Knowledgeable Attentive Effective
Hofheinz Heinen PLLC
Overview of Estate Planning
A Conceptual Approach
A Conceptual Approach
Walter Wm. Hofheinz
Table of Contents
Overview of Estate Planning
A Conceptual Approach
A Conceptual Approach
Walter Wm. Hofheinz
- How often are standard Will or trust distribution provisions altered for a particular client?
- How uniform are the type of fiduciaries chosen by your clients?
- How often are trust termination provisions (such as ages or phasing) altered for a particular client?
- How often are executor's or trustee's powers varied for a particular client?
- Is each client made aware of alternatives, and allowed to make an informed choice?
- Types of accounts
- Certificates of deposit
- Money market accounts
- Cash management
- Types of institutions
- Savings and loans
- Credit Unions
- Brokerage firms
I. Purpose and Scope
While there are many resources which provide technical guidance on the particular requirements of individual estate planning tools and techniques, few approach the problems of estate planning from the perspective of how to choose, combine, and use tools appropriate to the needs of particular clients. This outline provides one analytic pattern for such decision-making. It states a working definition of estate planning, discusses obstacles which must be considered by the attorney providing estate planning advice, if the advice is to fully meet the needs (both perceived and unacknowledged) of the client, and provides a step-by-step approach to choosing and using tools appropriate to the client's needs.
A working knowledge of the law of Wills, trusts, probate, business entities, real property, donative transfers, income taxation, and transfer taxation is assumed, since these form the foundation of the estate planning and probate practice. Accordingly, this outline focuses on the problems and opportunities presented by the characteristics and interactions of these fundamental areas.
II. Initial Considerations
Initially it is important to define the task to be accomplished, since, as one poster put it, "If you don't know where you're going, you're likely to end up somewhere else." All too often, a client will call and say "I'd like to make a Will." The lawyer then obliges, and the client thinks all is well. Unfortunately, in many instances all is not well. The disposition of non-probate property may not be appropriately coordinated with the testamentary plan resulting in unexpected dispositive results or failure to protect those who need management assistance, post-mortem administrative expense and inconvenience may be increased through failure to adequately deal with difficult-to-administer assets such as family businesses, and transfer taxes may not be minimized.
It is important to appreciate the full scope of undertaking representation of a client with regard to transactions impacting both all of the client's property and the well-being of family members or other beneficiaries. The importance of this understanding is enhanced by the fact that few, if any, clients fully understand alternatives available to them and the implications of choosing a particular course, unless competent legal counseling is provided to them through the process you adopt. In addition, for very good policy reasons, the recourse of beneficiaries for implementations seemingly inconsistent with the desires of those doing estate planning is severely limited-in other words, you can't fix it later.
A working definition of estate planning which includes the considerations appropriate to the full scope of such representation is the following: "Estate planning is the process through which the client's dispositive desires are realized with minimal inconvenience and minimal expense, each throughout the entire planning life cycle." As will become apparent in the following discussion, each of the components of this definition are inter-related, and often place conflicting demands upon the client and lawyer.
1. Realize client's dispositive desires
Throughout the planning process, it is imperative that the focus be on what the client wants to have happen to his property as it is transferred to his or her beneficiaries, whether during life or at death.
a. Attorney assumptions
Assumptions all too easily creep into our dealings with clients, especially when the assumptions are, in fact, valid most of the time. While assumptions may facilitate decision-making by the client and performance of cost-effective services, they can also interfere with achievement of the client's dispositive goals. Awareness is the first step toward intentionally focusing on the particular client's needs and desires. Ask yourself the following questions:
b. Compromises arising from extrinsic constraints
A second problem which often arises is that of assisting the client in his or her decision regarding the costs and benefits of deviation from primary dispositive desires in order to meet extrinsic constraints, primarily in the context of transfer tax planning. For example, many of my clients, in the absence of extrinsic considerations, would prefer a dispositive plan which left all their property to the surviving spouse outright; on the other hand, I have yet to have a client spontaneously describe to me a primary dispositive plan which even approximates a marital deduction bypass trust. Most of those in need of transfer tax planning, however, once they understand the costs and benefits, will compromise their primary dispositive desires in order to obtain the available tax benefits. Such compromises are the client's prerogative, however, and the lawyer should not impose them without informed decision-making by the client.
c. Benefits, control, and ownership
In exploring the dispositive desires of the client, it may be helpful to discuss the objectives of the desired disposition in terms of benefit and control, rather than ownership. Often clients simply have no idea that beneficial interest and control can be separated from each other and dealt with independently in order to accomplish a particular objective.
2. Minimal inconvenience
It is my experience that, for most clients, the inconvenience of determining and implementing an estate plan falls into one of two categories: the inconvenience of change itself, and the difficulty of requirements for implementing the plan chosen.
Change is unavoidable, but manageable. Appraisal of the extent and timing of change required by contemplated alternatives is an essential component in the cost benefit analysis performed by the client, whether acknowledged by the client or not. Many obstacles arising from the client's understanding of the process (discussed in detail below) which are related to this component of the client's evaluation can be avoided if the requirements imposed by a plan in this area are explicitly recognized and addressed by the lawyer.
b. Implementation requirements
The more obvious inconveniences related to the estate planning and transfer process are those related to the details of implementation, whether they are restyling account and beneficiary designations, creating and maintaining ownership entities, or transferring property during life or during the estate settlement process. Awareness should be maintained that it is often the timing of a required action, rather than the action itself, which imposes significant inconvenience on the client. For example, complete funding of an intervivos management trust is for most purposes the equivalent of transfer of property during an estate settlement. In the first instance, however, the client assumes the inconvenience of the process, in the second, the executor does.
The other less obvious inconveniences typically relate to the change in substantive position by the client implementing the planning: the change in relationship as a management trust is created, funded, and control is surrendered to a trusted child; the change in perceived economic security by the parent who, during life, transfers substantial assets to lower generation beneficiaries for tax planning purposes; or the transfer of equity interests to lower generation beneficiaries which creates a continuing fiduciary relationship on the part of the transferor.
3. Minimal expense
As we are all aware, expense is often the single component of the evaluation factors most apparent to the client. In evaluating this factor, however, the client is often unaware of the trade-off between current and future expenditures, and between expense and the convenience of the planning implemented. Expense items fall into several categories:
a. Out-of-pocket expenses
The first and most obvious type to consider is out-of-pocket expense such as legal fees, accounting costs, transfer costs, and other implementation costs.
b. Transfer taxes
The next expense item of which most clients are generally aware is the potential income and transfer tax cost. Often clients are confused, however, about the distinctions between and interplay of the income and transfer tax systems. Other clients may be concerned about paying taxes when they, in fact, have non-taxable estates.
c. Lost opportunity costs
Few clients seem to be aware of, or consider seriously, the potential lost opportunity cost (or actual possibility of out-of-pocket losses) which may arise from inflexibility, inappropriate ownership or transfer structure, or failure to design and implement a comprehensive plan.
