What Every Attorney Needs to Know About Estate Planning
Since many (if not most) attorneys specialize in a fairly narrow area of the law, many attorneys do not focus on estate planning issues in their day-to-day practice. However, any attorney, even an attorney whose only experience with estate planning was studying for the bar exam, needs to be able to recognize when a transaction or lawsuit the attorney is working on may have potentially significant implications for a client’s estate plan. In addition, even an attorney whose representation has no estate planning implications may want to alert a client to the estate planning implications of unrelated events of which the attorney is aware. The results of nonexistent, incomplete, or out-of-date estate plans are, all too often, arguments and misunderstandings, not to mention acrimonious lawsuits, among the deceased’s family and closest friends. This is almost always the last thing the decedent would have wanted. In order to help avoid this outcome, an attorney must be able to recognize transactions and events in the client’s life that are particularly significant from an estate planning perspective.
The following is a noncomprehensive list of critical transactions and life events that are ideal occasions for attorneys and other advisors to keep in mind as estate planning opportunities for those clients with whom they share close and confidential relationships.
Marriage
Even those with relatively modest wealth should update their estate plans when getting married. Pre-marriage estate planning documents (including beneficiary designations on retirement accounts and life insurance) usually do not reflect post-marriage intentions. Depending on the terms of any existing will and the existence and parentage of children, a surviving spouse may be entitled under the rules of intestacy (or under the pretermitted spouse rules if there is a pre-marriage will in place) to all of the deceased spouse’s probate estate, to half of the probate estate, or to half of the probate estate plus the first $60,000 of the probate estate. Nonprobate assets continue to pass in accordance with their form of ownership or beneficiary designation. Alternately, a surviving spouse may elect to receive 30 percent of a statutorily determined “elective estate.” The actual spousal entitlement will vary, with little regard for the deceased spouse’s actual intentions, depending on the presence and parentage of descendants, the terms of any existing will, and the title of existing assets.
Individuals with more substantial wealth will want to consider a prenuptial or postnuptial agreement to clarify rights upon divorce or death, especially if one spouse has children by a prior marriage or if either spouse has family wealth earmarked for future generations. Special provisions should be made to plan for homestead real property, and planning to take advantage of breaks given to married couples to minimize or avoid estate taxation should be considered. Solid estate planning may be the best gift a newly married couple can give each other.
Birth of a Child or Grandchild
The birth of a child — especially the first child — is probably the most obvious time to update an estate plan. The new parents will want to name a guardian in the event of both parents’ demise during minority, create a testamentary or lifetime trust to avoid appointment of a guardian of the property of the minor, and revise wills to avoid pretermitted child treatment. The parents should also consider homestead issues, i.e., whether the homestead should be titled tenants by the entirety to avoid an interest passing to minor children on the untimely death of a parent. Life insurance coverage should be reviewed for sufficiency. Wealthier new parents may begin a gifting program (perhaps including a 529 plan or other education planning) for the benefit of the child. New grandparents would also be well advised to update estate planning documents to provide a generation-skipping component, including a current gifting program.
Divorce
Anyone contemplating divorce should consult an estate planning attorney. As part of the divorce process beneficiary designations will need to be updated, jointly owned assets will need to be retitled, and wills and trusts will need to be revised or replaced. In addition, the special skills of an estate planning attorney may prove useful in drafting a marital settlement agreement that provides for the ex-spouse or children on death, particularly where estate taxes may be an issue.
Purchase of Life Insurance
Life insurance often represents the single largest asset passing on death, but life insurance is often purchased, and beneficiary designations are often completed without the assistance of an estate planning attorney familiar with the client’s goals and likely tax situation. Even sophisticated clients may not be aware that estate tax on an insurance policy may be avoided by use of an irrevocable trust, and few have considered that cumbersome guardianship proceedings for minors may be avoided by naming a trust for a child as a beneficiary. For best results, a client should consult with an estate planner before any insurance purchase is finalized.
Wealth Transfer or Liquidity Event
While most clients who have recently realized significant wealth (whether through sale of a business, inheritance, settlement of a personal injury claim, or in some other manner) eventually find their way to an estate planner, few seem to realize that the most effective estate planning opportunities may be available only before or immediately after the wealth transfer or realization occurs. For example, wealth received by inheritance may be asset protected if the recipient asks to receive the assets in trust. Timely disclaimers may avoid a level of estate taxation by moving wealth directly to a beneficiary’s children or even grandchildren. Wealth realized upon the sale of a business or other liquidity event may be leveraged for transfer tax purposes by the prior use of lifetime gifts (which may be eligible for valuation discounts). Many times income tax can be postponed and charitable gifts leveraged through appropriate planning prior to a liquidity event. For the wealthier client, newly liquid assets may make previously impractical estate tax savings strategies worth a second look.
Illness
Even though an appropriate estate plan may have been in place long before illness strikes, a serious medical challenge will often crystallize a client’s priorities in the way no other event can. Whether an estate plan review sparked by illness involves minor revisions or a completely new plan, the process often comforts the patient with the assurance that his or her loved ones will be taken care of in the event that he or she does not survive the illness. Families that avoid the topic of estate planning during illness to spare the feelings of the patient may come to regret the decision if the patient dies and the existing plan fails to reflect the expressed intentions of the deceased, or fails to minimize estate taxes.
