People with Even Modest Estates Need Estate Planning – Here’s Why
Tax law changes the past few years have permanently increased the gift and estate tax exemptions to much higher levels. For 2015, that exemption amount is $5.43 million per person ($10.86 million for a married couple).
Additionally, the "unused" exemption amount of the first spouse to die is now portable, meaning it is available to add to and be used by the surviving spouse.
Because of these changes, many people feel like they no longer need estate planning. However, there are still important estate planning needs that most people have, even with estates of modest size. Here are some of the most compelling:
- NAMING BENEFICIARIES. Many people don't think much about who will inherit their assets if they do not at least have a Will. Dying without a will is referred to as being "intestate". You probably would be surprised how your assets are divided if intestate, and likely it would not be how you would like.
Also, people often just forget who has been designated as the beneficiary under their retirement plans, life insurance and other assets, so reviewing these designations periodically is important. - APPOINTING GUARDIAN FOR MINOR CHILDREN. People with minor children should update or put Wills in place in order to name guardians. When deciding who will have physical custody, consideration should also be given as to who will manage the child's inheritance.
- APPOINTING A HEALTH CARE AGENT. Who will make medical decisions in the event you are incapacitated? Do you wish to remain on life support in such an event? This is another area in which you could be surprised by who is appointed under state law as the decision maker if you have not signed a health care proxy.
- APPOINTING SOMEONE TO MANAGE ASSETS IN THE EVENT OF INCAPACITY. In addition to considering who will manage and benefit from your assets after death, you need a succession plan in the event of your incapacity. This may take the form of a durable financial power of attorney, trust planning or a combination of the two.
- PROTECTING A BENEFICIARY FROM THEMSELVES. A trust is a useful tool for a beneficiary who is too young or does not have the proper investment skills to manage his own inheritance.
First, it can be used to name a person or institution as the investment trustee until the beneficiary is capable (if ever).
Second, a trust can be used to distribute funds over time to protect assets from a spendthrift beneficiary's own misjudgment.
Third, the trust can be used to provide supplemental benefits to a beneficiary with special needs without disqualifying the beneficiary from other government support, something that could happen if the assets are left outright to the beneficiary. - PROTECTING BENEFICIARIES FROM CREDITORS AND DIVORCING SPOUSES. Establishing an irrevocable trust can be one of the most useful tools for protecting assets left to heirs. If you have no plan or if your plan distributes your assets outright to your beneficiaries, you are foregoing the creditor and divorce protection that could be given to your heirs.
A properly crafted plan that maintains assets in continuing trust (rather than forcing out distributions of income or principal), can protect assets from the beneficiary's creditors or divorcing spouses. If the beneficiary is capable, the trust can be designed to give the beneficiary a great deal of control without giving up the protection the irrevocable trust provides. - PROTECTING YOURSELF FROM CREDITORS AND DIVORCING SPOUSES. Even if you have only modest wealth, you may encounter situations calling for enhanced creditor protection.
A person, for instance, who may inherit a significant amount from his or her parents should consider talking with them about changing their estate planning so that the inheritance is left in trust (e.g., for reason #6 above).
Also, a periodic review of assets and ownership structure is important to make sure there are no gaps for asset protection purposes. - ADJUSTING EXISTING DOCUMENTS TO DO "BETTER PLANNING." If you have an estate plan, it is a good idea to periodically review your existing plan, and adjust it for changes in circumstances, law or to remedy any defects in the creditor or divorce protection of the plan. Even irrevocable trusts can be modified in certain cases through decanting or modification laws or the exercise of a power of appointment.
- AVOIDING PROBATE. An estate can be designed to avoid probate through the use of beneficiary designations and a revocable trust. Probate can be costly and time consuming. It can also result in a loss of privacy since it is open to public disclosure, and sometimes is emotionally painful for the heirs. But probate can easily be avoided by establishing and funding a revocable trust.
This is especially important if you own real property in multiple states because probate proceedings may be required in each state. The revocable trust will designate your beneficiaries and provide asset management succession. And, it can be drafted to provide the creditor and divorce protection noted above.
Hopefully this list gives you some food for thought about your own situation. It's not necessarily pleasant to deal with these issues, but good planning now is one of the most caring gifts you can give your loved ones later, usually realized during a otherwise difficult time.