4. Over the entire planning life cycle
This, the final element of the definition, is, in my experience, the one most often ignored by both practitioners and clients alike. For disposition, the timing concerns are typically apparent. Often, however, clients do not fully appreciate the timing questions involved in reaching an optimal balance of inconvenience and expense.
As might be expected, these timing questions assume increasing importance, become more complex, and affect the balance of the different elements of the definition as the time frame for the contemplated planning expands. For example, in the context of a simple single-generation non-tax plan, timing is important to the extent that the inconvenience can be avoided entirely by the client, if not the executors and beneficiaries, and the expense of transfer can be delayed until death with minimal (if any, under Texas probate law) additional cost. On the other hand, in a complex multi-generation tax plan, timing questions may be of critical importance in determining not only the desirability, but feasibility, of potential alternatives.
The life cycle of a typical estate plan includes the following stages: initial implementation, maintenance, inter-generational transfer, and final termination and distribution. In long-term plans, the maintenance and transfer phases may alternate, as a number of generations may pass before the rule against perpetuities forces termination and distribution.
Whether the expected duration of the life cycle of a plan is only a year or two, as when planning for a terminally ill client, or whether final distribution is not expected for more than one hundred years, as is often the case with a multi-generation whole-family tax plan, a thoughtful and appropriate analysis of the way in which implementation timing affects the feasibility and convenience of the plan throughout its expected life is essential.
To effectively meet the challenge of appropriately representing clients in estate planning matters, the lawyer must overcome numerous obstacles. In general, these relate to the client's participation in the process, the substantive requirements of the areas of law involved, and the interrelationship of the two, which I have termed transactional obstacles. Each of these present separate sets of problems to the practitioner, and require that the practitioner acquire and maintain a broad-based skill set.
1. Client understanding
The first obstacle which must be overcome in many instances is the client's understanding of the substantive law applicable to, and the process of, inter-generational wealth transfer. Notice that I use the word "understanding," not "misunderstanding" in describing the essential problem. Most often, the client's information has been obtained form a variety of informal sources and sometimes even from less well informed lawyers. As we all do, the client has built a set of expectations regarding this small corner of his or her world, and is likely to exhibit resistance to a greater or lesser degree depending on the length of time the belief has been held, the perceived authority of the source of the belief, and the perceived consistency of the belief with other information gained by the client. In Texas, problems in this area are exacerbated by the fact that most media sources are national in scope, and that Texas processes in the wealth transmission process are unusual, if not unique.
Assumptions are those elements of the client's understanding that are simply accepted by the client as "background knowledge" without ascertainable source, substantiation, or even express acknowledgment. Incorrect assumptions, once explicitly acknowledged, can typically be corrected by supplying the client correct information. The key phrase is "explicitly acknowledged." The failure to make assumptions explicit, and verify their accuracy or correct their inaccuracy, is often the source of misunderstanding between client and lawyer, and can undermine the perceived authority of the advisor.
To give a simple example, it is elementary to the lawyer that a Durable Power of Attorney is ineffective to allow the transfer property by the attorney-in-fact after the death of the principal, and that it is therefore simply an ancillary lifetime management tool having no impact on the disposition made under the Will. I have found that many clients assume that something that works in the lifetime of the principal will continue to work after death, and that the Durable Power of Attorney may be used either as a substitute for a Will, or that it will allow changes in the dispositive plan after death of the principal. Many are surprised that the Durable Power of Attorney and Will perform independent essential tasks in the plan implementation. One possible implication of this assumption, if left unchallenged, is that the lawyer advising the client is suggesting unneeded work, which happens to tie into another assumption common in the public culture-that attorneys attempt to "create work."
Misinformation is composed of incorrect elements that have been explicitly and formally incorporated into the client's understanding. Misinformation typically arises either out of misunderstanding the principles applicable to particular factual circumstances, or out of correctly understanding sources which do not carefully distinguish the appropriate and inappropriate application of correctly stated principles to particular circumstances. Misunderstandings are usually fairly easy to correct: a simple explanation in context of the original source may suffice. The problem of misapplication of correct principles is often more difficult to correct, since this misinformation often arises from marketing materials designed to build upon popular assumptions.
A current example of this type of misinformation is the marketing of living trusts for the purpose of probate avoidance. There is a near consensus among those Board Certified in Estate Planning and Probate Law that such trusts uses for the primary purpose of probate avoidance are not appropriate for Texas domiciliaries owning only property subject to probate under Texas law. On the other hand, many clients have heard, and believe, that living trusts save money and are more convenient than probate. Their belief is strengthened by the selective presentation of the advantages, and minimization of the disadvantages, of use of this particular tool.
In dealing with such a misunderstanding, a comprehensive education is one viable approach which allows the explanation to affirm those parts of the understanding which are correct, but to supplement them with the other facts which suggest a different outcome to the evaluation. To continue the foregoing example, when clients are apprised of the fact that a living trust must be currently funded to be effective for probate avoidance (in other words, that they must assume the inconvenience and expense of that process rather than delaying it until their survivors must perform the required tasks), and that the delay incurs minimal additional expense, if any, since the administration of a properly planned estate will not be subject to day-to-day court supervision, few adhere to their misunderstanding.
Client biases frequently arise from personal or cultural background. Some have basis in fact, others in tradition, others really fall into the category I have above defined as assumptions. Those arising from personal experience may or may not be amenable to change through education. Cultural biases, on the other hand, are extremely difficult to change, and must simply be treated as facts present in the particular circumstances of the client. Where a bias of the client is an obstacle to planning generally accepted as appropriate to the client's other circumstances, it is essential that the client be fully apprised of the consequences of decisions based on the bias in order to prevent later misunderstanding on the part of the client or of the client's beneficiaries.
d. Alternatives available to reach client goals
(Is this lack of imagination as well?)
On the basis of their understanding, clients may not be aware that there are many ways to accomplish their goals, and will state their conclusion rather than the problem. For example, I sometimes have a client who will say "I really want X and Y to be co-fiduciaries." After exploration of their intent, I find that they are concerned that X will not be generous enough, or that Y will not make consistently good management decisions, or that either will not exercise discretion soundly over the long term. Usually all of the true problems contemplated by the client have better solutions than co-fiduciaries. Accordingly it is essential, when evaluating and responding to clients' expressed desires, to ascertain their true intent, and assure that they are aware of and have considered all appropriate alternatives.
e. Lack of information
Although probably the easiest of the problems associated with client understanding to deal with, it is also the most general. Here the cardinal rule is "Don't assume!"
