Put your beneficiaries first.
The traditional "hot button" that has motivated people to see their lawyers about estate planning is taxation. Death taxes--inheritance taxes, estate taxes, federal taxes, state taxes--have taken a notorious toll on unplanned estates over the years. With sound planning, that burden can be lightened 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 equivalent is $11.18 million per taxpayer ($22.36 million for married couples). The amount will increase for inflation through 2025, and in 2026 it will drop roughly in half. An exemption that large would seem to let most families of moderate wealth off the hook. In fact, most observers expect that there will be only about 1,000 federally taxable estates in the next few years.
Accordingly, families with less than $11.18 million in assets may be forgiven for feeling that they are no longer a tax target. But estate planning always has been about much more than tax planning. Estate planning always has been about financial protection for beneficiaries, with tax minimization just a means to that end.
If you haven't attended to your estate planning, don't use the excuse of "my estate is too small to worry about death taxes" to put it off any longer.
To begin, you have to know what you are working with.
• Inventory assets. Your estate plan will have to dispose of everything that you own; otherwise the state's law of intestacy will apply. Bank accounts, stocks, bonds, real estate, business interests, of course. Don't overlook insurance policies and retirement plan benefits. You'll need to know how as well as what. Which property is owned jointly, 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 you may want to remember some charities in your estate plan. Don't overlook the need to care for your pets after your death.
• 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 divorce.
• Weigh trust benefits. Trusts offer a wide range of financial benefits, especially valuable when beneficiaries need help with money management. Trusts may be established and funded during life (the living trust) or in a will (the testamentary trust).
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 also may 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.
Support trust. For an adult child who needs a permanent source of financial support, with the trust principal protected from the claims of creditors, a support trust may provide a solution. The beneficiary's interest is limited to just so much of the income as is needed for his or her support, education, and maintenance.
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. We are advocates for trust-based wealth management strategies. If you would like a "second opinion" about your estate planning, 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.
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