Estate planning primer, Pt. 3: Dispositive wishes

By Julius Giarmarco

Giarmarco, Mullins & Horton, P.C.


Author's note: This is part three of a five-part series on estate planning. Part one dealt with minimizing death taxes; and in part two, we discussed how to avoid the costs, delays and publicity associated with probate in the event of your death or incapacity. In part three, we will look at techniques to set forth your dispositive wishes — i.e., who gets what, when and how. In part four, we’ll examine how to coordinate the myriad technical rules relating to IRAs and other retirement plans with your overall estate plan. And in part five, we’ll discuss advance directives regarding your medical decisions upon incapacity, including end-of-life decisions.

Setting forth your dispositive wishes
The first step in the estate planning process is to figure out what you have, or estimate as accurately as possible what you will have, when you die. Once you've determined what you own, you should meet with an estate planning attorney to estimate how much, if any, your estate will have to pay in death taxes. The attorney will then assist you in preparing the necessary documents to carry out your dispositive wishes with the least amount of death taxes and without going through probate — if desirable.

Whether you have a simple will or a revocable living trust, those documents set forth who receives your estate when you die, how it will be distributed, and the names of the person or persons in charge of making this happen. With a will, the person who is in charge of carrying out your wishes is called a "personal representative" or "executor." With a trust, that person is called a "trustee." With proper planning, you can be certain that what you have goes to whom you want, when you want and how you want. You can also protect your heirs from their inability, their disability, their creditors and their predators, including ex-spouses.

For the most part, you can give your estate to whomever you choose. The only exception is that state law may not allow you to disinherit a spouse (without a prenuptial agreement). However, as mentioned above, if you die without a will or living trust, then state law will determine who receives your property when you die. What are the common choices people make about who inherits their estate?
In most cases, leaving everything to the surviving spouse, if living, otherwise, to the children (in equal shares), works just fine. However, this might not work well in a second marriage, particularly where there are children from a prior marriage. Nor does it work well for a married couple with a large estate. For those couples, their will or living trust should take advantage of both spouse's estate tax exemptions — $3.5 million in 2009. Otherwise, the first spouse to die may waste his or her exemption, resulting in unnecessary estate taxes at the surviving spouse's death.

A-B trusts
The way to take advantage of each spouse's estate tax exemption is by using an A-B trust as part of each spouse's will or living trust. The "A" trust is also commonly referred to as the marital trust, and the "B" trust is also commonly referred to as the family trust, residuary trust or credit shelter trust. When the first spouse dies, an amount equal to his or her estate tax exemption is funded into the B trust, and the balance to the A trust. The B trust is not subject to estate tax because of the decedent's estate tax exemption, and the A trust is not taxed because of the unlimited estate tax marital deduction.

When the surviving spouse dies, the balance remaining in the B trust passes estate tax-free to the remainder beneficiaries (i.e., children, grandchildren, etc.). The assets in the A trust (along with the surviving spouse's own assets) are subject to estate taxes, but only after deducting the surviving spouse's estate tax exemption. Thus, with an A-B Trust, a married couple can double the amount that they can leave their heirs tax free. Yet, during the surviving spouse's lifetime, he or she can receive — at a minimum — all of the income and principal from both the A and B trusts as needed for health, education, maintenance and support. Guardians
If you have minor children, your will should designate your first and second choices for their guardians. If you have a living trust, then the pour-over will discussed above will designate the guardians for any minor children. Failure to designate a guardian will result in a judge making the decision based on his or her estimation of what is in the best interests of the child.
Will contests
If you are concerned about the possibility of a will contest, steps can be taken to prevent a disappointed heir from improperly challenging the validity of your will or living trust. Among the things that your lawyer can do to mitigate the risk of unfounded claims asserting “insufficient mental capacity” and “undue influence” is to meet with you separately from the heirs you intend to favor; carefully supervise the execution of documents with witnesses from the law office; and perhaps even videotape the signing conference. The will or living trust can also include an "in terrorem" clause. This clause provides that anyone who contests the will or living trust loses whatever bequest has been granted to him or her. Hence, the "terror" that will result if one does not follow the directives of the will or living trust. Many states allow for a will or trust to have such a no contest clause so long as the heir challenging the will or trust does not have probable cause.

Minor children
When leaving assets to children, grandchildren or young beneficiaries, you will want to consider leaving those bequests in trust for them. The trustee can make the investment and spending decisions for the beneficiaries until they are old enough to make those decisions for themselves. You pick the ages of distribution and you name the trustee. Typically, distributions are staggered over a number of ages, such as one-third at age 25; one-half at age 30; and the balance at age 35. The will or trust should allow the trustee to postpone those distributions (beyond the stated ages) for a good cause, such as the beneficiary's addiction to drugs or alcohol, a pending divorce, bankruptcy, etc.

Selecting fiduciaries
As part of your dispositive wishes, you must designate the person or persons who will be the personal representative or executor of your will and/or the successor trustee of your living trust (fiduciaries). You can either name an individual or a bank or trust company to act as your fiduciary. You should name a second choice in case your first choice is unable or unwilling to serve or to continue to serve.
The responsibilities of your fiduciary include making sure all assets are accounted for, all existing debts and tax obligations are paid, and that the remaining assets are held, administered and distributed in accordance with your wishes. These are all important tasks and, therefore, selecting a fiduciary is an important decision. Your fiduciary should be given the power — under your will or living trust — to hire a lawyer, accountant and/or financial adviser to assist in the administration of your estate.

Usually, a married couple will name the surviving spouse to act as the fiduciary, either alone or as co-fiduciary with an individual or financial institution. Children can also be named as fiduciaries, but sometimes having one child manage his or her sibling's inheritance can foster acrimony between the children. And for larger estates and estates with complex assets (i.e., business interests), you should consider naming a lawyer, accountant, or financial institution as fiduciary or co-fiduciary with a family member. Consideration should be given to allowing family members to remove and replace the independent fiduciary with another qualified independent fiduciary.

The person or persons named to be the fiduciaries under your will or living trust are usually named as your attorney-in-fact under your POA. This is because a fiduciary under a will or living trust and an attorney-in-fact both deal with financial affairs. However, a bank or trust company will generally not act as an attorney-in-fact under a POA. Thus, an individual must be named for that role.

Finally, in formulating your estate plan, it's important to remember that if you use a simple will, that document will dispose of those assets in your name only at the time of your death. And, if you use a living trust, the trust only disposes of those assets that you transferred to the living trust during your lifetime, plus any assets that pour over into the trust (at the time of your death) under your pour-over will. Joint property will pass to the surviving joint owner, and life insurance, annuities and retirement accounts will pass to the named beneficiary — regardless of what your will or living trust says. A very important part of estate planning is to assure that these non-probate assets pass in a manner that is consistent with your dispositive wishes.

In part four of this series, we’ll examine how to coordinate the myriad technical rules relating to IRAs and other retirement plans with your overall estate plan.