In gathering information, explaining the relevant substantive law and the choices the client must make, and assisting the client in making decisions, start at the beginning and proceed with an explanation pre-planned in appropriate depth for the client's circumstances. I have also found it helpful to briefly summarize the things that the client does not need to be concerned about, and why. This approach has the advantage of usually uncovering assumptions, misinformation, and biases, while providing a complete context for decision-making. A complete exposition should not be skipped even for clients with relatively sophisticated and complete knowledge, since the goal is not only to transmit information, but to gain it about the client's understanding.
2. Need for sufficient information
Often clients feel that it is a waste of time to gather adequate information in the estate planning process. They will ask "Why is it necessary to go into all this if I know that I want all of my property to go to my wife, and if she does not survive me, to my children?"
The planning attorney must have an answer to this question. There are many reasons why it is vital to obtain sufficient information about the client's circumstances prior to implementing planning. First, it is necessary to determine whether consideration of tax planning is appropriate. Second, it is necessary to identify family members and dispositive desires, and to ascertain whether or not the dispositive desires are unusual and require protective measures. Third, specific assets, such as property located in another jurisdiction, may engender particular problems that need special treatment. Fourth, only through complete information may one ascertain potential problems in implementation of the planning adopted.
Acquisition of sufficient information is essential if appropriate advice is to be given and the client appropriately served. The amount and detail of information that is sufficient in any particular case requires a legal judgement. "Sufficient" may range from summary oral information provided by the client, to copies of a financial statement of the client and some documents of special concern to the planner, to development of a comprehensive detailed review of all aspects of the property of the client. Factors which may reasonably be taken into account in making this judgement might include the total value of the estate, the scope of the planning under consideration and to be implemented, and whether any of the assets have characteristics which are problematic.
If an individual is unwilling to cooperate in developing required information and evaluating planning alternatives, then that individual should probably not be accepted as a client.
a. Types of information to be gathered
The type of information to be gathered can generally be categorized either as financial or personal. The following is a "laundry list" of items which should be considered, even if they are not determined to be necessary in a particular client's case.
(1) Financial Information
Financial information is of course the core of information to be gathered in the planning process, since the object of the dispositive desires of the client is his property.
(a) Financial statement
A financial statement, or balance sheet, prepared by or for the client is a good starting place in determining financial information of the client. It is only a starting point, however, since such statements are typically made for purposes very different than that of the planning process. If such a statement is prepared in accordance with accounting principles as part of the ongoing business of the client, in all probability the values reflected on such a statement will not be fair market values of assets, but will instead be the book value, or basis less depreciation. Even personal financial statements may be rendered on this basis.
Financial statements prepared in connection with loan applications should also be viewed with caution, again due to their purpose. The client must be educated to the fact that in order to plan effectively, the full fair market value of the property subject to planning must be approximated, since fair market value is the standard of value used for transfer tax and dispositive purposes. The client should also understand that the approximations of true value used during the planning discussions are not necessarily those values which would be used in reporting the assets at the time a tax return became due. For planning purposes, it is often helpful to use the highest realistic value so that a "worst case" analysis may be made, even though at the time a return is filed the minimum realistic value may be reported if it is advantageous to do so.
(2) Assets and liabilities
Complete information regarding assets and liabilities is essential if the planning attorney is to correctly ascertain the value of the estate for estate tax purposes and identify special implementation and administration problems. In addition, information regarding assets and liabilities gathered during the initial interview can provide an extremely helpful stepping stone when administration later becomes necessary by providing a preliminary inventory of property owned by the client at the time of planning. Adequate information to identify each asset and liability should be obtained.
(a) Real Property, in Texas and otherwise.
Where a client owns a surface interest in real property, the minimum information which should be obtained includes the county and state in which located, size of the tract, the exact name in which held, the manner of acquisition, the amount of income produced, and the client's estimation of value. If feasible, it is also preferable to obtain a full legal description of the property.
With respect to minerals, the minimum information which should be obtained includes the county and state in which it is located, a production history for the prior year, and the name of the operator. Here again, it is preferable that a full legal description be obtained, as well as copies of any leases to which the property is subject.
(b) Tangible Personal Property
Special care should be taken in attempting to elicit information regarding tangible personal property since clients often do not think of such property as having monetary value, only sentimental value.
The client should describe the kind and extent of the collection, the estimated value of the collection, and (if it is an unusual collection) resource organizations for later obtaining appraisals or marketing the collection.
Although of substantial value, jewelry worn every day by the client may be overlooked. One helpful source of information for jewelry may be an itemized list developed for insurance coverage purposes.
Occasionally older clients may not be aware that their everyday furniture, which their parents gave them when they were married, might now be antiques with substantial value.
Many people who collect art believe that they are perceptive and effective in picking out art which will appreciate in value. Since marketability of works may be a significant problem, care should be taken that art objects not be over valued.
Automobiles, boats, cycles, recreational vehicles, trailers, etc.
At a minimum, the year, make, model, and estimated value of each vehicle should be ascertained. If feasible, it is preferable to obtain copies of titles to all vehicles.
(c) Intangible Personal Property
The corporation's name, the number of shares owned, the exact name in which held, and the approximate value of shares of stock owned should be determined. It is important to ascertain whether it is closely held or publicly traded. In addition, the stock broker with whom the client deals should also be noted. If available, it is helpful to obtain the CUSIP number for stock owned.
The issuer, the face value, the date of maturity, the yield, the redemption value, the exact name in which held, and the approximate value should be determined. In addition, it should be noted whether the bonds are a private placement or are publicly traded.
Limited partnership interests
In the absence of a binding Buy/sell Agreement, limited partnership interests are extremely difficult to value. Accordingly, complete details about operation and the facts surrounding the client's participation in the venture should be ascertained in the interest of an accurate valuation. It is often essential to review a copy of the limited partnership agreement in order to obtain this information.
It is essential that detailed information regarding tax shelters owned by the client be obtained. Not only are most extremely difficult to value, but care must also be taken that the tax shelter will at not some point in its life cease to have value or become a liability.
(d) Cash and other liquid assets
For all such assets, it is essential to determine the exact name in which the assets are held, the type of account in which held, the name of the institution in which held, and if a joint account, to whom the funds actually belong.
