Many people think that “estate planning” means simply signing wills.  There is much more to estate planning than signing wills, however.  A comprehensive estate plan should include 1) planning for all aspects of death (not just wills), 2) planning for all aspects of disability, and 3) protecting your current and future assets.  Hopefully this article will help shed some light on these issues.

 

Planning for Death:  Minor Children.  If a person does not have a will, assets in his/her sole name with no beneficiary designation pass as provided by state law.  Tennessee law provides such assets will be split among the deceased person’s children and surviving spouse (but spouse gets at least one-third).  If any child is under the age of 18, someone must hire a lawyer and go to court to be appointed as guardian of the child’s assets.  A guardianship should be avoided for five reasons.  First, it causes legal fees and court costs (paid for by the child).  Second, it requires the guardian to post a bond (paid for by the child).  Third it requires annual accountings of the assets every year (paid for by the child).  Fourth, it requires the permission of a judge (who does not know the child or his/her family history) to spend any guardianship assets.  Fifth, upon reaching the age of 18, the child will receive all the guardianship assets, outright.  Because most children are not mature enough or financially responsible to inherit substantial assets at age 18, it is wise to avoid this result.

 

A guardianship can be avoided by preparing a will that leaves assets in trust for children.  Leaving the children’s assets in trust eliminates the guardianship costs and problems discussed above.  Trusts also allow the parent to pick the person in charge of the children’s assets.  This person is called the Trustee, and can be a friend, family member, bank, or trust company.  The trustee decides how to spend the trust assets for the children and how to invest the assets, based upon the parents’ instructions as set forth in the will.  This type of trust is typically set up so that the Trustee controls and spends the assets for the children until the ages set forth in the will.  Common distributions are one-third at 25, one‑half at 30, and the balance at 35 (or later).

 

One last important con-sideration for people with minor children is to name who they want to have custody of the children.  This person is called the Guardian.  The Guardian’s job is to raise the children as the parent would, and instill the parents’ values in the children.  If there is no will naming a Guardian, then a judge will appoint a Guardian, however, it may very well not be the same person the parent would pick.

 

Coordinating Assets With the Will.  A fact that is surprising to many people is that even if you have a will, it does not control all of your assets.  For example, assets titled jointly with right of survivorship pass automatically to the other joint owner.  Assets with beneficiary designations pass to whomever is designated.  It is therefore very important to update the beneficiary designations and how assets are owned so that they are coordinated with the will.  Otherwise, life insurance or other assets could pass directly to a minor child, and a guardianship will have to be established to hold and manage the life insurance proceeds even if you have the perfect will!

 

Planning for Death:  Death Taxes.  Many people mistakenly believe that “death taxes” are not an issue for them.  Unfortunately, those people typically are unaware that life insurance proceeds are subject to “death taxes.”  They are also not aware that the Tennessee exemption from inheritance taxes is only $1 million. When life insurance proceeds are added to a person’s other assets, death taxes can quickly become an issue.  Anything left to a spouse is not taxed at the first spouse’s death.  They are taxed, however, at the second spouse’s death, to the extent his/her estate exceeds $1 million (assuming Tennessee residency; Mississippi has no inheritance tax).  The Tennessee Inheritance Tax on assets exceeding $1 million can be as much as 9.5%.  The Federal Estate Tax on everything over $2 million ($3.5 million in 2009) is 45%! 

 

A good estate plan must allow the use of both spouses’ exemptions from death taxes, instead of just one exemption.  Doing so can save as much as $1 million.  Accomplishing this goal requires the preparation of the correct type of wills for both husband and wife, coordinating how assets are titled, and coordinating the beneficiaries of life insurance and retirement plans.  Additionally, if a person’s will was prepared before 2002 it is likely out of date because of changes in the Tennessee and Federal death tax exemptions.  This change in the law could cause up to $225,000 in Tennessee Inheritance tax to be due at the first spouse’s death.  There are also more sophisticated ways of saving estate tax, such as Life Insurance Trusts, Family Partnerships, Grantor Retained Annuity Trusts, Charitable Trusts, etc., but these are beyond the scope of this article.  Please call me if you would like to discuss any of these techniques.

