There’s a lot to keep up with when estate planning. These tips could help, from updating beneficiaries after changing your plan to understanding will-substitute options like transfer on death.
Originally published on Kiplinger.com November 08, 2023
Have you ever attended a conference in which a panel took turns pronouncing tips for best practices or “life hacks” to improve your lifestyle or finances? Well, this article is a smorgasbord of 14 tips you should find useful in understanding or revising your estate planning and in your relationships with your trustee, estate planner, accounting firm and other advisers.
Consider bringing a professional trustee into your estate planning process. Effective collaboration will result in a more effective plan and more efficient administration.
Make sure your estate planner understands your business. Institute a Take Your Adviser to Work Day so your key advisers witness firsthand production, business practices and the roles of your key employees (including your children working for the company).
Discuss with your legal adviser the use of transfer on death (TOD) and payable on death (POD) options to pass accounts or other assets to your beneficiaries. Many banks are promoting designated TOD/POD beneficiaries without fully explaining possible adverse outcomes.
For example, when your selected payee dies, will the remaining funds on deposit belong to his/her estate, go to their heirs at law or lineal descendants, or will account custodians lock down the account until a court designates the proper payees? Finally, overuse of TOD/POD accounts can leave your executor with no liquidity to pay the estate’s debts and taxes because all the liquid assets have already been passed out.
If you control a closely held company, ensure that your estate planner reviews the terms of any buy-sell provisions in the shareholder and operating agreements to ensure that these terms are coordinated with liquidity available to your trust or estate.
Ask your estate planner to include substance abuse powers and protections for beneficiaries in your trust documents. Nonprescription drug use has risen to endemic levels in many states. Give the trustee powers to deal with any known or likely substance abuse issues, such as the power to:
• Pay costs directly to vendors rather than to the beneficiary
• Require testing and treatment programs and pay for them with trust funds
• Withhold mandatory distributions until the beneficiary meets certain testing and treatment standards
Ask your estate planner to use active voice in all your forms, communications and agreements. Active voice (subject, verb, object) identifies the person who is or will exercise the power or duty to avoid ambiguity and provide clarity.
“The Trustee shall distribute all the income…”
Passive voice (object, verb, subject or no subject) allows the actor to be less identified in order to emphasize only the authority but not identify responsibility.
“All income shall be distributed…”
Be careful with your personal information and documents. Today’s standards expect estate planners and financial advisers to never email sensitive information without encryption, to use secure systems to send documents and confidential/sensitive information and to use multifactor authentication on all remote access.
Please don’t open attachments from anyone you don’t know or even click on a suspicious email — even emails that appear to come from someone you know. If you didn’t expect an invitation, a document or a link to some article, pick up the phone and call the sender for guidance before opening the email.
Ask your estate planner to review the trust’s express standards of care with you. You need to understand the duties and liabilities of the trustee(s) and trust adviser, whether they are expressly fiduciaries or nonfiduciaries. When a trust states that a trust adviser is not a fiduciary and is not liable for actions taken in good faith, then any actions they take must be in good faith — this is a standard of care, and they are liable for actions taken in bad faith.
Trustees are wary of terms that allow advisers to direct the trustee with liability only for intentional misconduct while the trustee is liable for any breach of trust. The only source of restitution for following an imprudent direction is the trustee. Smart trustees will require separate indemnification for all directives under these circumstances, likely aggravating your beneficiaries.
Ask your estate planner to ensure that your trust absolves successor trustees of all prior acts of the predecessor trustee. When a trustee is named successor trustee, they will look for language in the document that absolves them of the predecessor trustee’s prior acts of commission or omission. If not in the document, the successor trustee will require that all qualified beneficiaries sign a release and indemnification.
Don’t rely on your recollection or summaries from your other advisers regarding gift and estate tax returns you have filed or your past use of your lifetime estate tax exemption, annual exclusion gifts, withdrawal notices and GSTT (generation-skipping transfer tax) allocations. Obtain and save actual copies of all these documents (with any required appraisals) in your own records to ensure they match up. Protect yourself by documenting your file with your contemporaneous notes and communications regarding such gifting. As the taxpayer, you and your estate bear the responsibility to maintain records and the burden of proof in any tax controversy.
Don’t allow any time to pass between finishing your new or updated estate plan to update your beneficiary designations. If you need assistance, ask your estate planner to review your existing deeds, titles, account details and beneficiary designations for any necessary changes. Your new estate plan may be worthless if your beneficiary designation forms are not completed correctly. Ensure that the beneficiary designations properly identify a qualified beneficiary, are properly structured for a conduit or accumulation trust and are compatible with the mandatory and discretionary distribution requirements of the trust.
If you are a beneficiary of a trust, you are allowed to review the trust administration and ask questions of the assigned trust officer. Make an appointment to discuss the terms in the trust regarding:
- How often you get statements or an annual accounting
- Whether you qualify for discretionary and/or mandatory income and principal distributions
- The standards the trustee must follow for making such distributions (i.e., what can the trustee pay directly to you and what costs and goods can the trustee pay for?)
- Whether your outside income and assets must be considered and to what extent
- Your income tax liability for the trust and how the investment decisions contribute to “phantom” income
- How your trustee’s use of the power to adjust between income and principal may be applied to your benefit
- Whether distribution decisions need to consider the effect on generation-skipping tax-exempt and nonexempt trusts
- Whether you have any control over the use of trust benefits during your lifetime or at your death (i.e., a power of appointment, a power to withdraw, a power to direct the trustee, etc.)
When you update your estate, ask your attorney to consider drafting trust restatements and new wills rather than trust amendments and codicils. Modern word processing makes it just as easy to prepare complete restatements rather than multiple amendments. It eliminates the confusion of moving back and forth between documents.
It may make sense to use the same accounting firm to prepare your personal tax returns and the fiduciary tax returns for any trust related to your personal tax liability. Many trust companies have an arrangement with a CPA firm that will result in faster and cheaper preparation fees.
Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.