The Planning Process
For the estateholder, formulating an estate plan can be one of life’s most soul-searching processes — it forces one to contemplate mortality and wrestle with deeply personal questions about who should receive the estate, how much, and when. This explains why fewer than 40% of Americans have drafted a will. Once the estateholder overcomes the inertia of “doing nothing,” the planning process begins. It can be broken into four basic phases:
Phase 1: Assess the Current Situation
It is difficult to find out where you are going without knowing where you are. Few estateholders are sure of what they are worth; fewer still know how their death will affect survivors financially. The first step is to gather the necessary financial and non-financial information on which to build the plan.
Gathering Information
The planning worksheets organize the basic information needed:
- Worksheet 1 — Non-financial information: will/trust locations, professional advisors, marital status and prior marriages, blood relatives (natural heirs under intestacy laws)
- Worksheet 2 — Balance sheet listing assets and debts by ownership type (individual, TIC, WROS, trust). Fair market value minus debt equals net equity by title. Also notes cost basis, asset locations, and out-of-state real estate subject to ancillary probate.
- Worksheet 3 — Retirement plan assets (vested benefits only), income sources, and which income sources cease at death
- Worksheet 4 — Life and health insurance coverage: policy numbers, face values, loans outstanding, and beneficiaries
Define Objectives
While gathering information, the estateholder should define the plan’s objectives. Common goals include minimizing tax burden, ensuring adequate and timely income for survivors, and limiting heirs’ access to principal. These goals are often mutually exclusive — establishing priorities is frequently the most difficult step in the process.
Identify Limiting Factors
Every estate operates within constraints: the estate may not be large enough to provide adequately for survivors; estimated estate tax liabilities may consume substantial portions of the estate; property may not be easily divisible; or non-financial issues (e.g., an heir not emotionally ready for a large inheritance, or children from a prior marriage) may restrict planning strategies.
Phase 2: Evaluate Options
An estate plan has two components: the personal plan (whom to leave property to, who will care for children, who will administer the estate, whether to prepare a living will) and the financial plan (whether to avoid probate, tax consequences, liquidity, timing of distributions, business succession). The estate planning team concentrates primarily on the financial plan while the estateholder addresses the personal aspects.
Key general factors to evaluate:
Tax considerations also shape the financial plan in three areas:
- Estate taxes — three basic strategies: reduce the taxable estate through lifetime transfers; freeze the estate’s value to exclude future appreciation; delay taxation through the unlimited marital deduction
- Gift taxes — the annual exclusion and current-value-based gift tax create opportunities to reduce the total transfer tax by giving lifetime gifts vs. waiting for estate taxation — but the cost of prepaying must be weighed against possible future savings
- Income taxes — three strategies: shift income to a lower-bracket taxpayer; achieve a step-up in basis on capital assets at death; and defer recognition of taxable income
Phase 3: Select a Course of Action
There are two components: the personal plan and the financial plan. For the most part, the estateholder must address the personal aspects; the estate planning team concentrates on the financial planning process. There are overlapping considerations — for example, there may be tax advantages to giving a lifetime gift while the estateholder has personal reasons for delaying the transfer. Each situation is unique, and the estateholder must carefully weigh all consequences.
Phase 4: Execute & Update the Plan
The final phase is ensuring the plan is actually implemented. Sometimes this is as simple as drafting a will and communicating the plan to the nominated executor. Other plans require detailed coordination: creating and funding a trust, re-registering deeds, updating beneficiary designation forms, and making lifetime gifts.
A carefully crafted plan can fail entirely if the implementation step is skipped. Consider the case of Bradley, who drafted a revocable living trust naming his children as beneficiaries but died before funding it. All of his assets — held jointly with his second wife — passed to her by operation of law, not to the trust or the children. An estate plan is not complete until it is fully implemented. “The devil is in the details.”
Estateholders must also follow through on a daily basis as conditions change. When changing employers, beneficiary designation forms should be updated immediately to coordinate with the overall estate plan.
Lastly, estate plans are only temporary. Major events require a formal review. Estateholders should review the plan upon:
- Marriage or divorce
- Physical incapacitation
- Incapacitation or death of a spouse
- Birth, adoption, or death of a child
- Death or incapacitation of the nominated executor, guardian, trustee, or other fiduciaries
- Creation or dissolution of a business
- Retirement or other major change in employment
- Significant changes in investment holdings or values
- Changes in domicile
- Significant changes in the tax code
The full implementation discussion — including the Bradley cautionary example and coordination checklist — is covered in detail on Page 5: Implementation.