(e) Pension plans
The company generating such benefits should be fully identified, including name, address and telephone number. A copy of the employee's statement showing his vested interest in the plan is helpful in determining the value of the property in the plan. Such a statement will often also reflect the beneficiary designation by the client currently in effect.
(f) Life Insurance
The exact name of the insured, the exact name of the designated owner, how the policy is owned, the policy number and the name of the issuing company, -- including address and telephone number -- should be obtained. If available, a copy of the first several pages of the policy will usually give sufficient information. If copies are not readily available, the client's insurance agent can often provide a complete life insurance inventory.
Face value, period over which renewed, and additional death benefits should be determined.
Whole-life (or variants)
The exact type of policy, the current cash value, and the face value should be determined.
Liabilities covered should be ascertained.
(g) Business interests
For all business interests it is essential that all participants be identified and the terms of the client's interest be ascertained. In addition, an approximation of value must be made.
Any trade names in which business is conducted, the names of advisors, and the information regarding the marketability of the business in the event of the death of the sole proprietor are especially helpful. It is important to note that the most qualified and knowledgeable source of information about sole proprietorships may be your client. After his or her death, some information may be impossible or difficult to find.
The number of shares owned and the percentage interest in the corporation those shares represent must be ascertained. In addition, it is essential to determine whether the corporation is closely held or is publicly traded, and whether agreements affecting the stock are in effect. Any such agreements must be reviewed in detail to determine their impact upon the dispositive plan of the client and the value of the stock.
If a written partnership agreement exists, it should be reviewed in detail. If not, the names of the partners, any trade names under which the partnership does business, the particular interest of each partner with special emphasis upon the client's interest, and agreements affecting the partnership interest should all be ascertained.
Agreements affecting interests
Where there are agreements affecting interest in businesses, the particular terms of those agreements should be reviewed in detail. Such agreements may have significant impact upon the permitted disposition of that interest or the valuation of the interest.
Role of client in business
In order to properly value a business interest, it is essential to understand the role of the client in the business. For example if your client is a key employee, his or her death may severely affect the marketability of the business; if only a silent partner, marketability will likely not be as much of a problem, but it may be more important to correctly ascertain the terms of the client's interest in the business.
(h) Powers of appointment
Although powers of appointment are relatively rare, inquiry should be made regarding their existence. If any exist, the exact terms of the power of appointment and a determination of the property subject to the power of appointment must be made. In addition, it must be determined whether any powers of appointment have previously been exercised.
(i) Assets in trust
If the client is a grantor or beneficiary of a trust, a copy of the instrument creating the trust should be reviewed to determine the exact beneficial interest of the client in the trust. In addition, it may be helpful to consult with the trustee regarding probable distributions expected from the trust.
It is only essential that the principal amount and payor be determined. It may be helpful, however, if the note is a substantial one, to obtain a copy of the note so that the precise terms can be ascertained.
Typically the contractual agreement giving rise to the liability should be reviewed in detail to ascertain the exact terms and amount of the liability. Special attention should be paid to contingencies, and to any provisions for liquidated damages for failure to comply with the agreement.
All contingent liabilities such as guarantees and instances where the client is a co-maker on a note should be ascertained. Special care must be taken, however, in evaluating the likelihood that the client will be required to actually fulfill his obligations under the agreement. This is essential if the contingent liability is a large one, since such a liability can significantly affect the determination of whether tax planning is appropriate or what planning should be implemented.
A client may have liabilities which are informal, and of dubious legal enforceability, which he nevertheless wishes to see satisfied out of his estate. It is therefore essential that a note be made of these liabilities and that appropriate recommendations be made.
b. Personal Information
Complete personal information is extremely helpful in implementing the planning decisions and in later administration of the estate. Information adequate to identify and locate each affected person should be collected, including name, address, telephone number, birth date, and social security number. Individuals for whom such information should be gathered include the following:
(1) The client
If beneficiaries are highly mobile, it may be helpful to also obtain information for another who would always know how to contact the beneficiary.
(3) Non-beneficiary family members
If a corporate fiduciary has been chosen, the individual contact with that corporate fiduciary should also be noted.
c. Dispositive desires
(1) Don't assume
As noted above in the working definition of estate planning, the dispositive desires of the client are of primary importance in the planning process. It is therefore essential to allow the client the freedom to express unexpected dispositive desires, and not assume that their dispositive wishes will coincide with that of the typical client. This is an especially difficult task when a prototypical fact pattern is presented by the client, such as a husband and wife with two children and no other natural beneficiaries. Non-leading questions should be used to elicit information.
(2) Who does client want to receive property?
For any individual beneficiary, certain generic information should be obtained, specifically that delineated under personal information found above.
Information of particular relevance to children as beneficiaries includes their number, their age, and whether they themselves have children, and the ages of such children. It is also essential to determine their marital status (and the stability of that situation), whether they are able to manage property (legally, or as a practical matter), and their general financial situation.
Often clients wish to provide for the lifetime support of their parents, but wish to determine the remainder beneficiaries of such a gift. Accordingly, if such a gift is contemplated the particular circumstances of the parent should be ascertained as well as the terms of the gift the child wishes to make.
It may be helpful to the client to suggest alternate beneficiaries who he has not previously considered. If a charitable organization is made a beneficiary, the client should decide whether the gift is to be unrestricted or made for a particular purpose. In addition, charities often do business under a name other than their correct legal name, which must be ascertained in order to properly effectuate the client's desires with the least difficulty.
(d) Contingent beneficiaries
Few clients will have given much thought to contingent beneficiaries in the absence of their primary and secondary beneficiaries. It is essential that such contingent beneficiaries be selected to preclude the possibility of intestacy. Often the suggestion of a charitable beneficiary is helpful.
(3) Special concerns of the client
It is in this area that the ability to suggest creative solutions and alternatives to a client's initial stated desire is most valuable. In order to be able to make such suggestions, it is essential that the circumstances surrounding the special concern be explored fully so that appropriate tools may be discussed.
(a) Desire to disinherit a typical beneficiary
Often discussion of this special concern of the client will disclose that dis-inheritance is not really the objective of the client, but that the client is instead interested in protecting the beneficiary from himself, herself, or others, or precluding irresponsible behavior. For instance, a beneficiary may have a severe drug problem, and the parent may not want to simply fund the child's drug habit, but may be unaware that a trust for the life of the child in which income is only distributed in the discretion of the trustee is possible. In such a case, the parent may wish to alter the original stated dispositive goal and provide for continuing potential support for the beneficiary.
(b) Desire to avoid a probable Will contest
If the client expresses concern about the possibility of a Will contest, the reasons for such concern should be fully explored. If the concern appears realistic, than the possibility of protective measures, including ways in which implementing documents are drafted and executed, should be discussed. In some instances, modification of dispositive desires may be helpful in minimizing the probability of Will contests, and should be discussed with the client.
