Many people believe that estate planning is only for the ultra-wealthy, a belief that has been exacerbated over the past several years with a markedly increased unified estate and gift tax credit ($5.45 million per individual in 2016). While it’s true that estate and gift tax planning was a common reason for estate planning within recent years, the belief that it is the only or most important reason is a common misconception. In reality, almost everyone can benefit from having his or her affairs in order for surviving family, and in many common scenarios, a plan is absolutely essential. Do any of these common scenarios apply to you?
You have minor children or dependents
If you have minor children or dependents, and you and the child’s other parent are both deceased and/or incapacitated, a court will decide who will take care of your children. A guardian and conservator will be appointed, and the person appointed may not be the person whom you would choose. A will or “separate writing” tells the court who your choice would be to take care of your children, and can also specify if there is anyone who you would not choose. It is important to ensure that your documents also address incapacity in addition to death. For more information, see our previous post, “Choosing a Guardian and Conservator for Your Minor Child.”
You want to ensure that certain loved ones are provided for
If you would like for certain items of personal property or certain assets to go to a specific individual, those wishes should be stated in an estate plan. Without a plan, your assets will pass according to the law of the state where you are domiciled at the time of your death, which may or may not comport with your intended distribution of your property. A plan that you choose allows you to have peace of mind in the assurance that your loved ones – often your spouse, children, and grandchildren – will be provided for.
You want to have control over how your assets are distributed
A common estate planning joke is that a trust is used because people can’t be trusted. Of course, this doesn’t necessarily apply to your beneficiary (although it can). In some cases, you may want to incentivize a beneficiary to engage in certain behaviors and abstain from others. In other cases, you may want to ensure that your funds are protected for your beneficiary from “creditors and predators” such as ex-spouses, lawsuit plaintiffs, and others. When you consider that there are no guarantees in life, the “trust” metaphor makes much more sense. If you want to ensure a loved one is benefited by your gift while making sure those funds aren’t diverted to purposes or people you never intended, consider trust planning. For more information, see our previous posts, “Incentivizing Beneficiaries” and “Protecting Trust Assets For and From Beneficiaries.”
You have children from a previous relationship
If you have children from a previous relationship, trust planning is imperative. On one hand, if you still want to provide to your surviving spouse, there is no way to ensure that the assets will not be diverted away from your children upon your surviving spouse’s death without a trust. This is especially true for your retirement assets. On the other hand, providing all to your children without estate plan documents noting your intentions can cause a surviving spouse to open a probate estate and claim that he or she was forgotten. Blended family dynamics can be delicate, and can often give rise to contentious probate litigation. If you and your spouse would be willing to consider a post-nuptial agreement reflecting your intended estate plan distribution, that is often a good route to pursue. In either case, be sure to formalize your wishes with an estate plan or you risk your children or your spouse being completely cut out of your estate.
You have pets
Because pets are considered property in the eyes of the law, any pets you leave behind will be distributed as property in probate court unless you make a plan for them. You might consider naming a pet care taker in your will at a minimum, or you might consider the broader protections of a pet trust. In either case, be sure to have a written plan for your pet(s) so that they are comfortable between your death and when they are placed with their ultimate caretaker. As with naming a guardian of minor children, it is also important to ensure that your documents address incapacity in addition to death. For more information, see our previous posts, “Who Will Take Care of Your Pet After Your Death?” and “Protecting Your Pet in Case of Your Death or Incapacity.”
You want privacy and want to minimize costs
Most items submitted to probate court are public record, whereas trusts preserve privacy. Probate court can also become much more expensive than the cost of preparing an estate plan. These fees include costs to open an estate, inventory fees based on the value of the estate assets, and attorney fees. Along these lines, you might consider preparing an estate plan in advance as a form of insurance against greater costs later on.
You have charitable goals
If there are certain charities that you would want to benefit upon your death, at the bare minimum you would need to make these wishes known in a will so that a probate judge could ensure that those wishes are carried out (otherwise your assets would be distributed according to state law – where the only potential beneficiary that is an entity is the state). Ideally, a trust, lifetime gifting, charitable IRA rollover, or a combination of these can be used to take advantage of charitable income tax deductions for you during your life, or for your trust after your death. For more information, see our previous posts, “IRA Charitable Rollover Made Permanent” and “Reduce Your Taxable Estate – Fund Education.”
You own a business
If you own a business, planning for the continuation or end of that business after your passing is vital. Without a plan for business succession, or a plan to wind up the business, there can be chaos as everyone scrambles to ascertain a forward path. Will a business be liquidated with your family benefitting from the proceeds? Will someone instead carry on in your name? What is your plan for your employees, if any, and your customers or clients? These are all important questions that must be addressed in a business succession plan that will work hand in hand with your estate plan.
You want to help your beneficiaries save on taxes
As noted above, tax planning within estate planning has shifted from an estate and gift tax focus to an income tax planning focus. There are several ways that estate planning can help you to save on income taxes for your beneficiaries. Some of the most notable include the avoidance of capital gains by ensuring a basis step up, avoidance of the uncapping of property taxes, distributing trust assets in such a way that certain assets are distributed to lower income tax bracket tax payers, and maximizing tax benefits in inherited IRAs. For more information, see our previous posts, “Naming Your Retirement Plan Beneficiary,” “You’ve Inherited a Traditional IRA – Now What?” and “You’ve Inherited a ROTH IRA – Now What?”
As you can see, there are many important reasons why an estate plan is still essential. If any of the above scenarios apply to you, talk to your estate planning attorney, or feel free to contact Mammel Law at 248-644-6326.