Trust & Estate Planning Basics

As wealth management continues to evolve, greater emphasis is placed on a wider range of related disciplines. I was hired by SEI Investments to help craft a series of plain-spoken, short monographs on discreet topics in estate planning which ranged from medical directives to selecting a guardian for your children.

David R. Evanson

Privately Published, Spring, 2006

Everybody Needs One

You have worked and sacrificed your entire life to provide for those you care about — spouses, children, grandchildren, siblings, stepchildren, parents and others. Yet everything you want to accomplish for these people is at risk if you fail to prepare a will. It’s true that your affairs will ultimately be settled, will or no. But without one, they will be settled according laws of the state you live in rather than according to your wishes.

And this is the essence of a will.

It is a legal document which provides directions from you to your heirs and beneficiaries about how you would like your assets, property and personal effects to be distributed.

It’s that simple.

Despite the all encompassing nature of a will, not quite all of your property is distributed by the plan it establishes. For instance property or assets held jointly, such as real estate, or financial assets held in a joint account will automatically pass to the other joint owner. Likewise, if you have named someone as the beneficiary of a life insurance policy or IRA or other deferred savings account, proceeds will go directly to them even if they are not named as a beneficiary in your will.

Because a will directs how your [italicize your] property is distributed, you are the only person who can change your will either by revoking it and issuing a new one, or amending it with a document known as a codicil. There are some circumstances under which your will could change automatically, such as in the case of marriage or divorce, though this varies by state.

Despite the complexities that can be associated with a will, the fundamental message about them is really quite simple. Every adult needs one because without it, they lose the ability to control the destiny of their property, and to exert a positive and considered influence on those they cherish most.

In addition to the distribution of property, a will allows you to:

– Appoint the Executor and successors
– Appoint guardians and trustees; and successors
– Designate custodians for assets
– Continue or enhance support of charitable causes

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Your Will names the Executor
One of the most important aspects of a will is the person you name in it to be your representative in carrying out your wishes with respect to the distribution of your property. This person is commonly referred to as an executor. The person you name to be your executors will be at once honored, and ultimately challenged by the task of settling your estate. Some of the roles and responsibilities of an executor include:

– Gather evidence of all debts, assets and expenses
– Claim life insurance benefits
– Open and maintain checking and savings accounts
– Have appraisals or valuations conducted for financial assets as well as real and personal property
– Manage filing of income and personal property tax returns
– Manage filing of state and federal estate tax returns
– Inventory safe deposit box
– Claim pension or profit sharing bonus
– Apply for Veterans Administration or Social Security benefits.

Given the complexity of the tasks, you want to choose your executor very carefully. Some qualities to consider might be business or administrative experience, the time to serve, geographic proximity to beneficiaries and estate property, sensitivity, lack of conflicts and finally, an understanding of the needs of beneficiaries as well as familiarity with your assets and estate.

Selecting a Guardian

A Must for Every Parent

Selecting a guardian for your children is similar to the preparation of a will: It is something everyone must do. In the case of a guardian, it means the care of your children will be carried by someone who understands your wishes, goals, objectives and philosophies rather than according to laws of the state where you. Thus, in essence, selecting a guardian is a nod to continuity in your children’s lives should anything unforeseen happen to you and or your spouse.

Though guardianship is often thought of in terms of the care of minor children, its focus can be much larger. Special needs children may require a guardian throughout their adulthood. Likewise, your aging parent may require a guardian if you are the primary care giver or care manager. In addition to caring for another, a guardian also assumes responsibility, but does not take title of, their ward’s real property.

Generally speaking, the guardian of your children is nominated in your will. However, it’s important that you gain the agreement and consent of the guardian in advance of the nomination. This begs the question: who should I appoint as guardian to my children? Some qualities to look for in guardians or factors to consider include:

– Is this person trustworthy?
– Are they capable of carrying out the duties of guardianship for as many years as may be required? Remember, your child may need guidance or assistance well after they achieve legal adult status.
– Although guardianship generally comes with funds from the estate, will this person be able to bear any financial imposition which may occur as a result of their guardianship?
– Will my child have to move in order to come under the care of this guardian, and if so, how far?
– Does this candidate have any experience as a parent?
– Does the guardian share your religious and philosophical beliefs, and if not, will he or she respect yours as it relates to the raising of your child?

It’s difficult to ensure that the guardian you nominate will raise your children exactly in the manner that you want. For this reason, if there are issues you feel strongly about with respect to the care of your children, it’s important that you leave written instructions to serve as a guideline for the guardian. Naturally, it would be difficult to leave instructions to cover every contingency and this suggests that the best candidate for a guardian is someone that shares your values and whom you completely trust.

