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Legal professionals — partners, associates, and paralegals — represent unique challenges in estate planning. Fortunately, sound planning — which considers the ownership of assets, designated beneficiaries, and the unfortunate risk of disability — can overcome these challenges. Legal professionals frequently have high income but also high debt from student loans. Although some pay off these debts early (or never incur them because of funding from other sources or proper planning by their ancestors), others turn these debts into long-term “second mortgages.” As they continue through their careers, legal professionals also acquire “hard” assets (such as real estate, automobiles, and other durable goods), some with enormous leverage or fixed debt. Some approach their financial situation with tenacity and create liquid investments. Frequently, they participate in retirement-plan accounts (such as 401(k) plans, Individual Retirement Accounts, and profit-sharing plans). For these legal professionals, planning must be tailored to their specific needs. This planning process generally involves gathering information about their wealth and family, analyzing their goals for the distribution of their wealth, and determining how to limit taxation of such distributions. In this planning process, legal professionals need to consider the following specific issues. MY TAXES The following basic rules apply for federal estate- and gift-tax purposes: Estate Tax: The highest marginal estate-tax rate is 45 percent. Marital Deduction: All transfers (gifts or bequests) to a U.S. citizen’s spouse are generally exempt from estate and gift tax because of an unlimited marital deduction. Annual Exclusion for Gifts: The current annual exclusion from the gift tax is $12,000 per person. In addition, amounts paid directly (1) to an educational institution for educational expenses or (2) to a provider of medical care are excluded. Lifetime Gift Exemption: Every U.S. resident has a lifetime gift-tax exemption of $1 million. This exemption will be applied to taxable gifts made during life (that is, transfers in excess of the annual exclusion amount). If an individual does not use the full exemption during life, it may be used to offset any federal estate tax at death. Applicable Credit Amount: Every U.S. resident also has a credit that currently exempts $2 million from federal estate tax (the applicable exclusion amount). Thus, a married couple generally has a combined $4 million exemption if proper planning is implemented. This amount will increase for estate-tax purposes to $3.5 million in 2009 (the lifetime gift exemption remains capped at $1 million) for each individual resident. The federal estate tax disappears in 2010, but without further legislation, it will return in 2011, using 2001 rates. MY ASSETS In general, estate planning begins with the collection of information. The more detailed information you provide, the better your estate planner can help meet your goals. A proper estate plan requires an accurate picture of your current net worth and future earnings potential. You should identify all of your sources of income, as well as each of your assets, listed by its value and type (for example, real property, bank accounts, retirement accounts, and life insurance). Again, most legal professionals have significant debt (from student loans, for example). Thus, you should also identify the amount and type of all outstanding liabilities (such as mortgages, student loans, and so forth). In addition, you should consider the nature of your assets for purposes of probate: Assets can be classified as: (1) probate assets, which pass as part of your estate at your death according to the terms of your will or, if you lack a will, by the intestacy laws of your state; or (2) nonprobate assets, which pass outside your estate. Nonprobate assets are typically passed according to the terms of a completed beneficiary-designation form (in the case of life insurance and most retirement accounts) or another written instrument, such as a trust or a deed specifying joint tenancy with rights of survivorship. Many legal professionals find that much of their net worth is based on nonprobate assets, such as profit-sharing, 401(k), or other retirement-plan assets or life-insurance benefits. You thus should make sure that you have completed all beneficiary designations, naming both a valid primary beneficiary and a contingent beneficiary (who receives the benefits if the primary beneficiary does not survive you). Every life change — such as marriage, birth of a child, or promotion to partner — should prompt further consideration of these selections. Because most retirement-plan benefits and life-insurance death benefits pass outside of your will, you must consider the total amount each beneficiary will receive from both probate and nonprobate assets. Careful drafting of the estate-planning documents is not enough when beneficiary designations may dispose of such a large portion of your wealth. MY BENEFICIARIES Your beneficiaries usually depend on your marital and family status. • Married: Married individuals should consider the following issues, among others, when preparing their estate plans: Proper use of the federal estate-tax marital deduction can allow each spouse to bequeath his entire estate to his spouse at his death without incurring any federal estate tax. Relying on the marital deduction, however, wastes the applicable exclusion amount available to the first spouse to die. The reason is that at the second spouse’s death, the combined value of the spouses’ estates would be taxable, and only the second spouse’s applicable exclusion amount would be available to offset any estate tax liability. Thus, couples whose net worth exceeds $2 million may want to consider planning techniques that shelter the applicable exclusion amount of the first spouse to die. One common plan is to use a credit-shelter trust, which simultaneously provides certain benefits to the surviving spouse and avoids estate taxation at the second spouse’s death. Nonprobate assets passing directly to the surviving spouse or other beneficiaries will not pass into any credit-shelter trust set up under your estate plan. This situation could leave your credit-shelter trust underfunded (that is, with less than $2 million), which would waste your applicable exclusion amount. Also, if wealth is divided unevenly between the spouses, they may wish to retitle (or rebalance) the ownership of certain assets between spouses to ensure that each has sufficient assets to take maximum advantage of each separate applicable exclusion amount. Furthermore, income-tax consequences, as well as protection against creditors (such as those arising from malpractice judgments), should not be overlooked. • Single: If you are single and do not have children, you should review whether your desired beneficiaries will receive your assets at your death. If you do not have a will, your assets will pass by intestate succession, as specified by your resident state’s statute. This typically provides that the assets pass equally to surviving parents (regardless of whether or not they are married), and then equally to surviving siblings. If you would prefer to give your assets to other beneficiaries or to a designated charity, you should complete an estate plan. • Children: If you have children, several issues should be addressed in your overall estate plan: If you have minor children, your estate plan should designate primary and successor guardians for them. You may also want to provide financially for the guardians to ensure that your children can maintain the lifestyle they are accustomed to. Selecting guardians is often one of the more challenging issues to resolve between married clients. If you have a disabled child (or desired beneficiary, such as a parent, other family member, or relative), you may want to establish a special-needs trust for her to ensure that she will still qualify for available federal and state benefits, such as health insurance. To minimize taxes, you can shift assets out of your estate by making annual exclusion gifts to your children or by making direct payments of their education and medical expenses. In addition to direct educational payments, you may want to create a Section 529 plan to provide for your children’s education. MY DISABILITY? In addition to tax considerations, medical issues are important to keep in mind. The life expectancy of the average individual is increasing, and it is expected that approximately 43 percent of people age 65 and over will spend some time in a nursing facility. Thus, you must implement not only an estate plan but also a “life plan,” which addresses issues such as long-term care, disability, and incapacity. Factors to consider when planning for a potential disability include the following: Powers of Attorney: You should execute the following documents to plan for your potential incapacity or disability: • A financial power of attorney that appoints an agent to handle your financial affairs.

