Estate planning is a crucial aspect of financial management that often gets overlooked until it’s too late (nobody likes to think about their own mortality). It involves creating a plan for the management and distribution of your wealth during your lifetime and after your death. Proper estate planning also ensures that your loved ones are taken care of and that your wishes will be respected when you are no longer able to manage your affairs. To that end, a good estate plan starts with you, the client. In preparing for your estate planning appointment, it is important to take an inventory of your assets and give prior, thoughtful consideration to whom you want to administer your estate, how your assets should be distributed, and any family issues that may require specialized planning.
Take Inventory of Your Assets
It is hard to know where you are going if you don’t know where you and your family are at financially. Therefore, your first step in the estate planning process is to complete an inventory of your assets and debts. Start by making a comprehensive list of all your assets, including real estate, investments, bank accounts, retirement accounts, life insurance policies, and personal property. If you’re married, be sure to separately itemize your spouse’s assets and debts. Each item should be listed at its current fair market value. Joint accounts and other co-owned assets should be noted as such with the appropriate adjustment to reflect your proportionate share of the asset’s value.
Before the initial appointment, your attorney will likely have you complete an estate planning questionnaire that includes a financial inventory. It is important to provide supporting documents where possible, such as real estate deeds, financial statements, and life insurance policies. Your attorney may need the information on these records to implement your estate plan. Remember that your attorney will be relying on the information you provide when advising you about different planning options. If the information is inaccurate or incomplete, his or her recommendations and your documents may not be appropriate.
Clearly Define Your Values and Goals
The next step is to clarify your values and goals. What do you want to accomplish with your estate plan? Do you want to provide for your loved ones, minimize taxes, or support a charitable cause? Does gifting property during your life make sense or will that money be needed during retirement? And what does retirement look like for you? For some people, retirement means relocating somewhere warm. For others, retirement might involve transitioning to a limited role in a family business. Defining your objectives will help you make informed decisions throughout the estate planning process and ensure that your plan aligns with your values and goals.
Choose Trusted Personal Representatives, Trustees, and Other Fiduciaries
One of the most difficult choices you will make during the estate planning process is who to appoint as your fiduciaries. Fiduciaries, in the estate planning context, include personal representatives that will administer your estate, trustees to manage your inter-vivos or testamentary trust1, and agents to act under a durable power of attorney and a health care directive. By default, most people will select their spouse as the primary fiduciary with one or more children serving as the back-up or successors; provided, however, that you will almost always serve as the initial trustee of your revocable trust.
While these default fiduciaries work well in the majority of cases, every situation is unique and you should still give careful consideration to the suitability of your proposed candidates. Ask yourself the following questions:
- What knowledge, skills, and experience does your proposed candidate possess? At a minimum, your fiduciary should be reliable, honest, and fiscally responsible. Although large and complex estates might benefit from a more sophisticated fiduciary, he or she can hire accounting, investment, and legal professionals as needed.
- What are the attitudes and philosophies of your candidate? How does the candidate understand their duty to manage your estate? Is that understanding consistent with your goals? For example, trustees often have discretion in how they administer a trust. The trustee’s investment strategy and plan for retention or liquidation of assets (such as a family farm or closely-held business) should align with your broader estate planning goals.
- How will family dynamics impact the administration of your estate? Your children might have a good relationship today, but things could turn ugly if one of your children is forced to deny an unreasonable distribution request from their siblings or your surviving spouse.
- Are there any potential conflicts of interest that should be avoided? In general, a fiduciary should avoid transactions that benefit them personally over other interested persons. The fiduciary should not engage in transactions that involve the fiduciary, the fiduciary’s spouse, or an entity controlled by either. Any contract or transaction affected by a conflict of interest should be expressly authorized in the terms of your estate plan. For instance, you could authorize your trustee to rent the trust’s farmland to himself at fair market value or a discounted rate. It should also be noted that Minnesota’s Trust Code generally prohibits trustees from making discretionary distributions to themselves, as a beneficiary, unless the power to make a distribution is limited by an “ascertainable standard” such as health, education, maintenance, and support.
Professional fiduciaries, including certain banks and trust companies, offer another alternative to individual fiduciaries. Having a truly independent trustee is advisable when there is a risk that separate factions within the family will be vying for control of your estate. Tax considerations may also require the use of an independent fiduciary.
Determine How You Would Like Your Assets to be Distributed
Consider the dispositive plan you would want if there were no taxes to avoid. Your plan should be an extension of your pocketbook and your property should be used in the same well-reasoned ways that you would employ if still alive. Avoiding taxes isn’t going to make you happy if the overall estate plan isn’t what you really want.
The traditional plan will give all assets to your surviving spouse or, if none, to your children in equal shares. A gift of your entire estate to the surviving spouse will have the practical effect of delaying your children’s enjoyment of their inheritance. This tradeoff makes sense because most people want to ensure their spouse is provided for later in life.
Assuming that you have a spouse, you will need to decide whether the spouse’s share of your estate is distributed outright or held in further trust. An outright distribution is the simplest approach and often preferred by the spouse. Your spouse will have complete control over the assets, but those assets will be subject to claims from the spouse’s creditors.
Alternatively, you could choose to place your spouse’s share of the estate into a special marital trust known as a Qualified Terminable Interest Trust (“QTIP Trust”). A QTIP Trust is attractive for individuals that want to retain a degree of control over their assets after death. These trusts are sometimes used in situations where the decedent had children from a prior marriage. The QTIP Trust will pay out net income to the surviving spouse each year for life. After the spouse’s death, the trust will terminate and be distributed to the beneficiaries designated by the decedent. And the underlying assets within the QTIP Trust are sheltered from the spouse’s creditors.
Regarding children and more remote descendants, your estate plan should make sense whether you live ten years from now or die tomorrow. Do you have minor children? Are you concerned about one of your children getting divorced? Does a child suffer from addiction? Give careful thought to the age, maturity, and disability of your descendants. It may be advisable to place your child’s share into a sub-trust with restrictions on distributions for specific purposes or until a child reaches a suitable age. Many children under the age of 25 would act irresponsibly if they received a large inheritance outright and free of trust.
Plan for Incapacity
Incapacity can happen unexpectedly due to illness, accident, or age-related decline. Your estate plan should also include provisions for the management of your estate and your physical person during periods of incapacity. These documents may include a durable power of attorney for financial matters and a health care directive for medical decisions. Additionally, if your assets are held in a revocable trust, the successor trustee will usually continue spending trust assets for your support and benefit. Depending on the nature of the disability, a more restrictive guardianship or conservatorship could be avoided.
While you don’t need to figure everything out on your own, it is important to clearly identify your values, what you own, and your legacy goals before beginning the estate planning process. This will help you and your attorney create an estate plan that is accurate, flexible, and no more complex than is needed for your circumstances. The information provided in this article is not intended to and does not constitute legal advice. The statements herein are for general informational purposes only. Should you have a question about your specific situation, it is recommended that you consult with a licensed attorney or other professional.
1 An inter-vivos trust is a type of trust created during your lifetime. It can be revocable or irrevocable. A testamentary trust is a trust that is established after death under the terms of your last will and testament.