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How Tax and Non-Tax Considerations Impact Estate Planning- Part II

April 26, 2023

When most folks think about Estate Planning, they focus on who gets what along with who distributes what. In some cases, clients consider their taxes, but that often occurs only when their estate will exceed the Applicable Exclusion Amount (currently $12.92 million in 2023). Comprehensive Estate Planning focuses on the foregoing but encompasses much more. The first part of this two-part series explored the various tax considerations and the impact of state law on Estate Planning. This second part will focus on the non-tax aspects of Estate Planning.

Regular readers of this blog understand that Revocable Trusts create the foundation for an Estate Plan by providing numerous benefits. Revocable Trusts allow the grantor of the trust to maintain control of their assets while alive and provide privacy after death. To understand how that works, it’s important to understand what happens in the absence of a Revocable Trust. Normally, a Will determines the distribution of your assets upon your death and allows you to select an individual or company to make the disbursements. Nearly everyone understands this aspect of Estate Planning. The Will also allows for nomination of a guardian to care for minor children. If you do not have a Will, then your state’s intestacy laws will govern distribution of your assets at your death. There’s no guarantee that the state’s distribution pattern matches yours. Further, state intestacy laws may appoint a stranger to handle these important tasks. Finally, a court proceeding will determine who will care for your minor children. Again, without your input, the court may select someone whom you would not want caring for your children. It’s easy to see how a Will or intestacy laws lack flexibility and fail to meet certain needs.

Regardless of whether you have a Will or your state’s intestacy laws determine property division and distribution of your assets upon your death, the individual in charge must petition the court for permission to transact the business of your estate through a probate proceeding. Depending upon the laws of your state, probate can be a lengthy, costly, and public process. If you want to avoid probate and maintain your privacy, a Revocable Trust serves as a Will substitute and provides the opportunity for you to do that. With a Trust, you transfer the assets to the Trust during your lifetime and manage them as the Trustee. You avoid probate altogether by using a Trust because the Trust doesn’t die, only the individual dies. The Trust contains provisions regarding what happens upon the individual’s death and vests a successor Trustee with the power to make distributions from the Trust without court oversight. The Trust also protects against incapacity by giving a successor Trustee the power to make distributions from the Trust for your benefit should you become incapacitated. Due to cases of fraud, institutions more readily recognize a successor Trustee acting on your behalf than an agent under your Property Power of Attorney. Thus, a Revocable Trust provides several great non-tax benefits to individuals desiring to have privacy and continuity in their Estate Plan.

In addition to the above benefits, using a Revocable Trust provides a way to protect your beneficiaries. Certain types of beneficiaries, for example, minors, those with special needs, or who have creditor issues require assistance in receiving and managing an inheritance. Consider the individual who plans to rely upon state intestacy laws for distribution of their estate. Those laws make no exceptions based on the type of beneficiary receiving the assets. This means that a minor, special needs beneficiary, or spendthrift could end up receiving funds outright. Outright distribution could have disastrous consequences for any special needs beneficiary by making them ineligible for the benefits that they were receiving. Outright distribution causes issues for a minor child by requiring a guardianship for such child to receive the assets. A spendthrift will squander any funds left outright. As mentioned above, the distribution pattern may or may not match your intended plan of distribution. Creating a comprehensive Estate Plan, consisting of a Revocable Trust, Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and a Health Insurance Portability and Accountability Act (“HIPAA”) Authorization avoids these consequences and gives the individual the ability to account for their own specific circumstances, be it a desire for privacy, protecting a particular beneficiary, or planning for incapacity.

Revocable Trusts also protect blended families. If either spouse has children from a prior marriage, establishing a trust allows that spouse to make distributions to those children on their death and/or create a trust for the surviving spouse that will be distributed to the children from the prior marriage upon the surviving spouse’s death. None of this is possible through the laws of intestacy. Finally, Revocable Trusts often contain provisions that help account for changes in circumstances through the inclusion of Trust Protector language. A Trust Protector may exercise certain powers to amend or change the Revocable Trust when the situation warrants it. For example, if tax consequences changed drastically and operating the trust as originally intended would be economically inefficient or cause undesired tax consequences, the Trust Protector can amend the Trust to provide a better result for the beneficiaries.

As these articles make clear, Estate Planning involves more than just who gets what when and who gives it to whom. It requires consideration of taxes applicable to an individual during life and to that individual’s estate at death. It also requires understanding the nature and character of assets in that individual’s estate as well as state law governing the title and disposition of assets. Finally, several non-tax considerations impact the shape of the plan as well. Privacy, continuity, and protection for certain beneficiaries, including those with special needs, minors, and spendthrifts all influence the plan. A comprehensive Estate Plan takes shape during life and grows and evolves as do your needs. One of our qualified Estate Planning attorneys can help demystify these confusing concepts and guide the client to a plan that accomplishes their goals in a tax-efficient manner.