• A health-care power of attorney that designates an agent to make medical decisions for you. • A “living will” or “advance medical directive” that specifies your decisions for your medical care during a terminal illness, coma, or persistent vegetative condition. Insurance: You should also consider the merits of the following types of insurance to assist you if you become disabled:

• Long-term care insurance (as appropriate) to support your medical care and prevent depletion of your estate if you must spend a long time in a nursing facility.

• Disability insurance to supplement or replace your income if you are no longer able to work. This is a specialized area that requires competent advice. As a legal professional, you want to ensure that the policy covers for any disability that prevents you from working in the “same occupation,” not just from employment in any other field. For most legal professionals who have significant recurring monthly expenses, time away from work without pay would be devastating to their families. Although most larger firms have limited levels of this type of insurance in their benefits package, most professionals should consider acquiring additional coverage at their own expense. When developing your estate plan, the major point for most lawyers and legal professionals to remember is, “Don’t go it alone!” Although it may appear simple to use form documents to draft your own estate plan (after all, most of you are paralegals or lawyers), the complexity of the tax laws, as well as the technicalities of each state’s probate laws, could cause you to make a major mistake with only a small misstep. Accordingly, you should work with professionals trained in both estate and tax planning to ensure that your estate plan is properly designed and implemented. Planning is a process — not a conclusion or a single step. It continues to grow with you and your assets, and it is never too early too start the journey.


Todd I. Steinberg is a shareholder in the Washington, D.C., and McLean, Va., offices of Greenberg Traurig. He specializes in tax and estate planning.

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