Because the new tax law passed in December temporarily raises the estate tax exemption base up to over $11 million starting in 20181, it is very important to work with a fiduciary like Decker Retirement Planning, in conjunction with your estate attorney, to help make sure you have the right estate planning documents in place. We can help ensure you take advantage of tax laws while avoiding potential issues—both financial and emotional—that we’ve seen. If you don’t have an estate attorney, we have several we can recommend.
In a typical estate, there are three items containing instructions used to transition the financial aspect of your estate after you pass. One is your Will. The second is your trust, if you have one. Third are your retirement accounts and insurance policies, which have named beneficiaries.
However, there are more issues to address when it comes to estate planning. The legal documents you may need include a Will, power of attorney, healthcare directive, and different types of trust/s.
Here are some things to consider:
1. Wills
When it comes to your Wills, our focus is on helping you make sure the distribution language is fair, your children (and/or stepchildren) still love each other after you’re gone, the lineup for succession in executors is logical and makes sense for your family, you have a pour-over provision to sweep everything not mentioned or titled into a trust or trusts, and you have AB language, so you can preserve the maximum estate tax exclusion available to spouses.
Executors: Create a Logical Succession
Your Wills need to have what we think of as common-sense succession. For instance, in the case of a husband and wife, each spouse names the other spouse as the primary executor of their Will. That way, when one passes away, the surviving spouse receives all the assets of the estate as the beneficiary while acting as the executor in transitioning the estate over to themselves. When the second spouse passes, the assets then go (like a single person’s does) to the children or the named beneficiaries.
In this case, the next person put in charge of transferring assets is the “secondary executor,” which many times is the surviving children as a group. The trouble is, when a Will names multiple children as “secondary executor” in charge of handling their parent’s estate transition, personality conflicts can permanently ruin relationships during this stressful time.
For instance, picture your left-brained, detailed, logical child trying to work with your right-brained, big-picture, creative child. The detail-oriented person might want to get things done logically and quickly while the artistic one is still processing and emotionally recovering from the loss of one or both parents.
This is why we sometimes recommend you name one single secondary executor in succession. We bring this up as an option to help make sure your children still love each other after the estate is processed. You know your children and their personalities, and you know whether they get along, think alike, and can work together or not.
(ALSO: See Compensation Clauses in the Trusts section below.)
Tangible Assets: Avoid Boilerplate Language
Tangible assets are your stuff, not your investment accounts. We’ve seen fights over tangible assets completely destroy relationships between children / heirs more than any other part of transferring an estate.
Leaving boilerplate language in your Will that says “tangible assets are to be equally divided” is a recipe for disaster. You can’t divide mom’s wedding ring or casserole dish, the Steinway piano that dad played or fishing hat he wore, or the framed lace doily that great-grandma crocheted at the turn of the last century—not to mention the family home or automobiles. We point this out as a consistent problem we’ve seen over and over again.
We often recommend there is a “sell provision” that states the house, cars, and/or other valuables are to be sold and proceeds divided equally. That way, your children, who are different ages and may be at different levels economically and financially, all benefit. As for your other possessions, create a family event where you have your children go through everything together with colored sticky notes marking what they most want when you’re no longer around. That way, you settle any disputes well in advance, and no child can claim they were treated unfairly by the others.
Appendix A of your Will is where you detail these specific gifts. If you work things out now, there’s less chance of a family rift or permanently broken relationship later during a period of grief.
Pour-Over Provision
Depending on your situation, if you do have a trust, we recommend a pour-over provision where all assets not named in the Will automatically transfer to the trust upon your death—allowing your loved ones to avoid the time and cost of probate.
AB Clause / Exclusion Language for Tax Purposes / Descendent’s Trust
An AB Clause is used for estate tax reasons, helping to minimize or zero out the amount of federal and state estate tax owed by your overall estate. It works by essentially cutting the estate in half, so there is a marital trust and a decedent’s trust, with the surviving spouse having access to both sides. The exclusion language and trust have to be written and set up carefully, so the estate gets the maximum estate tax exclusion, helping pass a higher estate value to heirs with minimum taxes owed. (We will help look ahead to 2026 when the new exclusion rates are set to lower back down to 2017 levels.)
