Spring Cleaning For Your Estate Plan

The close of first quarter means spring is upon us, and while many will be undertaking spring cleaning projects at home, now is also an ideal opportunity to dust off your estate plan documents. After years administering the documents I once drafted as an estate planning attorney, I’ve found most documents are plagued by the same handful of issues that can easily be cured with thoughtful drafting. Accordingly, we would all be well-served to review existing estate plan documents for any of the following provisions to ensure they will ultimately accomplish the intended objectives:

  1. Incapacity Determination. An important function of powers of attorney and trusts is to name someone to handle your affairs upon your incapacity. What often is overlooked, however, are the provisions dictating when and how such incapacity determination is made, which ultimately impacts when a named fiduciary can begin acting on one’s behalf. Nearly every such provision I’ve reviewed requires the written certification of two physicians who’ve examined the person as to their inability to manage their financial affairs. Due to HIPAA and the litigious nature of our society, physicians have become reluctant to provide any written statement regarding their patient’s diagnoses to outside parties. The practical result is that family members are unable to obtain the documentation necessary to trigger the fiduciary’s authority to take over, and the incapacitated person’s finances end up being monitored haphazardly by family or in limbo without anyone to act upon or protect them.
  2. 5 by 5 Withdrawal Rights. Many older irrevocable trusts provide the surviving spouse with the annual right to withdraw trust principal in an amount equal to the greater of $5,000 or 5% of the value of trust principal (“5 by 5 Provisions”). While intended as an avenue to simplify the survivor’s ability to access irrevocable trust assets, in most instances, these provisions unwittingly result in the survivor paying income tax on trust distributions they never actually receive, a phenomenon known as “phantom income.” Having this withdrawal right results in a taxable event to the survivor, regardless of whether the survivor ever receives or requests their annual distribution of trust principal. My experience in administering 5 by 5 Provisions has been that most survivors choose not to withdraw trust principal because they want to preserve trust assets for the next generation and don’t require the funds for living expenses. If this provision is part of your plan, it’s time to revisit your intentions and determine whether this should be removed.
  3. Charitable Devises. Documents often include charitable devises, whether to a client’s alma mater or charitable organizations, supporting causes dear to clients. However, most documents fail to accurately identify the institution’s legal name and restrict the use of funds to the specific purpose or cause the clients wish to support. Unfortunately, the slightest mis-reference can result in dollars not furthering the client’s intent. The following illustrates a real-life example:
    • Client’s will includes a gift to a university establishing a scholarship fund for students in continuation of the family’s long-standing fundraising efforts for the university. However, the named university’s fundraising and scholarships are not administered by the university, but rather its foundation – a separate legal entity. As a result, funds directed to the university only support university operations. Because the devise did not identify the proper entity, the funds were distributed to the university and the scholarship was never established as the client desired. This was a unique circumstance and each institution has different rules, so it’s always prudent to call the recipient entity and ask for the proper entity name/contact information to ensure your wishes are carried out.

While FineMark’s trust officers are not practicing attorneys, we are always happy to talk through these issues with you so you can have an efficient conversation with your estate planning attorney and update your documents, if necessary.


Lindsey Jackson

Spring Cleaning for Your Estate Plan

By Lindsey A. Jackson, J.D.
Vice President & Private Wealth Advisor, Trust

Articles In This Issue:
2019 First Quarter Review and Commentary
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