MORE THAN TAXES
Start with the many non-tax decisions involved in post-death planning. Several of these might be squarely in a financial advisor's purview:
* One of the most important decisions in post-death planning for many clients is determining in which state the client legally lived at death. This could have a profound impact on which laws govern the estate and what, if any, state estate tax will be owed. About 20 states have decoupled their estate-tax systems from the federal estate-tax system; determining whether the dearly departed lived in one of these states might be the sole determining factor in whether any state estate tax is due.
* Selecting which assets to distribute to which trust or beneficiary is vital for many reasons. If certain assets are more likely to appreciate than others, a better choice may be distributing them to trusts that will not be taxed in a surviving spouse's estate, or trusts that will be exempt from the generation-skipping transfer tax. Depending on the financial needs of beneficiaries, it might be best to distribute certain assets or asset classes to them.
From an investment perspective, this might avoid unnecessary transaction costs and quicken distribution time. If a family business is involved, assuring that the interests are distributed to the heirs working in the business might be the most important client goal.
* Compliance with the Prudent Investor Act is obligatory on estates, but many if not most executors and even many estate lawyers view the process as one of liquidation to cash and holding liquid funds to distribute. While in some cases this is optimal, and certainly holding more cash than might otherwise be required is common, liquidation of positions and holding only liquid assets is not always appropriate.
Decisions on what to sell and when should be made not only in the context of an investment analysis, but also in light of the needs of beneficiaries, distribution requirements and estate- tax consequences. While the step-up in basis upon death might eliminate capital gains, it does not eliminate the need for planning. The timing of a sale may fix a valuation for estate-tax purposes, and that needs to be considered in the analysis.
* Funding or not funding trusts is a decision sometimes left to the executor. Similarly, it's up to the beneficiary to decide whether to file a disclaimer declining his or her share of the estate. The combination of funding decisions, disclaimers and other flexible options can provide wiggle room. While this might seem to unravel the client's wishes, it can be used, especially in light of the rapid-fire changes in tax laws and the economic roller coaster of recent years, to reset a plan to what the decedent intended, or even improve the results. If a particular heir is in greater need, others might disclaim, shifting assets to the person in need and avoiding gift taxes. If an heir is in the midst of a divorce or lawsuit, a disclaimer may be a safeguard.
If the mechanism of portability in the 2010 Tax Act is made permanent in 2013, some estates will rely on that in lieu of funding trusts. However, the consensus for most estates is and will remain to fund a bypass or credit shelter trust (see "Wedded Bliss," May 2011).
Many wills have — and more in the future — will use disclaimer bypass trusts. In such cases, the surviving spouse will receive the entire estate outright and what he or she disclaims will pass into a trust for his or her benefit. How much should be disclaimed? Which assets should be used to fund the trust? These are all critical post-death decisions.
For wealthier clients, the more traditional bypass/marital trust plan will remain ubiquitous. In many cases, this will entail at least three trusts:
* A bypass trust up to the state estate-tax exemption ($1 million, for example).
* A trust for the balance of the federal exemption not used in the first trust ($4 million, for example, for a total of $5 million, or the current exemption amount).
* The balance in a marital trust that is generally set up as a qualified terminable interest property trust, which has to pay income to the surviving spouse annually and meet other requirements. Again, how much each trust is to receive, and what assets, are critical post-death decisions.