Estate planning: a vital dialogue

Discussions with parents or other family members regarding estate planning can at times be difficult, emotional and stressful. This discomfort, however, cannot compare to the financial pain felt by family members whose parents die without having implemented estate-planning strategies.

Relying on state governments to decide the management and distribution of our assets and property can be an unsettling experience. Probate costs and the time delays associated with municipal court systems may leave heirs financially unstable. Even those individuals with existing estate plans should review them to ensure they take into account recent tax law changes. We suggest to our clients to initiate a family discussion of these topics, or update any plan that is already in place, sooner rather than later.

Perhaps the most challenging task, especially with elderly parents or relatives, is initiating the discussion. Some may perceive it as the first step toward giving up control over their personal affairs. To assuage this concern, we may emphasize that estate planning is about providing the estate owner more control, not less.

Legal documents, such as wills and trusts, are tools that allow us to control the management and distribution of our assets both during life and at death. There is perhaps no way to gain greater control over our assets than to implement time-proven, legal estate planning strategies such as personal trusts.

To ensure an effective discussion:

• Choose a comfortable setting, arrange a convenient time and location and eliminate, or at least limit, distractions.

• Suggest a group discussion with siblings or other family members.

• Stress the importance of the topic and encourage an open and honest airing of issues and goals.

• Express concern for the elderly relatives’ future well-being and emphasize the need to implement an effective estate plan that will serve their needs and wishes.

• Use current books or articles on the topic to illustrate the benefits of having an estate plan and successful planning strategies. These may include articles on the consequences of not having a sufficient estate plan in place.

If appropriate, schedule more than one meeting.

Tools and options

Federal law imposes gift and estate taxes on the transfer of property. The current law provides each individual with gift and estate exemption amounts that allow property up to a certain value to be transferred tax free. In 2009, the estate tax exclusion amount is $3.5 million, which is inclusive of the $1 million lifetime exclusion amount for gift taxes.

The top rate of gift and estate taxes in 2009 is 45 percent. In 2010, the estate tax is scheduled to be repealed, while taxes on lifetime gifts will remain in effect with a $1 million exclusion amount and a top rate of 35 percent.

However, unless Congress acts to extend the law, in 2011 estate and gift tax exclusion amounts and rates will revert back to those in effect in 2001.

These issues should be discussed – and understood – by all family members and your tax and legal advisers in order to devise an effective estate planning strategy.

For a successful discussion of estate planning options, the family should understand the basic tools available:

• Will: A legally executed document that outlines and directs how and to whom a person wants his or her property distributed after death.

• Living will: An advance directive that gives instructions to doctors and hospitals regarding the nature and extent of care a person wants in the event of permanent incapacity.

• Durable power of attorney for property: This designates someone to act on a person’s behalf with respect to their financial affairs if he or she is physically or mentally incapacitated.

• Durable power of attorney for health care: This appoints a person to make health-care decisions in the event that someone is too ill to make a decision.

• Living trust: This is a legal arrangement that enables an individual to transfer money or other assets to a trustee, who holds legal title for the benefit of that individual and his or her beneficiaries.

Finally, parents and relatives may want to make available (perhaps to a trusted family member) the details and location of their financial accounts, including insurance policies, as well as the contact information of financial advisors.

It is a delicate topic, but delaying these discussions can lead to significant family hardship and a loss of highly prized and hard-earned assets.

Donald E. Sommese, first vice president and financial adviser based at the Manchester office of Morgan Stanley Smith Barney, can be reached at 800-726-6141.