2. Trusts
There are four main reasons Decker Retirement Planning, in conjunction with your estate attorney, may recommend establishing a trust or trusts:
- to help make sure distributions are made to all heirs in the case of blended families,
- to avoid public probate court,
- to control distribution timing, and/or
- to take care of disabled or special-needs children after you have passed.
Avoid Probate
We might recommend a trust to just flat-out avoid probate. Probate can tie up assets for four to six months and can cost a few thousand to tens of thousands of dollars depending on what state you live in; California, New York, New Jersey are the most unfriendly states when it comes to probate.
Whether you live in a probate-friendly or unfriendly state, it is very convenient to sweep most of your assets (except your retirement accounts) into a trust, with the trust’s distribution instructions making your estate transfer private, quick, and simple for your loved ones after you pass away.
Controlled Distribution
Sometimes, it makes sense to spread out the distribution of your assets over time, especially if there is a lot of money involved. A big lump sum payment can have a detrimental effect on some people no matter what their age—it’s like the lottery effect. They may quit their job, divorce, or make bad financial decisions, blowing all of the money quickly and becoming destitute financially and emotionally.
To minimize that risk, with very large estates we recommend you distribute assets over a period of time instead of in a lump sum upon your death. It may be better to distribute 25 percent initially, 25 percent five years later, another 25 percent in 10 years, and the final distribution 15 to 20 years afterwards.
Special Needs Trusts
There are other reasons to have trusts. For example, if you have a disabled or special needs child. With these sorts of trusts, you can have someone designated to become trustee to your child or children who handles their money well and cares about their welfare and well-being for the long-term.
Minor’s Trusts
Let’s say you have a son married to a daughter-in-law, they have two children, and the daughter-in-law is a big spender. The son predeceases you. You’ve got your two minor grandchildren living with the daughter-in-law, but you want your money to go directly to your grandchildren when you pass.
In this case, you can create a minor’s trust and have assets flow down to fund your minor’s trust for your grandkids, so when they become of age, funds can be used to fund their college education and for later in life.
Blended Families: The Revocable Family Living Trust
In cases where you are in a marriage and you each have children from different marriages involved, it is important to make sure that each child is treated fairly, particularly in the event that their biological parent’s death happens first. Because, in our experience, even though the intention may be good during the marriage, children can fare poorly if they fall out of favor at some point in the future when their real parent is no longer around or if the stepparent marries someone else.
The way to handle this may be a revocable family living trust, which is revocable up until the point of one spouse’s death, after which it becomes irrevocable. The creation of this type of trust helps ensure your final wishes for your biological children are actually carried out.
Succession: Family Living Trust Trustees
Here is another problem we’ve seen that we want to help you avoid when it comes to trusts and transitioning estates. Like the Will, there needs to be a logical succession for trustees in your trust. Furthermore, your trust/s need to work in tandem with your Will.
Typically, both spouses are grantors as well as trustees on a trust, and after both pass away, you name successor trustees—typically your children—to distribute or to continue the estate’s trust. We want to encourage you to make sure your choice for secondary trustee or alternate trustee makes sense given the personalities involved, and that the distribution instructions make sense and are fair, just like your Will.
Compensation Clauses
Another problem we typically see with trusts is the boilerplate compensation clause. It says something like, “reasonable compensation is due the trustee.” Well, what exactly is reasonable? There’s no oversight, so the trustee can write a blank check out of the trust, and the siblings will never know.
We feel it’s an honor to be elected by your parents as the trustee of their trust and/or executor of their Will. It’s an honor to process their estate. We highly recommend the compensation clause be removed because it’s so often abused. If you insist your trustee get paid, we recommend you put a dollar amount right in the trust document.
