PUT YOUR BENEFICIARIES FIRST
The traditional “hot button” that has motivated people to see their lawyers about estate planning is taxation. Death taxes, such as inheritance and estate taxes, federal taxes, and state taxes have taken a notorious toll on unplanned estates over the years. With sound planning, that burden can be minimized or even eliminated. In many cases, the tax savings easily cover the cost of the attorney’s fees for creating the estate plan.
That hot button has cooled considerably this year, as the federal estate tax exemption has been increased to $11.18 million per taxpayer ($22.36 million for married couples) for 2018. The amount will be increased each year for inflation, until it drops in half in 2026. An exemption that large would seem to let most families of moderate wealth off the hook. In fact, most observers expect that there will only be about 1,000 federally taxable estates in the next few years.
Accordingly, individuals with less than $11.18 million in assets may be forgiven for feeling that they are no longer a tax target, but estate planning is about much more than tax planning. Estate planning has always been about financial protection for beneficiaries, with tax minimization as a means to that end.
If you haven’t attended to your estate planning, we implore you not to use the excuse of “my estate is too small to worry about death taxes” to put it off any longer.
To begin, know what you are working with.
• Inventory assets. Your estate plan will have to dispose of everything that you own, including bank accounts, stocks, bonds, real estate, and business interests, otherwise your state’s law of intestacy will apply. Do not overlook insurance policies and retirement plan benefits. You will need to know which property is owned jointly and which is owned outright.
• Identify beneficiaries. A surviving spouse and children are the usual persons to be protected. You may have more distant relatives to include and/or you may want to remember charities in your estate plan. Do not overlook the need to care for your pets after your death, either.
• Check beneficiary designations. If you have an IRA or an employer-provided retirement plan, you already started on your estate planning when you made your beneficiary designations. These designations should be reviewed periodically, especially when there have been changes in family circumstances, especially a birth, marriage, or divorce.
The next steps require the advice of an attorney and the execution of legal documents.
• Make a will. Your will contains instructions for the disposition of your property. It also nominates an executor or personal representative to manage the settlement of your estate.
• Make a living will. This document addresses your expectations for medical care at the end of your life. You may also want to execute a power of attorney for health care to identify an individual to make medical decisions on your behalf.
• Execute a durable power of attorney. Identify an individual who can make financial decisions on your behalf.
• Create a document locator. Your family needs to know where your will and powers of attorney are kept. Your executor will need to know the location of all your other important papers, such as tax returns, account statements, property deeds, and insurance policies.
• Make arrangements for any safe-deposit box. Very often, a safe-deposit box is closed upon death and cannot be opened until probate. That makes it a poor choice for keeping documents that will be important at death.
These steps are not complete; they are simply suggestive of the ranges of issues that you will need to address in your estate planning.
INTRO TO TRUSTS
A great variety of financial protection strategies may be implemented with careful trust planning. Among the choices to evaluate:
Marital trusts. Several options are available to provide lifetime asset management and financial protection for a surviving spouse.
Discretionary trust. The trustee has sole discretion over what to do with the income and principal, just as the grantor does before the trust is created. The beneficiary has no interest in the trust that can be pledged or transferred. When there are multiple beneficiaries, the trustee may weigh the needs of each in deciding how much trust income to distribute or reinvest, when to make principal distributions, and who should receive them. The trust document often will include guidelines on such matters.
Spendthrift trust. The beneficiary is forbidden to transfer any financial interest that he or she has in the trust and may not compel distributions.
We specialize in trusteeship and estate settlement and are advocates for trust-based wealth management strategies. If you have questions about how trusts work and whether a trust might be right for you, turn to us. We’ll be happy to tell you more.