An Estate Planning Checklist: Putting Your Affairs In Order

By: Burt Levitch

Date: August 1994

We are often presented with questions from clients about various aspects of their estate plans.  These questions range from very basic to highly esoteric, and everywhere in between.  No publication can adequately address every concern, but we thought it would be helpful to share a few of these questions - and some general answers - with you.

As you read through the questions and answers, you will be reminded that estate planning is a relatively broad concept, and you may begin to appreciate two elements of the process.  First, estate planning involves a wide range of interrelated factors that need to be considered as a whole.  Second, it becomes apparent that no matter is too small for your attention - like who gets the balance in your airline mileage accounts?

Q.        How Often Should I Review My Estate Plan?

A.        Your estate planning documents should reflect your current wishes and financial circumstances.  Many people signed their documents 5, 10 or more years ago. Subsequent births, marriages, divorces and deaths of relatives and friends may now affect decisions made long under different circumstances.

The selection of executors, trustees and guardians should be reviewed regularly.  Just as important, you should frequently review the disposition of assets under existing documents. Specific cash bequests drafted years ago may seem inadequate - or overly generous - in view of current holdings. Other planned bequests may directly conflict with present feelings about named recipients.

So, how often? About once a year, you should review your documents to see if they still make sense under current circumstances. And about every 3 to 5 years - and in conjunction with births, deaths and changes in marital status - you should meet with an estate planning professional.

Q.        Should I Have A Living Trust?

A.        Particularly in California, living trusts have gained popularity in recent years.  A living trust consolidates title to various assets under a single document and facilitates the transfer of your property to your heirs without a probate proceeding.  In most cases, you would choose to be the trustee during your lifetime.  The transfers to your heirs are made after your death by your successor trustee, who can also manage your assets for you if you are incapacitated.

Having a living trust is appropriate in many situations, particularly if you over 40 and own a home or other real property.  It is virtually essential if you own assets in more than one state.  If you want to minimize expenses and administrative burdens following your death, a living trust may well be advisable.

Q.        How Do I Know If I Have Completely Funded My Living Trust?

A.        A living trust is only beneficial if the trust is "funded" - that is, if you have conveyed your assets to the trust. Often, people will sign trust documents but then neglect to transfer their real estate, bank accounts, brokerage accounts and other assets to the trust.

If more than $60,000 of assets remain outside the trust at a person's death, California law generally requires a probate proceeding.  But, as explained below, not everything belongs in a trust; certain property can be transferred by simply naming a beneficiary.

Q.        Does My Will Or Living Trust Transfer All Of My Property At My Death?

A.        No.  some assets are independent of your will or living trust.  Interests such as pension plans, individual retirement accounts (IRAs) and life insurance policies require a properly completed beneficiary designation form to bequeath the assets.  Considerable thought must be given to a designation form, which must be coordinated with the dispositions in a will or living trust.  Unexpected tax consequences can result if all relevant issues have not been explored.

Q.        Does My Will or Living Trust Transfer "Joint Tenancy" Property?

A.        No. If real property or bank accounts are held in joint tenancy, then upon the death of one joint tenant, ownership of the asset automatically becomes vested in the surviving person.  The will or living trust has no effect upon joint tenancy.

You need to carefully review ownership documents, because the effect of joint tenancy may be inconsistent with your intent and may have adverse estate and income tax consequences.

Q.        What Is The Impact Of Community Property On Estate Planning?

A.        California is a community property state, which often leads to unanticipated estate planning results.

For example, a spouse may develop a community property interest in a residence which otherwise is considered to be the separate property of the other spouse if community funds are used to make mortgage payments.  Also, federal law in the pension area may preempt California community property rules, invalidating an improperly completed beneficiary designation and thereby enlarging the interest of the non-participant spouse.

Q.        What Happens If I Get Married?

A.        Changing your marital status has enormous estate planning ramifications.  If you marry without a premarital agreement - and fail to revise your will or living trust - California law grants your spouse an automatic share of your community and separate property.

A carefully drafted premarital agreement and a thorough asset review by a knowledgeable advisor can avert possible disputes at a subsequent date.

Q.        And What Happens If I Get Divorced?

A.        If you begin divorce proceedings without changing your estate plan, your spouse's interest in your assets continues.  Even when the dissolution is final, your former spouse may retain unexpected rights if you have not fully revised your estate plan.

