Contrary to popular belief, there is much more to estate planning than signing Wills.  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.

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 1/3).  If any child is under the age of 18, a guardian must be appointed by the Court for the child’s assets.  A guardianship should be avoided for many reasons:  (1) It causes legal fees, court costs, and a bond premium (all paid for by the child); (2) It requires annual accountings of the assets every year (paid for by the child); (3) It requires the permission of a judge to spend any guardianship assets; and (4) the child will receive all the assets outright at age 18!

A guardianship can be avoided by preparing a Will that leaves assets in trust for children.  Trusts also allow the parent to pick the person in charge of the children’s assets and the age at which the children gain control of their inheritance.  The Trustee 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 your instructions in your Will.  A Will should also name the person to have custody of any minor children.  This person (the Guardian) will have custody of the children until each is 18.  If there is no Will naming a Guardian, then a judge will appoint a Guardian.

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 designated.  It is therefore very important to update 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 is 35% on assets exceeding $5 million in 2011 and 2012 but may increase to 55% on assets exceeding $1 million in 2013.  We do not currently know what the federal exemption will be in 2013, but it will likely be between $1 million and $5 million.

A good estate plan must allow the use of both spouses’ exemptions from death taxes instead of just one exemption.  Doing so can save a substantial amount of taxes.  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.

Planning for Death:  Income Taxes

Due to a new Tennessee law effective July 1, 2010, married couples can now create a Joint Revocable Trust that provides a significant income tax benefit to the surviving spouse.  In short, this trust will allow the surviving spouse to receive an increased “income tax basis” for all of the married couples' assets.  This means that the surviving spouse will be able to sell any assets such as investments, real estate, or businesses free of income tax.

Another benefit of the Joint Revocable Trust described above is that it allows the married couple to keep all of their assets titled jointly, rather than dividing up assets into his and her separate names.  An incidental benefit of this type of trust is that, like any Revocable Living Trust, it allows a person to avoid the delay, expense, and hassle of Probate Court.

Planning for Death:  Children with Special Needs

An often overlooked issue in estate planning is children with special needs.  Assets left to such children should be left in a 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 Disability/Incapacity

To properly plan for disability, 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 treatment if there is a terminal condition with no chance of recovery.  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.  Finally, long term care insurance is important to pay for the dramatically rising costs of nursing home care.

Medical Care of Children in Parent’s Absence

Any time parents go on a vacation without their minor 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.

Medical Care of a Child over Age 18

Parents with children over age 18 should have their children sign a health care power of attorney (often the parent) to make medical decisions.  Because of a federal law called “HIPAA,” parents may be unable to obtain medical information about an injured adult child from doctors and hospitals.  If a child is a minor, the parents have a right to their child’s medical information but, after a child is 18, they do not have the right without a power of attorney.

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 obtain an “umbrella” policy of at least $1 million to $2 million for additional liability protection.  Umbrella policies usually cost less than $250 per 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.  People that are in their 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 Trusts

In 2007, Tennessee passed a comprehensive asset protection trust law.  This law allows a person to create a trust, of which he or she is the beneficiary, and have the assets in the trust protected from creditors and lawsuits.  There are a lot of considerations involved with this type of trust that should be discussed with an experienced estate planning attorney.

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.  Consider letting the child take over control of his/her trust at a mature 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 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.

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.

C. Michael Adams, Jr., 2011
Williams McDaniel, P.C.
5521 Murray Avenue
Memphis, Tennessee 38119
901-767-8200
www.wmww.com