Volume 8, Issue 6
The Wealth Counselor
Why Estate Planning Is Still Important
With the federal gift and estate tax exemption currently at $5.25 million per person ($10.5 million for married couples), some clients and potential clients with “smaller” estates may wonder if they need any estate planning. But there are many reasons to do estate planning other than to avoid estate taxes. In fact, for most Americans, the recent tax legislation has brought incredible freedom. Instead of jumping through hoops to avoid estate taxes, planners can now concentrate solely on the real reasons clients need to do estate planning: to take care of themselves and their families the way they want.
In this issue of The Wealth Counselor, we will examine why proper estate planning is still important, regardless of the size of a client’s estate. We will also address issues to consider for those clients who already have plans in place.
Avoid State Inheritance/Death Taxes
Ensure Assets Are Distributed the Way the Client Wants
Even with a will, it is probable that not all of the assets will go through probate. Assets with a valid beneficiary designation pass outside probate to whomever the client has named as beneficiary(ies), and property owned jointly with right of survivorship will automatically transfer to the survivor. But if the beneficiary or joint owner is a minor or is incapacitated when the client dies, the court will get involved to protect their interests. If the beneficiary or joint owner has died before or simultaneously with the client, or the designation/title is otherwise invalid, those assets will have to go through probate and will be distributed according to the will or, absent a will, the default state law.
Many older people add an adult child to the title of their assets (especially their home) as joint owner, often to avoid probate. But this can create all kinds of problems:
Planning Tip: Probate can often be avoided by using joint ownership and beneficiary designations, but, in our experience, it most often leads to unintended consequences and has unintended risks. A better way to avoid probate is to establish and fully fund a revocable living trust. With a living trust, the trust maker keeps control over the assets, avoids uncertainty and unintended consequences, and avoids the risks associated with joint ownership. That’s why a living trust plan often is preferred by many clients and professionals alike.
Provide Responsibly for Minor Children or Grandchildren
In most states, a parent may nominate a guardian for minor children in a will or by a separate document. If both parents die before a child reaches legal age, the court will have to decide whether to accept the nomination or appoint someone to raise that child. If the last parent to die has made no nomination, the court will act without knowing whom the parent would have chosen.
On the other hand, establishing a trust for the children’s or grandchildren’s inheritance lets the trust maker (not some court) keep control of the inheritance, decide when each child or grandchild will receive it, determine what controls will be put in place to protect the beneficiaries’ inheritance from themselves and others, and select someone the trust maker knows and trusts to manage it.
Protect Inheritances from Creditors and Predators
Provide for a Second Spouse and Your Children
Naming a spouse who is not the parent of all of the children as a joint owner or beneficiary of life insurance or retirement accounts can be a problem because that means the spouse will have control of the proceeds if the parent-spouse dies first. Promises may be made now to include the children that are not the surviving spouse’s children, but that may not work out if the parent-spouse is the “glue” holding these children and their stepparent together.
Planning Tip: Lifetime trust planning is often the best solution. Through a trust, the trust maker can provide his/her spouse with lifetime income (or income until remarriage), yet keep control over to whom, when and how whatever assets are not needed for that purpose are distributed.
Provide for a Loved One with Special Needs
Planning Tip: A special needs trust can provide for a loved one without jeopardizing valuable government benefits. It is carefully designed to supplement and not jeopardize the benefits provided by local, state, federal or private agencies.
Plan for Disability
Planning Tip: Sometimes a power of attorney will not be accepted by whoever has control of the assets. That, and the fact that a living trust will provide detailed instructions and directions that a power of attorney will not, is why a living trust is much preferred to reliance on a power of attorney in the event of incapacity.
Health care documents are critical. We need to give someone the power to make health care decisions for us if we are unable to make them for ourselves. A living will can speak for us if we are unable and tell the doctors whether we want to be kept alive in a vegetative state or allowed to die. Federal and state laws control to whom doctors can disclose our medical situation in the absence of written direction, so we need to give those directions while we are able.
Finally, the exorbitant costs of long-term care, most of which are not covered by health insurance or Medicare, can wipe out a lifetime of savings. Long-term care insurance should be considered to protect assets.
Protect A Business and Other Assets
Planning Tip: Asset protection planning can and perhaps should be included in many of our clients’ estate planning. The time to plan for asset protection is before there is any potential threat. Once the threat of a claim arises, it may be too late.
Planning Tip: For clients who own a business, business succession planning should also be a part of their estate planning. Nobody lives forever, so someday the business will pass out of this owner’s control. Planning ahead can provide the time needed to grow and develop the business, groom a successor and look for a potential buyer if desired. If an adult child will take over the business, proper planning can also help provide fairly for any children not involved with the business.
Make Meaningful Charitable Gifts
Pass Down Values to Future Generations
If parents have young children, they can select someone who shares their views to manage the inheritance, and they can provide a letter of instruction to the chosen guardian with their views on the care of their children. Grandparents can provide for private or religious education. Even end-of-life and funeral/burial instructions can be personal and convey a client’s values. A thoughtful advisor can also help with other ways to pass on a client’s accumulated intellectual, spiritual and human wealth, too. Final gifts to a church or synagogue, university, hospital or other favorite cause will let the family know that giving is important to the client.
This is also an excellent time to review clients’ existing estate plans, especially in light of the changes in the income tax law that went into effect on January 1. Now that we have “permanent” estate and gift tax laws, we have more certainty under which to plan than we have had in the past 12 years. For clients whose estates are larger, be sure to take advantage of the high exemptions and techniques that are currently available. With the President looking to close more loopholes, many longstanding techniques may not be available much longer.
Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692