Lifetime Gifting
Passing On Good Fortune

Very few of us who have achieved any level of success have done so completely on our own. Usually, we owe whatever level of achievement we’ve attained to others in our lives. Many people, once they recognize this, have the urge to continue the tradition by making gifts to others which may include children, siblings, spouses or even friends. Gifting can be fulfilling, and has the added benefit of having a potentially positive impact on your estate planning.

During your lifetime, you can gift up to $1 million to others without incurring any federal gift tax. The strategy requires careful planning because the amount of your estate tax exemption (currently $2.0 million) is reduced by the amount of the gift tax exemption you utilize. Even with this tradeoff, the benefits can be substantial, because the appreciation of the gifts you give to children or others can be significant, and this growth will escape the tax on your estate.

For example, suppose you gave a gift of $10,000 to a child at birth. If this was invested and earned an average annual compound return of 8%, it would be worth $50,338 at the child’s 21st birthday. If this same $10,000 was kept in your estate earning the same 8%, and your estate was in excess of the $2.0 million estate tax exemption, the outcome would be quite different. Specifically, all of the $40,000-plus gain would be subject to a graduated estate tax that could be as high as 47%. By shifting wealth to heirs and beneficiaries, and allowing it to compound over time, significant portions of estate taxes on gains can be avoided.

Happily, there are certain gifts that you can give that are not counted toward your $1 million lifetime exclusion. The most well-known of these is the so-called annual gift exclusion. Under this exclusion you can give the annual exclusion amount ($12,000 in 2006) to an individual without you or the recipient owing taxes on it. Other gifts not counted toward your lifetime exclusion include:

– Charitable gifts
– Gifts to a spouse
– Gifts of educational expenses. To qualify for exclusion, these gifts must be made directly to the educational institution.
– Gifts of medical expenses. Again, to qualify for exclusion, these gifts must be made directly to the institution.

An old axiom in stock market investing is that buy and sell decisions should not be driven by tax consequences. The same principle applies to gifting. That is, while there are some potentially very favorable estate planning benefits, they should not be the motivation for gifting per se. Rather, your relationship with the recipient, and the goals and objectives you have in mind for helping them should be the primary motivator for the gifts that you make.

Medical Directives
The Best Way to Communicate Your Healthcare Preferences

Planning anticipates the obvious. Good planning anticipates events or circumstances that are perhaps not so obvious. Thus, while we can all appreciate the need for a will, it’s more difficult to imagine a scenario where we are temporarily or permanently unable to make our own healthcare decision. That’s why good estate and financial planning includes a medical directive.

Specifically, a medical directive is the best and most effective way to make sure your healthcare wishes are known in the event you are unable to communicate them. Though states laws regarding medical directives vary, one point is clear: if lawfully created, a medical directive is the best form of evidence, and one that is almost universally accepted by state courts regarding your wishes with respect to medical treatment.

A medical directive is sometimes called an advance directive, a healthcare directive or a living will. Though these terms may be used synonymously, some states view a medical directive more broadly, and a living will as a narrower set of healthcare directives related to the use or non use of life sustaining treatment.

Sometimes too the terms medical directive and a durable power of attorney for healthcare are sometimes are used synonymously. These two can in fact be exactly the same if the latter is crafted in such a way as to focus on a broad range of medical directives. Ultimately however, a medical directive will provide you more flexibility to state your healthcare desires.

One of the key components of a medical directive is that you can appoint someone as your agent to speak for you and make decisions when you are unable to. You can appoint almost any adult you want to be your agent: a spouse, a child, a friend or an advisor This can save your family and loved ones time, money and the strain of a legal proceeding when they least need or want one.

And even though you cannot appoint your physician to act as your agent, this doesn’t mean you shouldn’t include him or her in discussions with your agent about specific feelings and concerns you have. Some topics for discussion include:

– Life support
– Aggressive interventions
– Hospice or long term care
– What you may want during your final days
– Pain management

Paradoxically, one of the most important aspects of a medical directive is not what you write but what you say [italicize say]. Specifically, it’s critical to let your family, loved ones and perhaps business partners know that you have completed a medical directive, and what it says. Remember, your medical directive will become effective during a moment of extreme crisis, and it will ease the burden of all concerned, if they are aware in advance of the decisions you have made, and those who you have appointed to carry them out on your behalf.

