Developing a plan that will enhance and maintain the financial security of clients and their families is one of the primary purposes of estate planning. A good estate plan helps minimizes taxes, probate costs and other related expenses while a poor estate plan can create results that are inconsistent with a client's lifetime objectives. Let's explore some of the more recognized issues that serve as impediments to the estate planning process.
Part three of this series on well-planned estates discusses the improper ownership of assets; issues created by illness, job change and job loss; and the impact caused by a non-employed spouse's disability or loss.
Improper ownership of assets
The improper ownership of property is another obstacle to achieving a well-planned estate. Often, estate tax liability and ultimate ownership of an asset is predetermined by the form of ownership in which it is held prior to the owner's death.
For example, life insurance is an asset that is frequently improperly owned or positioned. If an insured individual retains any incident of ownership in life insurance, the life insurance proceeds are subject to estate taxation. Taxation of the proceeds results in an unnecessary monetary drain on the estate.
Taxation of the proceeds, however, can be eliminated by removing all incidents of ownership from the insured and giving them, for instance, to a spouse, adult child, or trust. This makes more net dollars available to the estate or its beneficiaries.
On the other hand, in some instances, the unlimited marital deduction may make it more desirable for the decedent to retain the ownership of his or her life insurance. It depends on the particular situation. In the end, proper ownership of assets, including life insurance, must be analyzed on a case-by-case basis.
Another form of property ownership that can be problematic in estate planning occurs when property is titled in joint ownership with right of survivorship. This includes ownership as joint tenants with right of survivorship (ownership by the deceased and any other person including the surviving spouse) or as tenants by the entireties (a form of joint ownership restricted to married couples that is allowed in many states).
The post-death succession of property that is owned in either of these forms is not controlled by a valid will's provisions. Rather, as a result of the form of titling, ownership is transferred automatically by operation of law to the surviving joint tenant(s) or tenant by the entireties.
If too much of an individual's property is owned in the form of joint tenancy with right of survivorship or tenancy by the entirety, an estate can become improperly balanced. This situation may be especially true in instances in which the surviving spouse inherits too much of the decedent spouse's property relative to the children. In addition, the surviving spouse could possibly end up having an excessive estate tax liability when he or she dies.
Here is an example: H and W are a wealthy couple who want to provide for each other when one of them dies. To accomplish their objective, they have titled practically all of their assets in joint names with right of survivorship. At the time of H's death, their combined estate is worth $7.8 million. When W dies several years later, the estate has appreciated and is worth even more. Since all of their combined estates will be included in W's estate for estate tax purposes, the tax liability will be greater than had at least some estate assets been titled separately and equalized to some degree between spouses.
Failure to plan for disability, illness, job change or loss
The cost of a protracted period of disability or a prolonged terminal illness may so greatly erode an otherwise adequate estate that the estate owner leaves nothing to the beneficiaries at death, except a crushing amount of debt. The ownership of adequate medical expense and disability income insurance protection is an important consideration in planning any estate. Disability income protection, in particular, is often misunderstood or ignored by individuals and clients -- despite the fact that statistically there is a greater likelihood of a significant period of disability before retirement age than there is of a premature death.
Estate owners need to plan for the possibility of changes in employment, including job loss and severance packages. At the very least, a notable variation in employment requires review of a person's existing estate plan.
Failure to plan for a non-employed spouse's disability or loss
An estate owner should not overlook the costs an estate would bear should some life altering event occur that prevents his or her nonemployed spouse from continuing to fulfill the myriad of tasks the spouse performs daily within the home environment. Studies have shown that expenses involved in paying someone else to clean, cook, raise children and so forth could be in excess of $100,000 annually. Clearly, such numbers are capable of diminishing even a substantial estate in a relatively short period of time.
This type of unanticipated occurrence is likely to reduce the net amount of estate value necessary for the educations of children, assets expected to provide for retirement needs, and assets expected to pass to children and other family members at death. Acquiring life insurance or disability insurance to offset the costs of paying someone for household and parenting services previously rendered by a wife or husband should be an integral part of family estate planning.
Additional impediments to a well-planned estate will appear in the next estate planning column.