Keep in mind, a reimbursement clause is fine. If any of your trustees is working with the distribution of the trust and they have expenses they have to pay, the trust should reimburse them.
3. Retirement Accounts / Insurance Policies
Your retirement accounts and insurance policies have beneficiaries, both primary and contingent, that upon presentation of your death certificate, move as a lump sum to your beneficiaries.
We hope you never put your trust as beneficiary of your retirement accounts or insurance policies. You typically won’t see it because it’s a major tax issue. Trusts are allowed by the IRS to pass one generation without probate, but it’s very inefficient to have a trust receive 401(k) or IRA funds because, for all intents and purposes, all your tax-deferred money has just been pulled out, triggering taxation. Your estate at some point will be paying unnecessarily high taxes on it. With insurance policies, it’s usually the case that individual beneficiaries can receive the policy proceeds tax-free, which is not necessarily the case with trusts.
There are exceptions.
Conduit Trusts
Attorneys won’t usually recommend you name a trust as a beneficiary to retirement accounts unless it’s a special type of trust called a conduit trust.
Often, the majority of your financial assets are in retirement accounts. Fidelity, Vanguard, Scottrade, whoever your retirement account custodian is, they’re given instructions that you and your spouse are primary beneficiaries to each other, spouse to spouse, and your children are listed as your contingent beneficiaries.
If tragedy strikes, and both you and your spouse pass away in car accident, as contingent beneficiaries, your children are going to get a lump sum from your retirement accounts, often a large amount of money. You can control distribution of your retirement accounts by using a conduit trust, allowing you to specify the distribution of percentages of the money over five, 10, or 20 years rather than a single, large lump sum.
Power of Attorney
There are other documents you should have in place when it comes to estate planning. For instance, power-of-attorney documents. Usually, power of attorney is split into finance and power of attorney healthcare. Sometimes, they’re combined into one with a durable power of attorney.
Power of attorneys are executed not when you’re dead, but when you’re incapacitated. They allow you to elect your surviving spouse, or someone that’s near and dear to you, to operate as you with all things finance or all things healthcare, so life can go on in your estate while you’re incapacitated.
When it comes to your power-of-attorney documents, we again look for common-sense succession. We want to help make sure each spouse elects each other as agent, and once a spouse predeceases the other, you bring your children, or the next generation, or someone near and dear to you in as the successor—and that it all makes sense for your family.
Trigger Clauses
The trigger clause is very important because it is what activates your power of attorney. How do you know when someone is “officially incapacitated?” We recommend two doctors testify that you are no longer capable of handling your finance or your healthcare affairs.
Sometimes, we see documents where the power of attorney is activated upon signature. That seems convenient, because you have an active document already in-hand. But, we’ve seen it cause real problems. For instance, one spouse can use the power-of-attorney document to clean out everything that the other spouse has—bank accounts, IRAs, sell the house, use the proceeds, and make a phone call from Cabo San Lucas and say “hey, honey, I’ve decided to clean you out.” It’s legal. You signed and dated the document.
That’s why we don’t recommend power of attorneys be activated on signature. It’s not a stress you need. Furthermore, we recommend two doctors testify because you can find two doctors anywhere. We’ve seen trigger clauses for power of attorney that name a primary care physician as the one that’s going to testify that you’re incapacitated. Well, if you’re on a trip and your spouse is incapacitated, or it’s a weekend and very hard to get hold of your primary care physician, you’re going to have a problem. That’s why we recommend two doctors because you can find two doctors in any emergency room.
Trigger Clause in Case of Dementia or Alzheimer’s
The exception to having two doctors required to trigger a power of attorney may be in cases of dementia or Alzheimer’s. In those cases, we recommend the trigger be a family counsel, comprised of people that know and love the person best, like a spouse, sibling and/or children. This eliminates the humiliation that may occur when being tested by doctors, as well as the doctors themselves not knowing exactly what has been forgotten by the person or what behavior is out of the ordinary for them.