(c) Desire to avoid predictable dissension among heirs
Problem beneficiaries should be identified, as well as the particular type of problem which they pose. Special care should be taken in selecting fiduciaries, granting those fiduciaries powers, and delineating the method of interim and final distributions of property.
(d) Desire to see farm/ranch land remain in family
Relevant considerations to discuss include who is currently operating the property, which potential beneficiaries are involved in operation, the portion of the client's estate represented by the property and whether compensatory provisions can be made for non-operating beneficiaries, and the difficulties inherent in management of multiple owner property. Potential methods of implementing such decisions, including partnership agreements, buy/sell agreements, or long term trusts, should be reviewed. Methods of providing liquidity for payment of transfer taxes, such as life insurance, or methods of minimizing such taxes should also be explored.
(e) Desire to determine who will run family business
Similar considerations to those created by a desire to retain farm and ranch land arise if a business is owned or controlled by the client. Special attention should be paid to agreements affecting the interest of the client, as well as the competence of beneficiaries potentially available to assume control of the business.
(f) Desire to control division of property
While in general it is preferable to allow the fiduciary maximum flexibility in partitioning and distributing property, clients may wish to control the particular portion of all or part of their assets to be received by each beneficiary. In such cases, it is essential that the client determine how such allocations are to be made, and whether he wishes to make specific bequests or provide a methodology for partition and allocation.
(g) Desire to provide for extraordinary needs of a particular beneficiary
If a client has a beneficiary with extraordinary needs, such as a mentally or physically disabled child, a thorough review of that beneficiary's life time needs and the best method of meeting those needs should be made. If the disability is severe, it is often preferable not to allow property to vest in the beneficiary, but instead to hold the property in trust for the beneficiary's lifetime with a competent trustee given discretion to provide for the beneficiary's needs. If an individual rather than institutional caregiver is contemplated for the disabled beneficiary, a determination should be made regarding whether special incentives for competent performance by that individual are in order.
(h) Desire for privacy
The client should be made aware that no disclosure need be made of his Will, trust, or other estate planning documents except where required for public recording or where essential for implementation. Typically, the overall dispositive scheme of the client can be kept completely confidential without creating difficulties in implementation. If privacy during administration of the client's estate is the primary concern, use of a revocable inter vivos trust as the primary dispositive tool may be appropriate.
(i) Desire to protect an inexperienced spouse
If the spouse is your client as well as the individual with the concern, great care must be taken in explaining advantages and disadvantages of the various means available to provide for management of property bequeathed to a surviving spouse. In such an instance, the spouses clearly have adverse interest unless agreement as to disposition can be reached. In the absence of such agreement, great caution should be exercised.
(j) Remarriage of spouse
If the client indicates concern regarding the possible remarriage of a spouse, with a resulting use (or abuse) of property received by the survivor, possible protective trust arrangements should be discussed. The client should be made aware that it is possible to grant an extremely wide range of interests, ranging from a limited income interest to a nearly unlimited access to principal and income, and that such a trust may be precisely tailored to meet dispositive goals.
(4) Special needs or problems of beneficiaries
(a) Children of prior marriages
Children of prior marriages are often encountered. The planning attorney should counsel the client and spouse regarding potential problems which can arise in a context of both dispositive plans and administration of the estate. Among these are a failure to make an appropriate disposition of personal property, problems with items of sentimental value, and adverse interests on the part of a fiduciary or others. The client should be advised to carefully consider decisions in this light.
Where any minor is a potential beneficiary, including possible lower generation beneficiaries such as grandchildren or great grandchildren, the planner should advise that a contingent trust for the protection of such minor beneficiaries under the Will is essential. It is often helpful if the client is made aware of the expense and inconvenience of a guardianship. In determining trust provisions, items which should be discussed include provision for distributions of income or principal to beneficiaries, administration during the term of the trust, and when the trust should end. If more then one minor is likely to be a beneficiary, the possibility of allowing each beneficiary access to the entire amount of property available should be considered.
Often the fact that a child or other beneficiary is a spendthrift will initially evoke from the client an indication that he wishes to disinherit or curtail gifts to the child. The feasibility of long term trusts with discretion in the trustee to distribute income or principal, with any other restrictions the client feels are necessary, should be discussed.
(d) Old age
Often a parent of a client is only likely to become a beneficiary at an advanced age. In such a case, the client is more likely to desire to provide for the support of the parent than to give unrestricted use of property to the parent. Use of a trust with appropriate dispositive provisions should be discussed with the client, including provision for remainder beneficiaries.
As with older beneficiaries, the intent of the client is likely to be to provide funds for the support of the beneficiary rather than to provide discretionary funds to the beneficiary. Again, discussion of utilization of a trust with appropriate dispositive provisions is in order.
As with incapacity, utilization of an appropriate trust should be discussed with the client. Special attention should be paid to possible adverse interest on the part of individual fiduciaries who may also be remainder beneficiaries.
(g) Substantial income and assets
(Don't we all wish we had this problem?) Care should be taken by the planner in ascertaining the exact situation of the beneficiaries with such a problem, and the client should be made aware of the benefits of providing for non-mandatory income distributions to such individuals or their beneficiaries. Such considerations may alter the initial dispositive intentions of the client.
3. Characteristics of property
With respect to each asset, it is vital to determine whether it is probate property or non-probate property, and whether it is community or separate. This information is needed in order to determine the value of the client's estate for federal transfer tax purposes, and to determine the appropriate choice of tools in implementing the client's dispositive plan.
a. Form of ownership
Property is either probate or non-probate property. Non-probate property has assumed increasing importance as a component of the value passing between generations over the past twenty-five years. By some estimates, more than 50% of the wealth transferred is non-probate property.
(1) Probate property
Probate property is that property owned by the client which will be subject to disposition under the terms of the Will of the client. Generally, all assets to which the client owns a legal interest outright are probate property.
(2) Non-probate property
Non-probate property is all property in which the client has an interest that will be transferred at the client's death (or happening of an earlier event) by operation of law or contract. The most common examples of this type of property include life insurance, property owned as joint tenants with right of survivorship, and retirement plan benefits.
b. Characterization as community or separate
Each asset must also be characterized as community or separate.
(1) Separate property
Separate property is that property owned before marriage, or property acquired during marriage by gift, descent, or devise. Separate property may include property made separate by agreement of the spouses, thus it is essential to ask if the married client has executed an agreement affecting the characterization of property. If not, the property under Texas law is characterized at the inception of title, and the characterization does not change after that time except by agreement.
