Volume 19, Number 5
July/August 2002
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.
Essential Points
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.
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