Q.        What If I Am "Just Living With" Someone?

A.        Many people need to consider the financial implications of a nonmarital relationship in order to provide for a nonspousal partner. This is particularly true if objections from family members are anticipated. Conversely, you need to be aware of potential claims from a cohabitant that might arise if the relationship ends.

Q.        What Is The Impact Of Estate And Gift Taxation?

A.        In designing an estate plan, and in reviewing existing documents, you are well-advised to consider the impact of federal estate and gift taxes. As discussed in our last newsletter, the first $600,000 of wealth is transferred free of tax. Above that, however, the tax rates begin at 37% and rise to 55% on estates exceeding $3,000,000.

The unlimited marital deduction can postpone the tax bite for married couples, but the problem reappears at the death of the second spouse. Also, certain basic planning is necessary to preserve the $600,000 exemption of the spouse who died first.

Q.        Who Pays The Tax, And How?

A.        Technically, the executor of your estate (or the successor trustee of your living trust) is liable for the tax, but the IRS can seek payment from beneficiaries as well. More important than who will pay the tax is which assets will be used to pay the tax, and whether the assets will be readily available.

Even a carefully drafted will or living trust may not address all of the payment issues, especially those relating to taxes on assets passing outside the document, such as life insurance or pension plan interests.  If you fail to express your intention, the tax burden may fall on unsuspecting heirs.

Q.        What Other Taxes Do I Need To Consider?

A.        Another tax issue to consider is the generation-skipping transfer tax, which can make transfers to grandchildren and certain other persons very expensive - such transfers aggregating more than $1,000,000 generally are subject to a tax of 55%, in addition to the federal estate and gift tax. You may want to utilize the $1,000,000 exemption from the generation-skipping transfer tax by making transfers to grandchildren, thereby removing such gifts from taxation on the death of your children.

Also, you need to consider the new, higher income tax rates on trusts, which should cause you to reexamine any existing trust that would force the accumulation of income for your beneficiaries.

Q.        What About Taxes On Life Insurance Proceeds?

A.        Life insurance owned by you will be included in your taxable estate.  Therefore, a $1,000,000 policy could shrink by as much as $550,000.  Careful planning could preserve insurance proceeds that might otherwise disappear in estate taxes.

Q.        What Can I Do To Minimize The Tax Bite?

A.        You should actively consider making gifts during your lifetime as a means of minimizing the estate tax.  You can give $10,000 per year to an unlimited number of individuals without incurring gift taxes.

For example, consider a husband and wife who both make gifts to their 2 children, their children's spouses, and their 4 grandchildren.  Gifts of $10,000 from both the husband and wife to each of those 8 beneficiaries could remove $160,000 from the couple's estate each year without the imposition of any estate or gift taxes.

Q.        What About More Substantial Lifetime Gifts?

A.        In many circumstances, more substantial transfers during your lifetime may also make sense, particularly gifts of appreciating property.  In a subsequent newsletter, we will consider more sophisticated techniques for life time transfers that could yield considerable estate tax savings and allow you to transfer more of your wealth to family and friends.

Q.        So, Who Gets The Airline Miles?

A.        Most airlines we surveyed report that they will distribute a person's account balance to the beneficiary named in a will or living trust.  But some airlines will only distribute accumulated miles to one or two beneficiaries.

Presumably, heirs who receive a specific bequest such as a fixed cash sum would not be eligible, and the residuary beneficiaries of your estate would share the account balance.

If you have questions regarding this newsletter or your estate plan, please call our Trusts and Estates Department at (310) 858-7700.

With over a decade of tax-related legal experience, Burt Levitch, head of our department, devotes his practice to estate planning and estate and trust administration.  In addressing these issues, he helps clients consider the financial and emotional needs of family and friends while facing the constraints imposed by estate taxation and other applicable laws.

Our Trusts and Estates department offers a wide range of estate planning and probate services geared to provide an orderly transfer of wealth from one generation to another.  We prepare wills and trusts, deal with real property issues, and furnish sophisticated lifetime and postmortem tax planning.  We also provide counsel to executors and trustees on the administration of estates and trusts, and we provide skilled representation in probate, trust and conservatorship proceedings and disputes.

Rosenfeld, Meyer & Susman was founded in 1957.  The firm's area of expertise include: Trusts and Estates, Litigation, Taxation, Corporate and Securities, Entertainment, Family Law, Labor and Employment Law, Insurance Coverage and Defense, Real Estate, and Employee Benefits.

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