(2) Community property
Community property is all marital property which is not separate. A presumption exists that all marital property is community, unless it can be proved otherwise. This leads to the result that although property cannot by agreement be turned into community property, by commingling it may be. The community property presumption is important for analytical purposes because it typically relieves the lawyer of the burden of examining the facts and circumstances at the inception of title to determine if a particular asset is community or separate.
c. Particular asset problems
Other problems and circumstances also must be considered in determining the appropriate recommendations for a client.
One must determine if the client owns any real property outside of Texas as probate property. If so, a determination must be made if an ancillary probate is worth avoiding, and if so, the particular way in which the plan should be implemented.
(2) Insufficient management/valuation knowledge
Any assets for which no one surviving the client is likely to have the experience, expertise, or inclination necessary to manage or sell at full value should receive special attention
(3) Assets with unusual characteristics
Assets which will be difficult to dispose of during the estate settlement process at full value due to the particulars of the market in which the asset is customarily traded, or which have other characteristics which make them unusual or difficult to administer should also be carefully analyzed. Other assets, such as professional practices, may require special planning during life in order to realize any value for beneficiaries after death of the client.
(4) Assets subject to extrinsic constraints
In addition to ascertaining the existence of a particular asset, one must determine if it is subject to some contractual or legal restriction which would affect the dispositive plan under consideration. Flags include business interests, business activities subject to licensure, property subject to regulation, and those in which concurrent ownership interests exist.
4. Transactional obstacles
Transactional obstacles are among the problems most difficult to surmount. They generally arise from the interaction of the perception of the client, the scope of knowledge necessary to make optimal recommendations taking into account all factors, and the skill set necessary to effectively evaluate the available alternatives.
a. Implication of personality types
In attempting to overcome transactional obstacles, it is helpful to be aware of the various styles with which people interact with "reality" and make decisions. The model I find most useful is that of the Myers-Briggs personality typology, an interpretation and expansion of Jungian personality typology. (The discussion below is an "executive summary" at best. For an in depth introduction to this subject, see the books Please Understand Me by Paul Kiersey, or Gifts Differing by Myers and Briggs.)
The influence of personality type is especially important since lawyers generally fall into a small minority group constituting less than 2% of the population, and have a distinctly different way of understanding "reality" and making decisions than do the vast majority of their clients (especially those who have accumulated substantial assets, who tend to fall into a group having significantly different approaches to these processes). This difference in style can often lead to a lack of communication and misunderstanding unless tools and techniques to ameliorate the difference are intentionally incorporated into the process by the advisor.
Although the typology is based upon four paired characteristic ways of interacting with the world, which create a matrix of sixteen possible personality types, one of those pairs creates the most difficulties for lawyer-client communications: the "intuitive" (N)-"sensing" (S) pair. These terms are used as terms of art, not in their common meaning. (I note that no one is purely one type or another, simply that each of us has a more or less strongly preferred way of interpreting reality and making decisions. It is also important to note that no style is better or worse, they are simply different.) Among other characteristic, an N sees possibilities as "real," often as real or more so than the things that surround them; an S, on the other hand, sees as "real" those things which can be currently sensed, and ascribes little reality to things that "might" happen.
As you may have surmised by this point, lawyers are typically N, and clients are typically S (the group which constitutes 80+% of the population). This difference in point of view has many implications for the planning process, some of which are discussed below.
b. Perceived costs vs. perceived benefits
The thread of differences in point of view attributable to personality type runs through many of the issues associated with evaluation of perceived cost and perceived benefit.
On a very basic level, what is before the S now is more important that what "might" be, because it is a thing subject to immediate sense perception. Thus the common feeling among clients executing a Will is that the stack of paper they have signed is what they have purchased, while the lawyer, seeing the benefit that will accrue when the client dies as "real," feels that that benefit is what has been purchased. How much are 30 sheets of paper worth? Perhaps $1.80 if copies made at the copy shop. The lawyer might, on the other hand, perceive the value based on the $5,000.00 of administrative expense saved, the $30,000.00 of guardianship expense saved, and the transfer tax savings of $150,000. As you may have experienced, this can sometimes lead to dramatically different evaluations of the value of the work, and therefore whether the inconvenience and expense of implementing the plan is worthwhile.
(2) Who is burdened, who is benefited
Maintain awareness that personality type issues may also cloud appropriate evaluation and decision-making in this area as well. For example, in long-term planning some significant portion of the benefit may accrue to persons not yet born, while most of the burdens will be borne by the client or someone with whom they are familiar.
c. Perceived complexity
Perceived complexity is another artifact of the interaction of the points-of-view of different personality types, as well as lack of sufficient information.
(1) Simple vs. simplistic planning
How many of us have had a client arrive at the office and state they wanted a "simple" Will-meaning one with as few pages as possible?
(a) The myth of the "simple" Will
Wills are not simple. Even for clients with relatively few assets of moderate value, they deal with complex interactions of fact and legal requirements, both in disposition and administration. At death they invoke complex procedures with a duration of months to years. The apparent simplicity of a short Will simply calls into play the relevant statutory provisions which govern requirements or situations not expressly dealt with in the Will. In doing so, they typically increase the complexity of the probate process, since the statutory provisions usually err on the side of oversight and preservation rather than efficiency.
(b) Apparent complexity vs. overall simplicity
By using some of the communication techniques discussed below, clients can be educated that short does not equal simple. Although I am happy to provide a complete discussion when the client requests one, I usually explain why the document they are reviewing looks complex but in fact produces overall simplicity by contrasting some particular administrative power contained in the document with the statutory provision which it replaces or modifies. An excellent candidate for such an example is the power granted to an executor or trustee to partition property upon distribution. By concrete example, I demonstrate that each of the provisions in the Will has associated with it a similar constellation of issues which are resolved by inclusion of the provisions in question.
(2) Need for clear explanation of tools and their application
Because people have different learning styles, some people will comprehend most effectively from oral communication, some from written communication, and some from graphic presentation of the information to be conveyed. In preparing to advise clients, each of these modes deserve consideration and incorporation into the discussion with the client.
d. True complexity
True complexity is simply real life, and real law. Estate planning reflects that fact, in that many of the solutions which meet special needs require complex implementations in order to meet the goals of the client in the particular circumstances in which the client finds himself or herself. The following discussion suggests some of the areas in which complex planning will be unavoidable, and use of routine patterns (for example, use of the surviving spouse as personal representative if all children who are beneficiaries are not the children of the surviving spouse) should be carefully examined in light of the special circumstances.
