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Thursday, August 20, 2009

If you don't have a succession plan

Estate planning pitfall:
You don’t have a succession plan for your estate plan

Some of the most important estate planning decisions involve naming people to act on your behalf after you die or, in the event you become incapacitated, during your life.

You’ll want to select people you trust and who possess the skills, experience and temperament necessary to carry out your wishes. You should also choose at least one, and preferably two, successors for each of these representatives. If you don’t, and one of them dies or is otherwise unable to serve, a court will make the decision for you (usually with some input from your family).

Common estate planning documents that should include successor designations include your:

  • Will. Your will should designate a successor executor, especially if you’ve named your spouse as the executor, because he or she might decline the burden of administering your estate while grieving your death. Further, if you have children who are minors, the will is the place for you to designate guardians for those children.
  • Trusts. Trustees often have considerable discretion to distribute funds and make decisions in accordance with your wishes, so selecting their successors is just as important as selecting the original trustees. Another option is to create a mechanism for the current trustee or beneficiaries to name successor trustees.
  • Health care documents. A health care power of attorney authorizes another person to make medical decisions for you, including decisions on life-sustaining treatment, when you’re unable to make them yourself. Your spouse will probably be your first choice, but it’s critical to choose one or more successors in the event he or she is unavailable or otherwise unable to make the decision.
  • Power of attorney. This document authorizes your spouse or another representative to manage your financial affairs. If he or she is unable to act, you need to have a successor ready to take over at a moment’s notice.
To avoid having a court make these decisions for you, review your executor, trustee, agent and proxy designations periodically to be sure you have replacements who are ready, willing and able to step in should the need arise.

Tuesday, August 18, 2009

A "Principle Trust" can help achieve your estate planning goals

For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. A popular tool for achieving this goal is the incentive trust, which conditions distributions on certain “acceptable” behaviors. But is this your best option?

Rigid distribution rules problematic
An incentive trust attempts to shape your beneficiaries’ behavior by conditioning distributions on specific benchmarks that are readily understandable and achievable. Examples include obtaining a college degree, maintaining gainful employment, or refraining from unacceptable behaviors such as drug or alcohol abuse or gambling.
In an effort to quantify acceptable behavior, some incentive trusts provide for matching distributions based on a beneficiary’s salary or charitable donations. Unfortunately, this approach can lead to unintended consequences.
For example, if your trust conditions distributions on gainful employment or matches a beneficiary’s salary dollar-for-dollar, it may discourage heirs from becoming stay-at-home parents, doing volunteer work or pursuing less lucrative but worthwhile careers, such as teaching or social work. If the benchmark is graduating from college or obtaining a graduate degree, the trust may unfairly penalize family members with disabilities or who simply lack the temperament or capacity for higher education.
One potential solution is to design a detailed trust document that attempts to cover every possible contingency or exception. Not only is this time-consuming and expensive, but, even with the most carefully drafted trust, there’s a risk that you’ll inadvertently disinherit a beneficiary who’s leading a life that you’d be proud of. Or, the trust may reward a beneficiary who meets the conditions set forth in the trust but otherwise leads a life that’s inconsistent with the principles and values you wish to promote.
Principles trump incentives
If you’re comfortable giving your trustee broader discretion, consider using a principle trust, instead. By providing the trustee with guiding values and principles rather than rigid rules, a principle trust may be a more effective way to accomplish your objectives.
A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually anything, from education and gainful employment to charitable endeavors and other “socially valuable” activities.
By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.
Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do very little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.
At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.
Not for everyone
Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.
On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future.

Friday, September 26, 2008

Not Using a Trust When You Should

Estate Planning Pitfall: Not using a trust when you should

Determining if a trust is appropriate for you depends on your objectives and your needs. Suppose, for instance, you have adult children in whose ability to handle the financial responsibility of inheriting your estate you have complete confidence. You’re unsure whether the idea of keeping assets in trust for them after your death is appropriate.

It would still make sense to use a trust during your life, as doing so will allow for the seamless transition of control of the assets at your death. And assets held in your trust prior to your death will pass to the beneficiaries without being subject to probate, which can be expensive and always is a public process.

In deciding whether to keep assets in trust after your death, though, you need to weigh the disadvantage of burdens — and, more important, the idea of having the assets “tied up” rather than going outright to your children — against the potential estate tax benefits down the road. 

Your circumstances will help to determine whether the assets should remain in trust. For instance, depending on the size of your estate, the trust can provide a means of keeping assets outside of the estate tax system forever or, at a minimum, for at least a generation.

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