Why Estate Planning Matters

Posted by   admin on    November 2, 2004

Why Should Planning My Estate Matter?

For many clients and their planners, the central goal of estate planning has long been to pass as much wealth, net of taxes, to the next generation as possible. This thinking suggests that protecting assets is the solitary goal of an estate plan. Unfortunately, it is this misplaced emphasis that focuses attention on assets rather than family, on structure over perspective and on tax savings over family need.

Estate planning should not be viewed as being about the dead and their assets. Rather, it is about the legacy left for the living where the primary consideration should involve protecting and preserving the family  a focus that begins with the living, not the dead. Its not that tax planning and asset preservation are unimportant; it just pales in significance to protecting family. Also, there seems to be a central truism in the passage of wealth: Every inheritance (or lack of inheritance) will effect the recipient  Warren Buffet. Often this effect will have a longer lasting impact on the family than ever imagined.

It might not be a surprise to you that most Americans haven't made a simple will or given consideration to a comprehensive plan to avoid probate or to save on estate taxes. So, why is it that most people don't consider estate planning as a critical aspect of their family and financial plans? This author believes that having to face hard questions and the potential of having to face emotional complexities far outweigh a familys economic reasons. Maybe, also, many just don't understand the basic reasons why they should!

As mentioned in our prior newsletters, we strive to provide articles on various aspects of wealth management to assist your understanding of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience.

This months letter will discuss some fundamental estate planning concepts and considerations for some broad categories of household status and age. The good news is that depending on your age, household status, health, wealth and level of caution, you may not need to do much in the way of estate planning at all. Lastly, and as always, we will finish with an update on our investment activities.

What Is a Simple Will and Why Might I Need One?

A simple will is a document that designates how you wish your property to be distributed among your relatives, friends, and favorite charity. Your will is also the place where you will identify people for important roles, such as:

  • The guardians for your minor children: who will care for and raise them.
  • The executor for your estate: who will be responsible for ensuring that all of your wishes as articulated in the will are carried out.
  • The trustees: who will manage any property you wish to be held in a trust vehicle, usually for future use by beneficiaries.

Only a written will can guarantee that your instructions will be known and followed after your death. If you do not write a will, state law will determine what happens to your wealth.

In most states, if you have children but no spouse, the state will appoint a guardian who will be responsible for attending to their finances while they are minors. If you have no spouse or children, if living, your parents will receive the inheritance. If you have no surviving relatives, the state receives all of your assets!

This may be a lot to consider, but to ensure the safety and protection of your loved ones, make your wishes explicit in a written will. Going without could be extremely hard on your survivors.

Trust that your most difficult decisions will involve whom you would like to ask to be the guardian of your children and the executor of your will.

Will I Ever Need to Change My Will?

It turns out that your will can be nullified by most major life changes. In general, a will can be rendered invalid by any of the following events:

  • Getting married
  • Having a child
  • Getting divorced
  • Moving across state lines

When you are married, many states assume that in the event of your death, you intend for your property to go to your spouse and children, if you have any. If you wrote your will before you got married and didn't include your spouse, your will could be made invalid. The same is true if you bear a child. If you don't change your will to acknowledge the child, it could be invalidated.

Codicils are amendments to wills and can be attached directly to the existing will. So if you are getting divorced, remarried, are pregnant or moving to a new state where the laws might be different, you should rewrite or amend your will.

What Does Probate Mean?

After someone passes away, all of his or her possessions become part of the estate. The transferring of the estates assets to the beneficiaries is called probate and is supervised by the probate court. During this process, the court validates the will and insures that the assets are distributed in accordance with the will.

Often, probate of a will can take a long time. If there are challenges to the will, the process can tie matters up in court for months or possibly several years. As a result, probate can be somewhat costly because of court fees. What's more, if you have property in several states, papers must be filed in each state's probate court. Then when the administration of the estate is complete, the will becomes a public document.

To avoid this time-consuming hassle, transferring assets to a trust can bypass probate.

What is a Trust?

A trust is a legal arrangement whereby any form of property is transferred to a trustee, who then manages the property for the beneficiaries of the trust. There are generally two types of beneficiaries to a trust. An income beneficiary who has rights to the income that the trust assets generate; and, a remainder beneficiary who has an interest in the principal assets at termination of the trust. The grantor is the person establishing the trust and the transferred property is the called the principal. Quite often, the property can remain in a trust for whatever length of time needed to meet your planning needs.

You don't have to be wealthy to consider establishing a trust. People of all income brackets can benefit from transferring property to a trust.

Its often said that there is a trust for every occasion and it is very easy to become confused by the jargon estate planning professionals use to describe them. To help you through some of this legalese, here are some basic trust types:

  • Revocable trusts can be modified while the grantor is still alive.
  • Irrevocable trusts cannot be modified while the grantor is still alive.
  • Testamentary trusts are established as part of a will and become effective at the time of the grantor's death.
  • Living trusts are established during the grantor's lifetime and become effective immediately.

