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Don’t Just Focus On Taxes & Probate. There Is So Much More To Do!

There are five primary ways you can leave your estate to your loved ones. Today we will briefly examine them. Four are very common, the other is becoming so.

Bill and Mary have a farm and various financial investments. Like most happily married couples, they own most of their real estate in joint tenancy with right of survivorship. Bill has life insurance and an annuity. He also inherited some ground from his parents. They have their machinery and the usual personal effects.

Probate Avoidance Planning

Bill and Mary added up the value of all their assets and decide that at just under $2,000,000 they don’t need estate tax planning. That amount is tax-exempt for deaths in 2006. They have heard about probate, and want to avoid it.

Their general practice attorney assures them that (1) the joint property will avoid probate when one dies, and advises them to put the inherited property and machinery (2) in a joint living trust. He points out that in Illinois, up to $100,000 can pass under (3) a simple “I love you will” (all to Mary) without probate; that should cover their vehicles and personal effects. Bill’s life insurance and IRA are payable to Mary as (4) designated beneficiary.

Assuming that Bill cooperates and dies first, that neither of them become disabled, and ignoring a multitude of other possibilities, how well will these four ways of planning work?

All of the joint property passes ‘automatically’ to Mary. The life insurance and annuity are paid to Mary, and their financial professionals help her collect. The inherited property and machinery passes according to the living trust to Mary. Bill’s miscellaneous personal effects and any vehicles in just his name—all together worth under $100,000—pass under the will to Mary. No probate. Mary is happy as a widow can be.

So what went wrong?

A few months after Bill’s death, Mary is out driving. It’s an early misty morning and she’s driving a bit too fast. She loses control on a slick road and slams into a school bus, hurting, even killing, some of the schoolchildren. These are the wrong people to hit. In an instant, everyone’s life is changed.

Mary will lose the lawsuits filed. It’s her fault (remember, driving too fast) and who’s on her side? No one! Her insurance company offers the full $1,000,000 she had as liability coverage, but the plaintiffs obtain judgments for much more. All of what Bill left her—life insurance and annuity proceeds, their farm, the machinery, personal effects, virtually everything she had—is taken. Mary will live on social security and leave nothing to their children.

Asset Protection Planning

A fifth approach for Bill and Mary would be to create an estate plan that provides for all of Bill’s assets to pass to Mary in trust instead of directly to her or her living trust. (Mary can do the same for Bill, in case she dies first.) While Bill is alive, he retains 100% control. When he dies, practical control passes to Mary, still free of probate. The design of this special trust can provide Mary with very broad control. Bill could specify that certain property must stay in the family. Under the four most common ways of titling and transferring assets—joint ownership or living trust, “I love you will” or beneficiary designation—Mary would lose everything, but with an appropriate and affordable protective trust she is safe! Their full $2,000,000 estate can be protected as soon as either of them dies.

“But the risk of a lawsuit against Mary is so small, why bother?” you ask. Such proactive planning can do much more. When Mary dies the protected trust can be split among the children into shares they control, and remain lawsuit-protected forever, even to subsequent generations! It will protect against a child’s divorcing spouse, long-term disability, or about any other imaginable threat to the family wealth! Such planning can protect the farm if Mary remarries. It can eliminate estate taxes: if Mary lives ten more years and the estate grows 3% per year, the protective trust would save about $800,000.

Focusing too much on simplistic issues like probate will cause you to miss tremendous opportunities. A counselling-oriented attorney will help you explore these possibilities and plan accordingly.

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Article authored by Curt W. Ferguson and originally published in the Prairie Farmer magazine, March 2006 issue