Taking Your Own Estate Planning Seriously
By Shane Swanson

In life, there are two things we all can depend on -- death and taxes. But lawyers, perhaps the best-informed about why having appropriate counsel is important, are the worst at seeking it out when it comes to estate planning for themselves. The number of lawyers who do not plan at all is surprisingly high, and those who do plan, don't update their plans as they should. All too often, lawyers don't seek professional help in estate planning, and as a result, these lawyers and their families could be losing lots of money.

WHY NOT PLAN?

So why don't lawyers take time to plan? When prodded, my colleagues offer me the usual excuses I hear from everyone: "I don't have time to plan for death, I'm too busy living." "I'll get to it after the first of the year, or when I retire, or after Congress changes the tax laws next session."

However, there are a couple of exceptions to mere procrastination. Some lawyers think, "Hey, I went to law school. I can write a will. How hard can it be? Everybody knows those guys just change the names in the forms. Most of it is boilerplate anyway."

While you don't want to pay someone else to do what you can surely do yourself, if you're honest, you know the reality of you actually preparing an estate plan is as likely as keeping your timesheets current or remembering your assistant's birthday. If and when you do find the time to complete it, you may only cover where you want your property distributed. Taxes never hit the radar screen.

Complacency is a subtler but equally serious challenge facing those who should be planning. At one point, you recognized that estate planning is a specialty warranting consulting an expert. And so you did ... 25 years ago, just after your last child was born. That child is now out of college and has a child of her own. If this is you, in all likelihood, your plan is no longer worth the paper it is printed on. Why? In 25 years time, your family has changed, tax laws have changed, and you may have made decisions that affected your estate without you even knowing it. Here again, the result could very well be that those who are supposed to benefit from your estate plan could ultimately pay significant amounts of taxes.

COSTS OF NEGLECT

The basic truth is that few professional people, including lawyers, can get by without an estate plan. Let me illustrate with some hypothetical examples in which lawyers could find themselves and how they could have saved money had they paid more attention to their estate plan.

First, let's look at Karen. Karen is a successful attorney. She has practiced for 30 years, and she and her husband, Steve, have managed to accumulate a $2 million estate. She and Steve saw an attorney 25 years ago and had an estate plan prepared to make sure their children were protected. Twenty-five years ago, they had less than $10,000, and they needed only a simple plan. They left everything to each other, and then in trust for their children. They signed their documents, put them in a safe deposit box, and forgot about them. Since that time, they have assumed that they have planned properly.

Unfortunately, what worked for Karen and Steve 25 years ago is a disaster waiting to happen today. If Karen and Steve both died tomorrow, their forgetting about their estate plan would cost their children $500,000 in completely avoidable estate taxes.

The problem with Karen and Steve's old plan is that it wasted one spouse's "unified credit." As a married couple, Karen and Steve may give an unlimited amount of property to each other during life and upon death without paying any taxes, using what's known as the marital deduction. In addition, each of them has what is known as a unified credit. The unified credit allows each to give away during life or upon death property valued at up to $1 million without paying any federal gift or estate tax.

Assuming Steve died on Tuesday and left his half of their $2 million estate to Karen outright, there would be no tax due on the $1 million he transferred to Karen as a result of the marital deduction. Unfortunately, because Steve gave his $1 million outright to Karen by way of the marital deduction, he did not make use of his unified credit. As a result, when Karen dies on Wednesday, she will have $2 million in her estate, but with only her unified credit remaining, she will be able to pass on only $1 million to their children without paying any federal estate tax. The result is a tax of up to 50 percent on that portion of her estate exceeding $1 million.

This would not have been the case if Steve had transferred his half of the estate to a unified credit trust for Karen's benefit. By doing so, Steve could have made the principal and income available to Karen during her lifetime without giving up the benefit of his ability to transfer $1 million tax-free to their children upon Karen's death.

