable power of attorney, on the other hand, grants a representative the authority to act on behalf of the donor in regards to medical matters. These two documents are very important, as they grant power, while you are still living, to someone you trust to act on your behalf during times when you are unable to make the decisions for yourself.

I hope this article has enlightened you regarding the inclusions in a good estate plan.

In summary, for each spouse, a ‘typical’ estate plan should include:

  • Revocable Trust
  • Last Will and Testament
  • Financial Durable Power of Attorney
  • Health Care Durable Power of Attorney

These decisions are important ones and should be revisited on an ongoing basis as you discuss your financial plans with your Family CFO.

Michael Carpenter, J.D., CPA, CFP®

Michael is the professional consultant for Steve Finerty and Linda Pietroburgo.

Additional articles