(1) Special family circumstances
Special family circumstances frequently mandate additional true complexity in planning. Such complexity may appear in the guise of disinterested fiduciaries, additional ownership entities, or checks and balances built into the particular way in which dispositions are made. Where the client has been married more than one, and their are children by other than the current marriage, issues affecting management, control, and final disposition are affected. Relationships between siblings or other beneficiaries within the family, especially when some are participants in operation of a business and some are not, can be problematic. Since these types of problems will often not be forthrightly announced by the client, it is essential to be sensitive to their potential existence and adopt an openness with the client which will allow such discussion, both in the information-gathering stage and the implementation stage of the process.
When a beneficiary has a mental or physical disability severe enough to preclude outright ownership of the property by the beneficiary, special complexity is introduced into the process, even if other family members are supportive and willing to step into the older generation family member's place after their death. Complexity is introduced by the need to provide checks and balances on fiduciaries, flexible distributions standards, and in minimizing potential conflicts of interest.
(2) Tax planning
As we are all aware, tax planning requirements also impose significant unavoidable complexity . These take many forms. In working with clients, such complexity as required changes in desired disposition, compliance with technical requirements, and creation of multiple ownership entities must be explained to clients in a way that makes sense to them.
(3) Business planning
Business interests can also introduce true complexity into the estate planning process. Relationships with other owners, preserving value in the face of external constraints, and the unequal bargaining position of survivors and those who have been active participants in the business all pose real obstacles to appropriate planning.
Developing explicit patterns for the application of the principles developed above assists in the accurate and appropriate analysis of the optimal way to meet the needs of a particular client.
The circumstances of clients generally fall into categories based upon whether single or multiple generation planning is appropriate, and whether tax avoidance is an appropriate goal or not.
1. Simple Single generation dispositive planning
For by far the vast majority of the population, this is the appropriate category of planning. By this category I mean an outright disposition (at some appropriate age) to the beneficiaries of the client. Typically this type of plan will utilize a Will as the primary dispositive device, with testamentary protective trusts for minors or disabled beneficiaries, and with final outright distribution. In cases in which the client owns real property outside of Texas, it may be advisable to utilize a revocable trust as an ancillary tool, or the primary dispositive tool with a pour-over Will for other assets. In addition, the typical client will require lifetime planning documents such as a Durable General Power of Attorney, a Health Care Power of Attorney, a Directive to Physicians, and sometimes a Designation of Guardian.
Threshold tests and some additional considerations included:
a. Gross estate, asset composition, and spending habits
If the estimated gross estate of the client and the client's spouse is substantially less than $600,000, transfer tax avoidance is not needed. As the gross estate approaches that amount, however, the composition of the assets included in the estate or the spending (or should I say saving?) habits of the client may indicate that tax avoidance should appropriately be considered.
Assets which should trigger at least a discussion of the possible need for transfer tax planning, whether basic or advanced, typically have significant appreciation potential. Often the small business of a young couple can reasonably be expected to grow in value in the future, or real property valued at fair market value in a depressed market might suddenly appreciate in favorable economic times.
Even in the absence of such assets, the spending or saving habits of the clients may indicate that in the normal course of events their estate will increase to a taxable level-or will not.
In either such instance, the possibility of appropriate tax planning should be discussed, since the client may determine that, on the balance, the expense of proceeding with the more complex planning may be outweighed by the benefit of minimizing later expense and inconvenience.
The characteristics of the recipients of the property may also suggest that multi-generation tax or protective planning is appropriate. Traditionally protective planning has been thought of as a way of protecting minors, those without capacity, and those without good sense from their misfortune. Increasingly, however, protective planning on the part of the older generation has the purpose of protecting property transferred to the beneficiary from external threats: spousal claims, creditors' claims, and professional tort claims. Thus where the beneficiary falls into a high risk group (for example, is a doctor or a lawyer), or is on their third marriage, substantial consideration should be given to whether protective planning is in order.
2. Multiple generation dispositive and protective planning
The first branch of more advanced planning is appropriate where no tax avoidance is required at the client generation, but one or more factors indicate that creation of ownership entities lasting more than one generation would achieve the planning goals of the clients and their beneficiaries. Note especially the change in perspective at this point-the focus is on the evolution of the plan over a much longer life cycle, that of at least two generations younger than that of the client (or if the client is in the middle generation, at least one generation older than the client and one generation younger than the client), and the incorporation of the additional generations' planning goals into the estate plan for the client.
Typically, in addition to the tools used in single generation planning, one or more irrevocable generation skipping trusts will be established, usually inter vivos, sometimes as testamentary trusts. The disposition of all older generations is poured into these generation skipping trusts, which then become the primary ownership entities through which benefits are passed to the younger generations. Such trusts usually have a duration limited only by the rule against perpetuities.
Factors which may make consideration of this planning approach appropriate are both non-economic and economic.
a. Non-economic factors
Non-economic factors which argue in favor of implementing multiple generation planning include achieving special management goals. These emphasize distribution timing objectives, but may also touch on management concerns for one or more members of the lower generation. Each of these considerations is independent. For example, a lower generation family member may agree that benefits should be passed to his or her children, but feel that he or she is the best manager of the property prior to distribution, in which case the lower generation family member may serve as Trustee. Alternatively, there may be a desire to benefit the child, but only to the extent benefits are really needed, with any balance passing to other descendants, in which case an independent Trustee may be appropriate.
b. Economic factors
Economic factors which often argue strongly for multiple generation planning include asset protection and tax planning for lower generation family members. Where such considerations are the primary motivators, it is often appropriate for the beneficiary to also serve as Trustee, and to have beneficial interests as broad as possible yet not interfering with the intended objective.
(1) Asset protection
As discussed above, where a beneficiary has significant potential liability problems, the client can establish a spendthrift trust which nearly completely shelters the transferred property from the misfortunes of the beneficiary, whatever they may be. Indicators include the inclusion of a beneficiary in a high risk group for tort liability, high risk business activities, multiple marriages, or a pre-existing bankruptcy.
(2) Lower-generation tax planning
As noted above, the second reason for multiple generation planning is to eliminate or minimize taxes in lower generations, even where the planning client does not have a taxable estate in excess of the exemption equivalent of $600,000. Frequently this planning opportunity occurs when a middle generation member seeks advice, and realizes that if an expected gift from a parent is received, their estate will immediately increase to a level at which tax planning will be essential. Through appropriate planning at the parent generation, the child may entirely avoid, or at the very least limit, the need for transfer tax planning in their generation.