Moreover, federal law isn't the only law that Karen and Steve need to worry about. In June 2001, the federal government overhauled the estate tax laws to provide for the increase in the unified credit from what would have been $700,000 this year to the current $1 million. Facing an uncertain economy, the Minnesota Legislature has refused to follow suit. As a result, there is now a difference between the unified credit amount and the amount you can give away during life or transfer upon death without paying any state gift or death tax. Specifically, in Minnesota, individuals may transfer only $700,000 without paying a state gift or death tax. The upshot is that how Karen and Steve manage this discrepancy may change the tax they pay to Minnesota by thousands of dollars.

LIFE INSURANCE

Looking again at Karen and Steve. Suppose that they purchase a life insurance policy on Karen's life with a face value of $1 million, seeking to ease the burden of estate taxes on their children. Responding to the suggestion of their insurance agent, they sign the application, pay the premium, and congratulate themselves on looking out for their children's future.

Here again, the reality is that if Karen and Steve both died tomorrow, even with a life insurance policy, their children would face $500,000 in completely avoidable estate taxes. These estate taxes would have been avoided if Karen and Steve had purchased the life insurance inside an irrevocable insurance trust. Since most irrevocable insurance trusts cost between $1,500 and $3,000, Karen and Steve would be money ahead before signing on the dotted line.

Moreover, proper planning could have saved Karen and Steve money with the actual purchase of the life insurance. Rather than purchasing a policy on just Karen's life, they might have preferred a second-to-die policy on both Karen and Steve's lives. If the policy truly is just for the payment of estate taxes, a second-to-die policy makes sense since the proceeds of the insurance will not be paid until both Karen and Steve die, which is when the bulk of the taxes are due. In addition, the premiums may be considerably less than those for the single policy. Finally, prudence would dictate that they consider blind quotes from several companies before making their purchase, a process much simplified if they would work through an advisor who maintains relationships with several insurance agents.

PLANNING FOR GENERATIONS

Let's say that Karen and Steve's oldest child is smart enough to marry well. Even though the son and his wife work hard all their lives, neither of them will ever want for anything. Although Karen and Steve are delighted with their son's good fortune to be happy and rich, they insist that they want to treat all of their children equally. As a result, they leave their estate in equal shares to each of their children.

This situation is yet another missed opportunity for Karen and Steve. If their son is wealthy enough not to require access to his (presumed) $1 million inheritance, he will let the money grow over his lifetime only to pass it on to his children when he and his wife die. By the time he and his wife die, their estate is taxable without including the amount of his inheritance. As a result, the unified credit cannot protect the amount he inherited from his parents from taxes. Therefore, after taxes, only a little more than half of the money will pass to his children.

This could all have been avoided if Karen and Steve had taken time to plan. They could have made their son's inheritance available to him during his lifetime and provided that the entire $1 million plus the growth over their son's lifetime would have passed to their grandchildren tax-free upon their son's death.

Karen and Steve could have done this by making use of their generation-skipping transfer (GST) tax exemption in much the same way that they could make use of their unified credit. The government allows individuals to transfer assets valued at $1.1 million each to members of their grandchildren's generation without incurring the GST tax.

Karen and Steve could have eased their son's heavy tax burden had they transferred his share of their estate to a GST trust. The typical (GST) trust would provide that assets would be held for their son's lifetime. During his lifetime, income and principal would be available for his needs as well as those of his children. Then, upon his death, the assets would be distributed to his children tax-free, resulting in significant savings.

CONCLUSION

The foregoing discussion and examples only begin to cover the range of options available for planning your individual estate, and the examples cited may not be appropriate, depending on your circumstances. Estate planning is serious business and involves more than simply buying insurance or filling in the blanks on a standard form. Working through an estate planning attorney you can access a variety of professionals including insurance agents, accountants, psychologists, bankers, and financial planners who can help you plan for the unexpected. By carefully providing for disposition of your property and navigating the tax code for your financial benefit, a carefully drawn estate plan can provide real value to you and your family, as well as giving you well-deserved peace of mind.

SHANE SWANSON is an attorney with Parsinen Kaplan Rosberg & Gotlieb, practicing in the area of estate planning. He graduated cum laude from the University of Minnesota Law School in 1998.