Introduction
The relationship between a client and an estate planning attorney requires healthy two-way communication. Just as a patient should always give her physician all relevant information, an estate planning client should fully answer all questions that her attorney asks regarding her financial arrangements and family situation. At a minimum this means telling the attorney about all assets, liabilities, life insurance plans, retirement plans, existing partnerships and other entities, trusts the client has created, and trusts of which the client is a beneficiary.
And just as a patient should ask as many questions as she feels she needs to ask in order to be fully informed, so an estate planning client should satisfy herself that she fully understands all the ramifications of a particular course of action before she commits to it. There should be nothing embarrassing about asking a question multiple times until the answer is fully understood.
Ideally, an attorney would explain all relevant information to the client without the client even asking. In the real world, however, that often does not occur. The client should assume that she needs to be her own advocate. Ultimately, both the client and the attorney should remember that the best relationship is one in which there are no surprises.
The following discussion offers some questions that a client may want to ask her estate planning attorney.
How much complexity will there be?
Attorneys sometimes suggest estate planning techniques to clients that appear simple from the attorney’s perspective but end up being unwieldy from the client’s perspective.
A basic estate plan, the centerpiece of which will be a revocable trust, does not generally inject much complexity into the client’s life. Initially, the client will need to transfer assets to her revocable trust. On an on-going basis, the client will be transacting business through her revocable trust rather than in her name as an individual. Most clients do not find the administration of a revocable trust to be especially burdensome. (See the discussion of revocable trusts under “Basic Estate Planning Information” on this website.)
On the death of the first spouse, however, the estate plan may contemplate the creation of one or more irrevocable trusts for tax or other reasons. (See the discussion of a “Basic Tax-Smart Estate Plan for a Married Couple” under “Basic Estate Tax Information” on this website.) The creation of these trusts may require the opening of new bank and brokerage accounts and the preparation and filing of additional tax returns every year. The couple should ask the attorney just what will be required after the first spouse dies, and they should make sure they are comfortable with that plan.
More sophisticated estate planning techniques usually require even more complexity. For example, the creation of a family limited partnership combined with a plan for possible future gifts of partnership interests can require that (1) annual minutes be kept of partnership meetings, (2) partnership tax returns be filed each year, (3) partnership funds be kept in separate accounts from personal funds, (4) periodic statements be filed with the state, (5) valuations be performed of the gifts that are made, which may include appraisals of the underlying real estate, and (6) gift tax returns be prepared each year in which gifts are made. (See the discussion under “Advanced Estate Planning Information” on this website.)
In general, before the estate planning client agrees to a course of action, she should ask the attorney:
What additional bank or brokerage accounts will need to be opened and maintained?
What additional income and/or gift tax returns will be required each year?
What restrictions will exist on the client’s ability to access funds?
What real estate appraisals or business valuations will be needed on a regular basis?
What continuing attorney involvement will be needed?
It is often the client’s accountant who will bear the burden of a sophisticated estate plan. Accordingly, another important question for the client to consider is whether her accountant is sufficiently familiar with the type of estate planning transaction contemplated. For example, if the attorney recommends a sale of partnership interests to an intentionally defective grantor trust, does the client’s accountant have experience with such arrangements?
One final note on complexity: Estate planning professionals are not infallible. The more complicated an estate plan is, the more likely it is that something will go wrong. It never hurts to remind the attorney of the K.I.S.S. (Keep it Simple, Stupid.) principle and to ask the attorney if there is a more simple way to accomplish the same (or a nearly as good) result.
What will be the tax consequences?
An attorney may recommend an estate planning technique to a client because it will save estate taxes, but fail to explain to the client other tax consequences. The client should always ask the attorney to explain to her each of the following tax ramifications of adopting a particular estate planning strategy:
(1) income tax consequences
(2) capital gain tax consequences
(3) estate tax consequences
(4) gift tax consequences
(5) generation skipping transfer tax consequences
(6) property tax consequences
Particularly in today’s uncertain tax environment, the client should ask her attorney what the tax consequences are likely to be under different scenarios. For example: What if the client dies in a year when there is a $5 million estate tax exemption? What if the client dies in a year when there is a $1 million estate tax exemption? What if there is no estate tax when the client dies?
It is also helpful to ask the attorney what the tax consequences will be under different market scenarios. What will happen if the value of the property dramatically appreciates? What will happen if the property declines in value?
What will the attorney’s fee include?
An estate planning client should always be clear about what services the attorney’s fee includes and what services it does not include.
For example, the client should ask the attorney who is responsible for funding the client’s revocable trust. Transferring real estate to a revocable trust will require the preparation of deeds. Transferring partnership interests to a revocable trust will require preparation of partnership assignments. The client should ask the attorney if preparation of these documents will require an additional charge.
If a more sophisticated estate planning technique is adopted, will there be an additional charge for:
Obtaining a tax identification number for an irrevocable trust or a partnership?
Preparation of gift tax returns?
Preparation of deeds?
Preparation of life insurance policy endorsements?
Coordination with real estate appraisers?
Phone calls to answer questions that the client may have in the future?
What other fees will there be?
When an attorney quotes a fee to the client for the legal work associated with a sophisticated estate planning technique, such as a family limited partnership, the client should always ask what additional fees, such as real estate appraisals, business valuations and state filing fees will be needed to implement the technique. The client should also ascertain what on-going fees will be needed, such as annual state registration fees and annual accountant fees to prepare additional income tax returns.
Can changes be made in the future?
Clients often assume that a particular estate planning technique can be unwound if it does not turn out the way the client anticipated. While some entities, like LLCs and limited partnerships can be dissolved, other entities, like irrevocable trusts, often cannot. Similarly, once a gift has been completed, it usually cannot be revoked.
Unanticipated circumstances often arise after the client completes an estate planning transaction. For example, the client might place her residence in a Qualified Personal Residence Trust, confident that she will not be selling the home for many years. If, however, she then decides that she needs to sell it before the QPRT term has expired, she may be very frustrated at the complexity that is involved in doing so.
Before completing a transaction, the client should always ask the attorney whether and to what extent it will be irrevocable.
What is the client responsible for?
Once the estate plan is implemented, it may fall to the client to keep it operational. For example, if the client has an irrevocable life insurance trust, certain procedures will be required to ensure that the desired tax results will be realized. Annual insurance premiums must be paid from certain funds and not other funds; notices must be sent to beneficiaries each year, etc.
Whatever advanced estate planning technique the client has adopted, the client should ask the attorney to provide her with a list of items for which the client is responsible, including:
Gift tax returns that will need to be filed
Income tax returns that will need to be filed
State registration fees that will need to be paid
Notices that will need to be sent to beneficiaries
Other deadlines