Powers of Attorney
An Essential Tool for Managing Disability

While the necessity of a will is widely understood, the need for an executed power of attorney is not. Unfortunately, the lack of understanding regarding a power of attorney does not diminish its importance. Like a will, almost everyone should have an executed power of attorney.

Legally, a power of attorney is a document where you (known as “principal”) designate another person or persons as your attorney-in-fact to act on your behalf with powers as broadly or narrowly as you define. A so-called durable power of attorney is one that remains valid even when you become incapacitated.

A power of attorney is important in health care as well as financial matters.

With respect to healthcare, a durable power of attorney confers upon the attorney-in-fact the power to make healthcare decisions when the principal cannot because he or she is not legally competent as a result of illness, injury, old age or accident. Generally, the attorney-in-fact consents to and authorizes medical treatment. One of the most important and most challenging aspects of a power of attorney with respect to healthcare is the extent to which it authorizes the attorney-in-fact to terminate treatment or life support. It’s important to keep in mind, that in some states a durable power of attorney for healthcare requires the execution of a separate legal document.

Similarly, during a period of incapacitation, there may be a change in the investment or economic climate such that certain investments need to be bought or sold. If these assets are jointly owned, any buy or sell decisions require the consent and signature of both spouses. As a result, the absence of a power of attorney may result in the diminution of jointly held assets simply for lack of being able to make timely decisions. On the other hand, the existence of a power of attorney between spouses will enable each to make timely decisions regarding investments when one of them is incapacitated.


What are the specific duties which might be authorized in a durable power of attorney? The can be as broad or narrow as you define. Below are some typical authorities.

– Manage property
– Consent to medical care
– Write checks and make deposits
– Manage legal claims
– Consent to surgery
– Gain entry to/inventory safe deposit boxes
– Buy and sell investments
– Discontinue life support
– File tax returns
– Distribute insurance and other benefits
– Terminate medical care
– Make gifts to individuals or institutions
– Exercise shareholder or grantor rights

The sometimes broad powers granted through a power of attorney can provoke anxiety. A durable power of attorney can be revoked or amended at any time so long as you are competent, and the powers assigned to an attorney-in-fact terminate at the death of the principal.

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The Soul of the Trust

The U.S. Constitution is remarkable, yet in the final analysis, it is simply a document. Its’ success may be derived from what is written on it, but in equal measure, its success comes from the statesmen and stateswomen who have breathed life into it – according to its dictates – across the generations. Conceptually, the same notion applies to trusts. Its’ design is of paramount importance, and must be very carefully considered before being crafted. However, over the life of the trust, it is the individuals charged with enforcing and administering the trust that will ultimately determine of its’ success.

Because of this, one of the most important decisions made by the grantor (the person who creates the trust) is the designation of a trustee. The trustee is the person or organization responsible for carrying out the goals and objectives of the trust.

To gain insight on the range of responsibilities for trustees, consider the major areas of focus that most trusts address: gifting in support of groups, individuals or institutions, reduction of tax liabilities, and avoiding the court-supervised process of distributing property according to a will, also known as probate. Therefore the responsibilities of the trustee, in the broadest sense include investment, management, the protection of trust assets and adherence to the intentions of the grantor.

These responsibilities very naturally underscore the qualities you should look for in a in an individual or corporate trustee. Specifically:

Familiarity With Trust Assets and Beneficiaries/Absence of Conflicts. Trusts often materialize through benevolence borne of familiarity, and as a result, a well qualified trustee is sensitive and empathetic to the motivations and genuinely interested in the beneficiaries.

Availability & Willingness to Serve the Term of the Trust. Good choices for trustees are individuals and organizations that have some geographic proximity to trust property or beneficiaries, and who can serve for the duration of the trust. Think who understands my goals and people in my life I want to impact.

Investment, Accounting and Tax Planning Expertise. Investment and reinvestment of trust funds, as well as the tax consequences issuing from trust activities are the core of trust administration. Accordingly, experience in all three disciplines is vital in a trustee. Think who would I go to for advice on my investments today? Who would I hand my check book to?

Given the wide rage of financial and relationship skills which constitute a qualified trustee, it’s hardly surprising that at times a single candidate just doesn’t fit the bill. For trusts that are broad in the scope of their goals, assets or beneficiaries, grantors often try to capture the strengths of professional and non professional trustees by appointing each as the co trustee. Obviously, a co trustee arrangement introduces its own set of challenges regarding power and division of responsibilities. But these challenges are rarely more complex than those the trust seeks to overcome to begin with, and as a result are worth the investment of time to overcome them.

