wealth
ESTATE PLANNING: A HOLISTIC APPROACH time of implementation. A detailed understanding of probate versus non-probate assets dovetails with a well-contemplated estate tax allocation provision in the client’s will. For some clients, the estate tax allocation provision is the most important or the most complicated provision in the will. For clarity, reference here to a “will” includes any dispositive document that is a so-called will substitute, such as a revocable trust. It is imperative, therefore, the attorney communicates with the client about the flow of assets and estate tax consequences, and perhaps income and generation-skipping transfer taxes as well. Sometimes, however, attorneys who might spend considerable time discussing transfer taxes and how to reduce them will choose an estate tax allocation clause without conferring with the client. Even where tax apportionment is discussed, drafting oversights or mistakes can lead to negative results. The estate planning team and the client need to first consider if all estate taxes, including those resulting from non-probate assets, should be paid from the residuary estate or if beneficiaries of non-probate assets and specific (pre-residuary) bequests should pay their share of estate taxes. Generally, the client’s intent is that DIFFERENTIATING BETWEEN PROBATE and non-probate beneficiaries of personal property and specific bequests receive assets is critical. The easiest way to understand the difference such assets in their entirety without being reduced by estate taxes. is to determine if the property, through its titling or beneficiary Additionally, where a client names both charitable and nondesignation, directs the distribution of the asset to its beneficiaries charitable beneficiaries of the residuary estate, the intent is for at the time of the owner’s death. Common probate properties only the non-charitable beneficiaries to pay estate taxes. include real property owned outright or as a tenancy-in-common, If the attorney does not address estate tax apportionment, nonqualified bank or brokerage accounts not held in joint-tenancy, drafts the provision improperly or fails to consider all the taxable interest in corporations and other estate’s assets, it is possible the attorney legal entities, jewelry and automoinstead of the client determines the disFor some clients, the estate tax biles. Common non-probate assets positive plan. There is no significance allocation provision is the most include real property held jointly; to a lack of an estate tax allocation life insurance (unless the decedent’s important or the most complicated provision or having an incorrect one if estate is the beneficiary); qualified a decedent’s estate is not taxable or if provision in the will. retirement accounts such as IRAs, the beneficiaries of probate and nonKeoghs, profit-sharing plans, pension probate assets are the same and share plans and 401(k) plans; bank or brokerage accounts with a named in the same percentages. beneficiary on the account; and beneficial interests in a trust Much as a person who dies intestate is given an estate plan by account expiring at death. applicable state law, so, too, with estate tax allocation clauses. If Probate and non-probate assets together comprise the gross a decedent’s will lacks one, state law provides a plan, and the tax taxable estate. As noted last month, the estate planning team follows the asset. More often than not this results in the most equishould prepare an overall analysis of all assets to increase the table outcome, as compared with the residue of the probate estate odds the ultimate distribution will match the client’s intent. A paying the entire tax bill; however, it may not be what the client substantial portion of a client’s estate could be non-probate assets desires. The bottom line is every client with an estate subject to and be distributed to beneficiaries outside of the will. Accordestate taxes should have and is entitled to an estate tax allocation ingly, not having an accurate accounting of all assets may have provision that makes sense for the client and results in accomplishnegative effects on what may have been an excellent plan at the ing his or her goals.
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globaltravelerusa.com
SEPTEMBER 2018
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Part two: Don’t ignore the importance of estate tax allocation clauses.