3. Basic transfer tax planning
Basic transfer tax planning becomes appropriate as the value of the gross estate of the married couple exceeds the $600,000 exemption equivalent; nearly all clients agree that it is necessary by the time the gross estate exceeds around $800,000 to $900,000. Techniques typically implemented in addition to those above are the basics of transfer tax planning: full utilization of each decedent's unified credit through use of a "bypass" or "credit shelter" trust (usually testamentary); deferral of taxes on any amount in excess of the exemption equivalent through use of the marital deduction (IRC §2056); use of lifetime gifts within the annual present interest exclusion ($10,000 per donee per donor per year, IRC §2503); and removing the value of life insurance from the client's estate through use of irrevocable trusts, sometimes containing "Crummey" provisions, so as to qualify gifts for the present interest exclusion.
a. Values and asset composition
Up to a value of approximately $1,200,000 for the gross estate of a married couple, all transfer taxes may be completely avoided simply by implementation of marital deduction bypass planning. As the value of the gross estate exceeds that amount, the asset composition will determine whether basic or advanced tax planning is appropriate to the clients' situation. (Note that for a single client, more advanced techniques become appropriate as the gross estate exceeds $600,000, depending on asset composition.) In almost all cases, only the value of "real" assets, those which the client can use, consume, invest should be used to determine the type of planning which is appropriate, with escalation to advanced techniques only when such "real" assets exceed an amount somewhere between $1.3 and $1.6 million, depending on the tolerance of the client for paying taxes. Life insurance, usually of little value to the insured client while still alive, can be easily removed from the gross estate of the client by transfer to or purchase within an irrevocable life insurance trust, with minimal inconvenience and expense to the client.
As the asset value reaches the upper part of the range appropriate for this type of planning, often clients begin to feel more comfortable about making gifts. This willingness enhances the effectiveness of the annual exclusion as planning tool. For example, a married couple could transfer to 3 children and 5 grandchildren a total of $160,000 each year at no tax cost. A gift giving program, fully implemented, can keep an estate in the range in which basic planning is appropriate.
b. Single or multiple generation
Considerations similar to those discussed above under non-tax multiple generation planning pertain also to those situations in which the older generation has implemented basic tax planning. As might be expected, as the estate size increases, arguments favoring multiple generation planning strengthen.
In particular, one should seriously consider a multiple generation plan if the gross estate divided by the number of next generation beneficiaries exceeds the exemption equivalent. For example, if married clients with a $1.4 million estate leave that estate to two children, each of the children will immediately have a taxable estate upon the death of the parents. Through use of multiple generation planning, transfer taxes in the children's generation (and younger) can be completely avoided at no additional tax cost in the parent's generation (up to $2 million in such a transfer).
4. Advanced transfer tax planning
Advanced transfer tax planning becomes appropriate when the gross estate exceeds a value of between $1.3 and $1.6 million. Such planning fully utilizes the principles described above. In addition, actions based upon two additional principle are typically employed: first, fully leveraging the exemption equivalent by making transfers prior to appreciation rather than after; second, exploiting the valuation anomaly created by the existing interpretation of "fair market value." Where the asset composition permits, substantial taxable gifts may minimize the total amount of tax payable. Charitable giving may in some cases provide a net benefit to primary beneficiaries while also providing a substantial gift to a charity in which the client is interested.
The amount passing in a multiple generation form is limited to the $2 million available to the couple, with the balance passing in a fashion which will not incur the generation skipping transfer tax.
Typically, advanced planning adds to the repetoir described above techniques developed to split management from equity (currently primarily in the form of limited partnerships), overlay ownership entities on operating entities to facilitate early equity transfer, and the creation of contractual rights and obligations. In addition it is frequently desirable to restructure operating entities as well as ownership entities.
Planning for those clients for whom a charity is their primary beneficiary, although relatively rare, constitutes a category of its own since, if technically correct, such a plan will incur no transfer taxes (IRC 2055). In addition, the Internal Revenue Code and Regulations prescribe with great specificity the ways in which any type of split interest gift may be made, through which the donor retains a term interest or reversion, or grants such an interest to another. These facts make planning for such a client much easier, since the primary decision to be made is whether to make the gift during life and obtain related income tax benefits or to wait until death, and the primary implementation consideration is strict technical compliance with the requirements of the Code.
Although trite, the saying that "Change is the only constant" is all too true in the area of estate planning. Change arises from many sources-new legislation, economic changes, changes in personal circumstances of those involved with the plan. As plan life cycles become longer, this fact becomes inescapable. To the extent possible, the lawyer should create an environment within the implementation of the plan that allows adaptation as things change.
Formula clauses, flexible distribution standards, broad non-general (traditionally called limited or special) powers of appointment, and flexible trust termination provisions are all methods used to achieve this end. In addition, I would suggest that the following principles enhance the ability of those involved in plan implementation to maximize the benefit of the plan:
Allow decisions by those with the best information
Consolidate control in each generation in those who would "normally" receive property outright
Plan for orderly transitions in control in both ordinary and extraordinary circumstances
Prudence Pennyrich, age 33, has come to you for consultation regarding estate planning. She was formerly married to Les Pound. Both are professionals with good earning capacity; she is a lawyer, he is an accountant. Their two children, ages 5 and 9, live with her, although they spend substantial amounts of time with their father (the parents were appointed joint managing conservators). She is on good terms with her ex-husband, but is concerned that his new wife has encouraged less conservative spending habits than she believes appropriate. Her estate consists of "real" assets valued at approximately $240,000, including both real and personal property, liabilities of approximately $80,000, and life insurance having a face value of $400,000. She has recently become involved as a principal in a start-up technology business which is currently unmarketable, but growing rapidly. She will likely inherit approximately $300,000 from her mother (her father died some years ago).
Her stated goals are to provide for management of her affairs in the event of her incapacity, to provide for a disposition of her property to her children in equal shares upon her death, and to provide for management of the children's property should they be unable to manage their affairs when they are entitled to receive the property.
Prudence Pennyrich is twenty five years older, wiser, and much wealthier. She has come to you for consultation regarding estate planning. She is married (for the second time, for 22 years) and has two children by her first marriage, ages 30 and 34, one of whom is involved in the operation of the very successful technology business she helped start, the other of whom is a medical doctor. Her estate consists of "real" assets valued at approximately $2,400,000, including the business interest and other real and personal property, liabilities of approximately $200,000, and life insurance having a face value of $400,000. Her husband has an estate of approximately $550,000, consisting of real and personal property, acquired before their marriage. He has no children, and considers her children to be his own, even if not by birth.
Her stated goals are to provide for a disposition of her property for the support of her husband if necessary, and then to her children in equal shares, while minimizing the imposition of transfer taxes.