While several tax advantages exist that are associated with certain kinds of trusts, here are some family minded uses for consideration:

  • You want to encourage grandchildren to attend college by setting up education trusts.
  • You would like your children to have access to their inheritance as they become mature enough to manage it responsibly, or
  • You use a trust to create incentives and opportunities for heirs without supporting an unearned lifestyle.
  • You want to protect an inexperienced heir from judgment errors by arranging an independent financial advisor and trustee.
  • You wish to keep private the contents of your estate and how your estate is being distributed.

Some Other Basic Things to Consider

There may be a time in your life when you are unable to make your own financial or healthcare decisions because of extreme illness, disability, incompetence, or even when on extended holiday. At these times, it is important that someone you trust is legally empowered to make these decisions on your behalf.

Power of attorney is a document by which you, as principal, appoint a person to act as your agent or attorney-in-fact. An agent is one who has authorization to act for another person. If you have appointed an agent by a power of attorney, acts of the agent within the authority spelled out in the power of attorney are legally binding on you, just as though you performed the acts yourself. The power of attorney can authorize the attorney-in-fact to perform a single act or a multitude of acts repeatedly. You need to pick someone you can trust!

Many people are unaware that an ordinary power of attorney is revoked, and the agent's power to act for the principal automatically stops, if the principal becomes incapacitated. However, in many states, a power of attorney with proper wording may be made "durable." This means that the power of the agent to act on the principal's behalf continues despite the principal's incapacity, whether or not a court decrees the principal to be incapacitated.

It is possible to create a durable power of attorney so that it will only go into effect when the principal is incapacitated or when some other stipulated event or condition occurs. This is ordinarily called a springing durable power of attorney.

Most states have one set of laws governing financial POAs and second set of laws governing POAs for health care decisions. Therefore, it is the common and recommended practice not to mix the two purposes into one document.

Living Wills and Medical Powers of Attorney serve different but complimentary purposes. A Living Will sets forth the individual's intentions in case of terminal illness or persistent unconsciousness. A Medical Power of Attorney authorizes an agent to make health care decisions for the principal when he or she is no longer capable of making them. Many states allow for a Living Will and a Medical Power of Attorney to be combined into one document. 

What Makes Sense For My Household?

If you're single and under 30, I'm very surprised you've read this far. Unless you're uncommonly wealthy, you're better off concentrating on more enjoyable social happenings. But, if you are financially secure, you might want to write a will so you can leave your possessions to whomever you choose.

If you've got a life partner but no marriage certificate, a will is almost a must-have document. Without a will, the law in most states will dictate where your property goes after your death, and unmarried partners often get nothing.

Having children complicates life -- but then, you already know that. Estate planning is no exception. At a minimum, write a will that leaves your property to whomever you choose and names a guardian for your children. The guardian will take over if both you and the other parent are unavailable. This may be unlikely, but it's worth addressing just in case. If you fail to name a guardian, a court will appoint someone, possibly one of your parents. Also, make sure you have adequate life insurance coverage.

If you've made it to a comfortable time in life, you will probably want to take some time to reflect on what you will eventually leave behind. But given that you may well live another 30 or 40 years, there is no need to obsess about it. Chances are your conclusions will be different in ten or twenty years, and your estate plan will change accordingly. Review again what Ive written above and consider saving your family the cost (and hassles) of probate. If you have enough property to worry about estate taxes, think about tax avoidance as well.

If you are elderly or ill, now is the time to take concrete steps to establish an estate plan. First, consider a probate-avoidance living trust and, if you're concerned about estate taxes, a tax-saving trust. Also, write a will, or update an old one. Then, although no one wants to do it, take a minute to think about the possibility that at some time, you might become unable to handle day-to-day financial matters or make healthcare decisions. If you don't do anything to prepare for this unpleasant possibility, a judge may have to appoint someone to make these decisions for you. No one wants a court's intervention in such personal matters, but someone must have legal authority to act on your behalf.

We're At Your Service

Whether you're an estate planning professional or a client undergoing the process, were happy to help. When going through the process, we can help you through some of the hard decisions that will confront client participants. And, when there is a need for money management, we are unbiased decision-makers most appreciated by trustees and beneficiaries with moderate to low tolerances for risk taking. As well, our accounting firm affiliate is more than capable to assist with you tax and administration needs. We're at your service!

ELF Capital Management Investment Performance Update

All investing is a tradeoff between the risks you take and the returns you can hope to earn. There are some dangers that you can anticipate -- at least to a certain extent. And then, sometimes you recognize a trend can't continue because the economic fundamentals won't sustain it. For example, it was clear that the Internet boom couldn't go on forever because many of the companies were spending investment capital they had raised rather than cash flow generated by their businesses. Sooner or later, the investment capital had to run out and the boom had to end. It did, and scores of investors were hurt when it did. I start with this because it now seems timely to reinforce the concept that there is more to managing investment risk than simple diversification.

Due to our view of growth and inflation rates in the US economy, coupled with interest and currency valuation levels, we are maintaining a defensive investment strategy in all portfolios. The presidential election only adds uncertainty to the mix. Yet we look forward to when we may change our posture toward greater opportunity as these factors become more favorable.

For the month ended October 31, 2004, our one-month performance is up 0.13%, our three-month return is down 0.07% and our one-year return is up 1.86%.

For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.

ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.

The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.

The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELFs ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.

Copyright 2004 ELF Capital Management, LLC. All rights reserved.