Volume 19, Number 5
Planning the Lawyer's Estate
By Frank Overton Brown, Jr.
The fundamentals of estate planning are the same for lawyers as they are for other individuals, but there are additional aspects of estate planning that are applicable to lawyers in general and to senior lawyers in particular, especially those who are sole practitioners. This article follows the law of Virginia; federal tax law provisions and basic planning principles are the same throughout the United States, but be sure to check specifics for your jurisdiction.
Estate planning is an ongoing process that consists of the following steps: gathering facts, determining client intent, and formulating goals; analyzing effects of various taxes and other factors; designing, drafting, and implementing the estate plan; and periodically reviewing and adjusting the plan, based upon changes in laws, personal and asset situations, or client wishes.
Just the Facts
Fact gathering is the critical first step in estate planning. The use of well-organized forms is essential, as is gathering complete and accurate personal, asset, liability, and other data. In addition to their own skills in this area, lawyers may utilize resources such as other members of the bar, certified financial planners, CPAs, life insurance professionals, or bank trust officers, bearing in mind the particularly confidential nature of certain aspects of an attorney's estate. This team approach often produces a synergism that results in a considerably enhanced estate plan. (In addition to general information, estate planning checklists for lawyers should contain numerous additional items, which are detailed in the PDF checklist included with this article.)
Utilizing the "three P's of estate planning" helps to focus the estate planning process:
o People. Who are the people involved; what needs must be addressed?
o Property. What property is available to meet those needs?
o Plan. What plan can be developed, taking into consideration the effects of taxes on estates and gifts, generation-skipping transfers, and income?
Under the current unified U.S. estate and gift tax laws, the estate of each person who dies in 2002 receives an estate tax unified credit exclusion of $1 million. (This is also called the "applicable exclusion amount" or "equivalent exemption"-a direct credit, equivalent to an exemption of $1 million, against the tax owed.) This amount passes free of estate and gift taxes and can be used during a person's life and/or at death. This amount is in addition to the exclusion of $11,000 per donee per year for gifts during a donor's lifetime. It also is in addition to the lifetime exclusion of "qualified transfers" paid directly to an educational institution for an individual's education or training or directly to a provider for an individual's medical care.
An unlimited estate tax deduction also exists for any amount of property given to a qualified charity at death. As a result of the marital deduction for estate and gift tax purposes, an unlimited amount of property may pass free of estate and gift taxes from one spouse to the other upon the death of the first spouse. This transfer may be made outright; in trust (such as a general power of appointment marital trust or a qualified terminable interest property marital trust); or, if the recipient spouse is not a U.S. citizen, in a qualified domestic trust. As a result of the marital deduction, an estate of any size can pass to the surviving spouse free of estate and gift taxes. The problem that often arises is that the surviving spouse's estate is then larger than the equivalent exemption (shown below), resulting in substantial estate taxes at the surviving spouse's death.
Tax Unification Exclusions
Year of Death Exclusion Amount Top Tax Rate
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
The Economic Growth and Tax Relief Reconciliation Act of 2001 established an increasing estate tax unified credit exclusion amount, phased in over a period of years. The chart below shows that the dollar amounts of the phase-in are somewhat back-loaded, with the most significant relief coming toward the end of the relevant time period.
Effective for decedents dying on or after January 1, 2010, the estate tax will be repealed; however, the estate tax will be reinstated on January 1, 2011, with a $1 million exclusion amount, unless Congress passes and the president signs new legislation continuing the repeal. For generation-skipping transfer tax purposes, each decedent has an exemption of $1.1 million, reduced by whatever amount was used during the decedent's lifetime.
In order to reduce or eliminate estate taxes, spouses may rearrange titling of assets and beneficiary designations in order to equalize their estates and enable the first spouse who dies to establish a "credit shelter" trust for the benefit of the surviving spouse. This would provide for the surviving spouse but would not be taxed in the surviving spouse's estate. The credit shelter trust can be established as the amount of the equivalent exemption for the year of death of the first spouse. However, if the value of the assets in the credit shelter trust increases before the death of the second spouse, the increase remains sheltered and passes to the remainder beneficiaries free of estate taxes.
Important considerations that relate particularly to estate planning include the following: planning for incapacity or disability (avoiding guardianships and conservatorships); avoiding intestacy; saving estate taxes; providing financial management; taking care of and protecting beneficiaries; preserving assets; choosing a specific executor, trustee, or other fiduciary; avoiding probate; and maintaining privacy. In addition, lawyers specifically must address the formal closing or other disposition of a law practice.
The specific ethical obligations of law practice mandate essential duties that must be incorporated into ending client relationships and/or passing clients on to another practitioner. Among these are a written plan for the orderly closing or disposition of the practice; designation of another duly-licensed lawyer to assist the executor in that regard; and the maintenance and identification of a coherent system of records to help the other lawyer carry out legal responsibilities, including handling client property that may be in the lawyer's possession. In the event a lawyer did not make such plans, the state bar in Virginia, for example, must petition the court to appoint a receiver to deal with the lawyer's practice-at a substantial cost that can be a drain on the limited budgetary resources of the bar.
To plan for the possibility that the lawyer may become disabled or incapacitated, the lawyer doing the planning should enact three durable powers of attorney (general, health care, and special, to deal specifically with the law practice) and appoint a licensed lawyer as attorney-in-fact to deal with all matters related to the law practice. In Virginia, the state bar's nearly 8,000-member Senior Lawyers Conference (SLC) runs an ongoing program to encourage lawyers to plan for their death or disability.
The SLC website contains a sample durable special power of attorney (www.vsb.org/slc, click on "Attorney Resources") that you can download, modify, and use to designate another lawyer to act in the event of your own disability. The provisions con-tained in the power of attorney can also be modified, mutatis mutandis, to provide part of the basis for an agreement or last will and testament for a lawyer. The same website also links to an article, "Planning Ahead: Protecting Your Client's Interests in the Event of Your Disability or Death," which contains many helpful suggestions for such planning.
If consistent with individual wishes, a lawyer also might want to execute an advance medical directive to assist in decision making should the lawyer become terminally ill.
At death, assets may pass by will, in which case they will be subject to probate and will become a matter of public record, or pass by various probate avoidance devices. These instruments include a revocable living trust (which may be funded or unfunded during lifetime); joint tenancy with the right of survivorship as at common law and tenancy by the entirety with right of survivorship as at common law; beneficiary designation; and payable on death (POD) designation and transfer on death (TOD) designation. When using these various probate avoidance devices, take care that the estate tax planning structure of the estate plan is not inadvertently circumvented. The estate plan should be one in which asset titling and values, beneficiary designations, and documents are part of an integrated whole, not just a series of unrelated parts.
An even greater array of estate planning techniques (beyond the scope of this article) is available to senior lawyers, depending upon specific goals. These include the following: irrevocable trusts (life insurance and other); charitable remainder trusts; lifetime charitable giving; lifetime non-charitable giving, including gifts under the state's Uniform Transfers to Minors Act; family partnerships; generation-skipping transfer tax planning; and educational savings accounts (qualified state tuition programs).
Estate planning for a senior lawyer is essential. A well-planned estate is in the best interests of the lawyer, clients, beneficiaries, and the bar.
Frank Overton Brown, Jr., is an attorney in private practice in the Richmond, Virginia, area.