Top Ten Reasons Why People with Even Modest Estates Need Estate Planning

By Heidi C. Freeman, J.D. | Volume 2, Issue 1 (January 2014)

The American Taxpayer Relief Act of 2012 (actually passed on January 1, 2013), permanently increased the gift, estate and generation-skipping transfer tax exemptions to $5 million per person.  In 2014, adjusted for inflation, the amount is actually $5.34 million per person ($10.68 million for a married couple).  Due to the increased exemption amounts and the addition of portability, significantly fewer clients are in need of transfer tax planning.  This article provides ten reasons why clients who do not have a transfer tax concern still have compelling estate planning needs.

Reason #1: Naming Beneficiaries.  Many individuals have not considered who will inherit their assets if they do not have at least a Will.  Intestate succession laws differ widely from state to state.  A client may be surprised to learn that his/her spouse and parents or spouse and children will share in the inheritance under the state law where the client resides.  Also, clients often forget who has been designated as the beneficiary under retirement plans, life insurance and other assets, so the advisor is well served to review these designations with the client periodically.

Reason #2: Appointing Guardian for Minor Children.  Clients with minor children should be encouraged to at least update or put their Wills in place in order to name guardians for their children.  When deciding who will be the physical custodian of the minor child, clients should also consider who will be the trustee to manage the child’s inheritance.

Reason #3: Appointing a Health Care Agent.  Clients need to consider who will make medical decisions in the event the client is incapacitated and whether the client wishes to remain on life support.  This is another area in which clients may be surprised by who is appointed under state law as the decision maker in the event the client has not signed a health care proxy.  It is especially important for unmarried clients who wish for their significant other to be their health care agent.

Reason #4: Appointing Agents/Trustees to Manage Assets in the Event of Incapacity.  In addition to considering who will manage and benefit from their assets after death, clients need to have a succession plan in the event of the client’s incapacity.  This may take the form of a durable financial power of attorney, trust planning or a combination thereof.  Clients with businesses may want to name different people for purposes of running their company vs. their personal assets.

Reason #5: Protecting a Beneficiary from Himself/Herself.  A trust is a useful tool for a beneficiary who is too young or does not have the proper investment skills to manage his/her inheritance.  First, it can be used to name a person/institution as the investment trustee until the beneficiary is capable (if ever).  Second, a trust can be used to distribute funds over time to protect assets from a spendthrift beneficiary’s own misjudgment.  Third, the trust can be used to provide supplemental benefits to a beneficiary with special needs without disqualifying the beneficiary from other government support.  Clients with special needs children are often unaware that by leaving assets outright to their children, they are placing the special needs child in a position that may disqualify the child from benefits in the future.

Reason #6: Protecting Children/Beneficiaries from Creditors and Divorcing Spouses.  An irrevocable trust established by a third party either during lifetime or after death can be one of the most useful tools for asset protection.  Clients who do not have any planning documents or whose documents distribute outright to their beneficiaries are foregoing the creditor and divorce protection that could be given to their beneficiaries.  If the client’s documents are drafted so that the assets are maintained in continuing trust (rather than forcing out distributions of income or principal at staggered ages), the trust assets can be protected from the beneficiary’s creditors or divorcing spouses.  If the beneficiary is capable of managing the inherited wealth, the trust can be designed as a beneficiary-controlled trust, which gives the beneficiary as much control as possible without giving up the protection the irrevocable trust provides.   With a beneficiary-controlled trust, the primary beneficiary is either the sole trustee or the investment trustee.  For optimal creditor protection, the trust will be designed as a fully discretionary trust with an investment trustee (the beneficiary) and a distribution trustee (independent trustee).

Reason #7: Protecting Your Client from Creditors and Divorcing Spouses.  Even clients with modest wealth may encounter situations calling for enhanced creditor protection.  A client who may inherit several hundred thousand or more from his/her parents should talk with his/her parents about changing their estate planning documents such that the inheritance is left in trust for the client (i.e. Reason #4 above).  Advisors should periodically review the client’s assets and ownership structure to make sure there are no gaps for asset protection purposes.  For example, if the client has forgotten to wrap rental property in a business entity, such as a limited liability company, or if the client has a corporation that could be converted into a limited liability company for superior charging order protection.  In addition to isolating assets in business entities, clients may consider transferring a portion of their wealth to a self-settled spendthrift trust.  A self-settled spendthrift trust is an irrevocable trust that protects the trust assets from the settlor’s creditors, while still allowing the settlor to benefit from the trust assets.  Fifteen states have adopted laws that offer creditor protection for self-settled spendthrift trusts.  Each of the states that allow self-settled trusts require a statute of limitations period that must expire before transferred assets are protected from the settlor’s creditors.  Therefore, it is advisable to start asset protection planning as early as possible.

Reason #8: Minimizing Income Taxes.  Advisors may find that their clients’ focus has shifted from minimizing estate taxes to minimizing income taxes.  The income of assets held in a trust that has its situs in a state with no state income tax may escape state income taxation of the state where the client resides.  The contributed assets must produce income that is not considered source income as to the taxing state.  For example, a New York resident could contribute a marketable securities portfolio to a Nevada Intentionally Non-Grantor Trust (“NING”) to reduce or eliminate state income tax for the income of the portfolio.

Reason #9: Adjusting Existing Documents to do “Better Planning.” It is always a good idea to review the existing documentation of a new or prospective client.  Even irrevocable trusts can be modified through (i) the decanting or modification laws of many states or (ii) the exercise of a power of appointment.  The modification may allow the trust to address a change in circumstance for the client’s family or remedy a defect in the creditor and divorce protection of the trust.   Attorneys and other advisors should ask to see copies of existing trusts, including irrevocable trusts of which the client is a beneficiary, to see what can be done to improve the trust under new favorable trust laws.

Reason #10: Avoiding Probate.  A client’s estate can be designed to avoid probate through the use of beneficiary designations and a revocable trust.  Probate can be a costly and time consuming court proceeding and can easily be avoided by establishing and funding the revocable trust during the client’s life.  The revocable trust is especially important for clients who own real property in multiple states because ancillary probate proceedings are required in each state if the property is titled in the client’s name.  The revocable trust will outline the client’s beneficiaries and provide asset management succession (in the form of a successor trustee if the client becomes incapacitated).  The revocable trust can be drafted to provide the creditor and divorce protection noted above for the client’s beneficiaries upon the client’s death.

The above list is intended as a guide only, as there may be additional reasons for a particular client to do estate planning.  It is important for attorneys and other advisors to recognize the use and utility of trusts and other basic estate planning components beyond transfer tax reasons.



Heidi C. Freeman is a partner of the Law Firm of Oshins & Associates, LLC.  She practices primarily in the area of advanced estate planning, asset protection planning and business planning.  Ms. Freeman can be reached at (702) 341-6000, ext. 3, or by email at

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