Purchase of Real Property
While purchase of real property may appear at first blush to be a relatively inconsequential event from an estate planning perspective, upon closer inspection it is apparent that real property purchases often have significant — and often unintended — estate planning consequences.
Homestead rules should be taken into consideration whenever title to a residence is taken. A homeowner who may be survived by a spouse or a minor child has limited options for devise of a homestead. Without proper planning, these limitations can create an unpleasant surprise for the family of a deceased homeowner.
Appropriate consideration should also be given to the form of ownership of commercial real property to take into account creditor protection issues and the possibility of discounted gifting. Outright ownership of such properties can expose the owner to liability for lawsuits relating to the property and make eventual transfer of the properties to younger generations difficult and inefficient. In addition, any resident of a state that does not currently assess an estate tax, such as Florida, should pay careful attention to the manner of holding title to property in a state that does assess an estate tax, such as New York. Placing such property in an appropriate entity may allow substantial state estate tax savings.
Even the most carefully drafted estate planning documents may not save unintended dispositions and taxes if later real estate purchases are not coordinated with the existing plan.
Change in Domicile
Anyone planning to move from one state (or country) to another should update his or her estate planning documents to reflect the new domicile. This planning not only legally confirms the new domicile, it allows the client to excise provisions in current documents that may not be effective in the new domicile (such as no-contest clauses) and take advantage of provisions not previously available (such as a separate list to dispose of tangible property on death). Large differences in state law in such areas as spousal elective share, state estate tax, and homestead disposition of property on death make it possible, if not likely, that estate planning documents prepared out of state are no longer appropriate. Country-specific laws make estate planning a must for the mobile international client.
Significant Charitable or Personal Giving
A client who is contemplating significant charitable giving (either during life or upon death) may be surprised to learn that such gifts may be leveraged through use of a charitable trust to include a component benefiting his or her family. Other clients may benefit from the charitable legacy inherent in the creation of a private foundation or donor advised fund. All substantial charitable givers should seek professional guidance to determine the income and estate tax consequences of their plans. Clients planning significant personal gifts may benefit from advice regarding the benefits of gifts in trust, filing of gift tax returns, avoiding the use of unified credit, tax efficient funding of education planning, and many other issues. A client’s advisors should take steps to make sure any substantial giver is appropriately advised.
International Travel
Clients frequently request revisions to estate planning documents before traveling internationally. As long as such planning is done well in advance of the planned trip (to leave plenty of time for client planning and review of documents), a client’s elevated level of concern about safety may serve as an excellent opportunity to catch up on long intended (and long delayed) changes to an estate plan. All too often, however, a client will request changes immediately prior to travel, creating a patchwork plan that may not be corrected once the trip has been completed. A timely suggestion sufficiently prior to the planned activity can make all the difference in the world.
Retirement
Retirement is an ideal time for a client to review and update an estate plan because by retirement much of the uncertainty about the nature and extent of a client’s likely estate will have been removed. With a good financial plan to estimate future income and expenses, a client may better assess exactly what assets he or she would like to pass to what beneficiaries. Some clients may wish to scale back on gifting programs once the reality of a “fixed income” sets in; others may realize that an excess exists from which to begin a gifting program.
Conclusion
While estate planning is a lifelong endeavor that should not be neglected at any time, a review of the potentially significant events listed above indicates a few easily recognizable opportunities for an advisor to add value to a client experience by recommending the creation of or an update to an estate plan. While not every client will need estate planning at each potentially critical juncture, there are great potential savings (both emotional and financial) for the families and friends of those that do.
1 The official comments to Rule 4.2.1 of the Rules of Professional Conduct note that “A lawyer ordinarily has no duty to initiate investigation of a client’s affairs or to give advice that the client has indicated is unwanted, but a lawyer may initiate advice to a client when doing so appears to be in the client’s interest.”
2 Given the potential complexity of many estate planning issues, once a need for estate planning is identified, any attorney who does not practice in the area of estate planning should consider association with or referral to an estate planning specialist. See Rule 4-1.1 of the Rules of Professional Conduct.
3 A child who is not provided for by a will executed before the birth of the child may be entitled, in some circumstances, to an intestate share of the parent’s estate.
4 See Kevin Matz, Practical Strategies for Funding a Child’s Education, 33 Estate Planning 6 (June 2006).
5 See Jeffrey A. Baskies, Every Divorcing Client Needs Estate Planning, 80 Fla. B. J. 62 (December 2006).
6 See Patrick J. Lannon, Planning Opportunities With Irrevocable Life Insurance Trusts, 34 Estate Planning (May 2007).
7 A beneficiary who executes a timely and effective disclaimer will be treated for estate tax purposes as having predeceased the decedent, allowing assets to pass, without tax consequences to the disclaiming person, to the alternate beneficiary provided for under the operative document or applicable law.
8 See Patrick J. Lannon, Domicile Planning — Don’t Take it for Granted, 80 Fla. B. J. 34 (January 2006).
Patrick J. Lannon is a member of the Private Clients Group and is board certified in wills, trusts and estates. His practice principally involves all aspects of domestic and international estate planning, including tax-advantaged transfers of assets, multi-generational planning, federal and state taxation of trusts and estates, charitable giving, pre-nuptial and post-nuptial planning, the creation and administration of charitable entities, and issues relating to change of residence. He received his J.D. from Harvard Law School and is a member of the Florida and New York bars.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Melissa Murphy, chair, and Richard R. Gans and William P. Sklar, editors.