For example, you may have your brother act as the initial trustee for your son’s trust while he is too young to make important decisions, then at an appropriate age (25-35) have your son become a co trustee where he can be mentored by your brother. Finally, at an age you determine, have your son become the sole trustee of his own trust where he makes his own decisions and enjoys additive protections of the trust which include increased protection against creditors and divorce.

This is just one example of how you might structure a trustee relationship, and which underscores the notion that there may be more candidates than you first imagine. However, once you have the “long list” of candidates that fit your requirements, your Personal Business Manager can help put the combination together and get to the “short list”

Sidebar: Responsibilities of a Trustee
The primary and fundamental responsibility of a trustee is to carry out the objectives according to the terms of the trust. In fulfillment of this broad directive, the day to day responsibilities of trustees include:

– Managing investments
– Recordkeeping
– Tax planning and filing
– Making distributions to beneficiaries
– Paying the expenses of the trust
– Serving as custodian of trust assets

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A Flexible Tool To Help You Achieve Your Goals

You want the very best that life can offer, not just for yourself, but for your family as well as others you care about. While this objective is simple, achieving it may not be. Complex state and federal inheritance laws, potentially onerous tax liabilities, and let’s be honest, the unique constellation of personalities which constitute a family, means that optimizing what your real, personal and financial property can offer requires a commensurately nuanced approach.

Enter trusts. In everyday parlance, trusts sound dry and technical, and may even provoke a yawn. But the conceptual framework of trusts rests on an ingeniously creative idea which makes them ideal for tackling estate planning and wealth management challenges. Specifically, by separating the legal ownership of property from the benefits which it offers – dividends, income, shelter for example – individuals can develop approaches to problems that are exactly tailored to their goals and objectives.

This limitless application of trusts is one of the primary causes for confusion about them. As a result, it’s sometimes helpful to think about trusts in terms of what they can accomplish for individuals and families. From this perspective the major areas of focus are: gifting in support of groups, individuals or institutions, reduction of tax liabilities, and avoiding the court-supervised process of distributing property according to a will, also known as probate.

With respect to gifting, trusts can help you migrate assets away from your estate to heirs and beneficiaries, and still exert influence or control over how these gifts are utilized. As a very basic example, assume you set up a savings account for a child. Under the Uniform Transfers to Minors Act, which governs cash and other gifts of property to children in most states, the options for distribution are limited: upon reaching adulthood, the child assumes control of the funds. To the contrary, if these same gifts for the child were placed in a trust, you could very precisely specify the timing and nature of the distribution, how it is invested, and what it could be spent upon, along with a myriad of other details.

Regarding tax optimization, left unchecked or unplanned for, state and federal inheritance taxes can significantly reduce a healthy estate. While federal as well as many state inheritance tax laws allow a marital deduction, enabling property to pass to the surviving spouse tax free, effective estate planning focuses on reducing or eliminating the inheritance tax once the surviving [italicize surviving] spouse dies. So called marital and by-pass trusts (also known as a credit trusts) can be used in tandem to manage, reduce and in some case eliminate the inheritance tax liability at the second death.

The marital trust generally provides the surviving spouse all of the income from the trust, and provides him or her with “blank check” powers to use, consume, give or leave the assets as he or she sees fit. However, to achieve tax optimization, a certain portion of assets in the marital trust can be held back and allocated to a by-pass trust in an amount equal to the one time credit against federal estate taxes, which is also known as unified credit exclusion amount. Currently, this credit is $2 million. At the top estate tax rate of 46%, the $2 million placed in a by-pass trust will result in tax savings of $920,000.

A third area of focus involves establishing a trust to avoid probate, which is the court supervised process of distributing property according to a will. In some states, probate is an expensive and time consuming process, and regardless of the state, probate exposes the assets and beneficiaries of an estate to the public record. One strategy to avoid probate is to create a revocable living trust to hold the assets of an individual because assets held in a living trust are outside the purview of the probate process. However, it is important to keep in mind that by establishing a revocable living trust you do not [italicize do not] achieve any of the tax avoidance benefits of a marital or by-pass trust.

Trusts derive their power, in part because of their status as a legal entity. However, it would be short-sighted to lose sight of the fact that trusts also derive much of their power and usefulness by the virtue of the skills and experience of the trustee or trustees charged with administering them. A trust, no matter how artfully designed may be destined for trouble if the trustees are not up to the task. While a trustee can be the grantor and/or the beneficiary, the notion of who controls the trust is the most important decision you will make when establishing a trust to realize the many benefits they offer you and others you care about.

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