 

Planning for Death:  Children with Special Needs.  An often overlooked issue in estate planning is children with special needs (such as autism, mental retardation, Down Syndrome, etc.).  Assets left to such children should be left in a specialized trust known as a “Special Needs Trust,” which can be incorporated into the will. This type of trust is necessary to preserve the child’s eligibility for various governmental programs, such as Medicaid/TennCare, to provide for basic health care during the child’s life.  The goal is to continue the government benefits, while allowing the trust to supplement the governmental benefits and pay for things that Medicaid/TennCare will not, so that other family members are not burdened.

 

Planning for Incapacity.  As mentioned above, estate planning includes not only planning for death, but also planning for incapacity.  To properly plan for incapacity, everyone should have durable powers of attorney for financial AND for health care matters.  These will allow someone to manage your financial affairs and make health care decisions if you are unable to do so.  Living wills should also be signed that document your preference regarding being kept alive artificially if there is a terminal condition with no chance of recovery (think Terry Schiavo).  Lastly, just as life insurance is important at death, disability insurance is important in case of injury and inability to work.  Disability can be more financially devastating than death because additional ongoing expense can be caused by the injury.  Also, long term care insurance is important to pay for the dramatically rising costs of nursing home and similar care.

 

Medical Care of Children in Parent’s Absence.  Any time parents go on a vacation without their children, they should sign a power of attorney authorizing someone to consent to medical care for their children.  Failing to do so could cause delays in a child’s medical treatment.  The power of attorney can be limited to the dates they are absent (with a few days extra, in case they are delayed returning).  Typically the person named is the same person caring for the children in the parent’s absence.

 

Asset Protection Generally.  Asset protection is important even if one doesn’t have significant assets now.  Lawsuit judgments do not simply go away if you have no assets.  They can be used years later to take assets a person obtains through inheritance or otherwise, as well as to garnish future wages.  Protecting children’s inheritance from divorce is a big concern for many people also.

 

Asset Protection: Insurance.  Everyone should review their automobile policies to ensure they have sufficient coverage (e.g. Caps of $250,000/$500,000), and obtain an “umbrella” policy, for additional coverage, of at least $1 million to $2 million.  Umbrella policies are very inexpensive, usually less than $250/year for a $2 million policy.  In the Memphis area, it is also important to make sure your homeowner’s policy includes earthquake insurance, with a reasonable deductible.  Deductibles of 10 or 15 percent are recommended.  People that are in there 50’s or later should also consider obtaining long term care insurance, because the cost of nursing home care is predicted to rise dramatically over the next 20 years as baby boomers pass into their retirement years. 

 

Asset Protection: Credit.  It is also crucial to protect your credit, as “identity theft” and reporting errors on your credit are becoming more prevalent and damaging.  Even simple errors can cause higher interest rates when financing a car, home, etc. Everyone should review their credit report from all three credit reporting agencies annually (available online for $30), or even subscribe to a credit monitoring service. 

 

Asset Protection for Children.  Leaving a child’s inheritance in trust protects the assets from the child’s creditors, divorce, or lawsuits.  Tennessee amended its trust law in 2007 to make it clear that a child can be the sole trustee of his/her own trust, and still have the trust assets protected.  Instead of terminating the child’s trust at a certain age, consider letting the child takes over control of his/her trust at that age and let it continue for the child’s life to continue the protection.  The child can also be granted the power to appoint where the trust goes at his/her death. This type of trust (often called a “Dynasty Trust”) gives the child control of the assets when he/she is sufficiently mature, protects the assets in the event the child is sued or divorced, and even prevents the assets from being hit by the “Death Tax” again at your child’s death.

 

C. Michael Adams, Jr., CPA, JD, LLM 10-08

Williams, McDaniel, Wolfe & Womack, P.C.

5521 Murray Avenue, Memphis, Tennessee 38119

901-767-8200