4. Healthcare Directive
The healthcare directive is basically the document that’s created to pull the plug. It also typically has DNR (do not resuscitate) provisions, organ donation provisions, etc.
Trigger Clause in Your Healthcare Directive
In almost every case, we recommend your healthcare directive be triggered when two doctors testify you are being kept alive artificially. For your protection, we want to help make sure that two doctors testify you’re being kept alive artificially.
What we have seen (far too often) is a trigger clause that says when one doctor diagnoses you with a terminal illness, the other spouse can pull the plug. Well, you might live 18 months after diagnosis. Other trigger-clause language we see frequently is when your spouse “can no longer recognize you” they can pull the plug.
We believe those triggers are uncomfortably vague, and we recommend you add the specific language that two doctors are testifying that you’re no longer capable or able to handle your financial or healthcare affairs.
Pain Medications
We also look to help make sure pain meds are part of your healthcare directive; that you’re not going to suffer. Many times, people will check and initial a boilerplate box that says if the healthcare directive has been activated, you want them to pull the plug. What you may not realize is this means you get no artificial hydration or nutrition or pain medications; that’s it, you’re done. Well, you may suffer in your transition from pulling the plug to death!
That’s why we want to help make sure you have written in your healthcare directive that pain medications are allowed, and you want them even if they can prolong life. You want to make sure you don’t suffer.
Healthcare Directive vs. Healthcare Power of Attorney
Here’s another thing to consider. We had a client whose husband went into a coma. She called 911. She went to the local hospital. The hospital asked for a healthcare directive. She went home, got it, came back, gave it to the hospital, and that’s the last time she was consulted for any strategy or discussion regarding her husband’s healthcare, because the hospital now had written, signed and dated instructions on how the person, the man in a coma, wanted his healthcare to be received.
Two doctors showed up, just like per written instruction, and said her husband was being kept alive artificially and told her she should gather the family. She gathered the family, and they pulled the plug. More than 80 percent of the time it ends there. But, in his case, it didn’t. He lingered. She asked for ice chips. The hospital said nope, it says right here, no artificial hydration. The next day, he went fetal, and started to moan with pain, and she asked for morphine and they said no, it doesn’t allow us to give him pain meds.
What did we learn from this?
First of all, put pain medication, hydration, and nutrition in your healthcare directive. But, if you are a spouse, give the hospital your healthcare power of attorney, not your spouse’s healthcare directive.
Once again we’re not attorneys, we’re just real-life observers. We want you to have input in your spouse’s healthcare decisions while both of you are around.
However, that being said, if there is only one of you remaining—your spouse has passed away—have your healthcare directive on file with the hospital, because you don’t want to put your children or family in the difficult position of pulling the plug on you.
Update and Review Your Estate Planning Documents
Remember not to treat your estate planning documents as if they cannot be edited. Now that you’ve read this article, let’s get your attorney on the phone and talk through these issues with him or her. We recommend these changes based on our experience, but your attorney may agree or disagree. Let’s have a conversation on these points to help make sure your documents are edited the way you want them, so you’re happy with your estate planning documents at this point in time.
That said, you should go over your estate planning documents often. You should update them if you’ve gone from single to married, if you’ve had children, if you’ve had children predecease you, if you have lost a spouse and have remarried, etc. Those are all life events that should remind you to go back and review your documents to make sure that they say what you want them to say.
Conclusion
You should also review your documents if estate tax laws change, which they just did1. Call Decker Retirement Planning at 855-425-4566.
1 Forbes “Final Tax Bill Includes Huge Estate Tax Win For The Rich: The $22.4 Million Exemption.” Forbes.com. https://www.forbes.com/sites/ashleaebeling/2017/12/21/final-tax-bill-includes-huge-estate-tax-win-for-the-rich-the-22-4-million-exemption/#1db427841d54 (accessed January 23, 2018).
“The tax bill … temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes.”
