Estate planning is not just for the wealthy
By Julius Giarmarco
Giarmarco, Mullins & Horton, P.C.
An estate plan is the process of planning for the orderly administration and disposition of property in the event of the owner’s death or incapacity, while minimizing or eliminating estate taxes. But, as a result of the American Taxpayer Relief Act of 2012, estate planning is no longer about estate taxes for nearly 99.8 percent of Americans. The reason is the $5.25 million gift and estate tax exemption, which is indexed for inflation. However, persons with non-taxable estates still need an estate plan (i.e., will, revocable living trust, general power of attorney, and health care power of attorney) to address a host of other significant issues.
The non-tax goals of estate planning include the following:
Avoid intestacy laws
Every state has laws that direct what happens to property (in the decedent’s name alone) when someone dies without a will (called dying “intestate”). Not surprisingly, only spouses, children and blood relatives inherit under intestacy laws. These “default wills” may not work well, particularly for unmarried persons who are without children or who are charitably inclined. A complete estate plan will avoid any surprises under the intestacy laws.
Probate is a lawsuit that you file against yourself and then lose. There is no reason to go through probate. A married couple faces four probates — one at each spouse’s death, and one in the event of each spouse’s incapacity. It’s only the assets in the deceased or incapacitated spouse’s name alone that have to go through probate. But even property held in joint name (or payable by beneficiary designation) must go through probate upon the surviving joint tenant’s (or beneficiary’s) death or incapacity. The court costs, legal fees, publicity and delays associated with probate can be easily avoided by having all assets titled in the name of a living trust.
Set forth dispositive wishes
Only with a complete and up-to-date estate plan can you be assured that what you have goes to whom you want, when you want and how you want. This is particularly true for persons in second marriages who have children from a prior marriage they wish to protect. And parents with special needs children who are receiving government assistance must be careful to implement an estate plan that does not result in the loss of those benefits. (More below under “Special needs trusts.”)
If you have minor children, then the most important decision that you will have to make in preparing an estate plan is deciding who will take care of your minor children in the event of your death. It is often not an easy thing to consider, but you should name one guardian and one alternative (in case your first choice cannot serve). Protect heirs
A comprehensive estate plan will protect your heirs from their inability, their disability, their creditors and their predators (including ex-spouses). Some spouses are uncomfortable with or incapable of handling financial matters. Most parents want their children to receive their inheritance when they are old enough and experienced enough to properly manage the assets. Thus, holding the assets in trust for the spouse’s or child’s health, education, maintenance and support – with lump-sum distributions for children at stated ages (e.g., 25, 30 and 35) – is usually a good idea. A capable trustee (e.g., an accountant, lawyer, bank, or trust company) should be appointed to manage the assets and distribute them to the beneficiaries per the terms of the trust.
Make medical decisions
Everyone remembers Terri Schiavo, who was in a persistent vegetative state for 15 years before her artificial hydration and nutrition were stopped. A dispute between her husband and her parents produced one of the most hotly-contested, protracted and well-publicized end-of-life cases in history. You can avoid a similar situation for your family by executing a health care power of attorney.
With a health care power, you can decide to what extent, if any, you want heroic measures to be used to sustain your life and who will make those decisions if you cannot. The financial aspects of long-term care are also important. Do you have sufficient funds to provide for your medical care? Should you purchase long-term care insurance? Will you qualify for Medicaid? Neglecting these issues can put a heavy burden on a spouse and other family members.
Prepare for incapacity
Estate planning is not only about handling your affairs in the event of your death. It also involves handling your affairs if you become incapacitated. In that case, who will manage your assets, pay your bills, file your tax returns, care for your pets, enter you into an assisted living center or nursing home, communicate with your health care providers, etc.? With a general power of attorney and a living trust, these matters (and numerous others) can be handled by fiduciaries you select. Otherwise, such matters may end up under the local probate court’s supervision.
Plan for elder care
You are likely to live much longer than your parents did. But what happens if you are not healthy and are incurring insurmountable health care costs? Your assets could be wiped out by a lengthy illness and hospital and/or nursing home stay, leaving your spouse and family with nothing. An elder care attorney can help guide you through the complex maze of Medicaid and veteran benefit laws; explain the options available to pay for home health care, assisted living and nursing home costs; assist you in qualifying for benefits; and implement a plan to protect your assets from nursing home costs.
Children will not fight over dividing a bank account equally. However, deciding who receives a piece of jewelry or artwork can cause a tremendous rift between siblings. Many parents leave it to their children to work out the equal division of personal property. The better approach is to divide the personal property among the children as part of a personal property list incorporated into a will or living trust. Select fiduciaries
Oftentimes, the most difficult decisions you face in the estate planning process are selecting your first and second choices for fiduciaries. There are up to five roles to be filled: (1) the personal representative under your will; (2) the successor trustee under your living trust (if you are no longer able to act as trustee); (3) the attorney-in-fact under your general power of attorney; (4) the patient advocate under your health care power of attorney; and (5) guardians for any minor children. Typically, a trusted family member, advisor, or bank or trust company will fill these roles. Oftentimes, the roles of the personal representative, successor trustee, and attorney-in-fact will be held by the same person or persons. For a married couple, the first fiduciary is oftentimes the spouse.
Consider life insurance
Consider the many uses of income tax-free life insurance in a non-taxable estate. Life insurance provides immediate cash for payments of debts, funeral expenses and administration costs. It can provide security for loved ones in the event of a breadwinner’s premature death. Life insurance can “create” an inheritance and provide for dependents with special needs. It can also be used as an equalizer for those inactive children not receiving a family business. Finally, life insurance can be used to enhance charitable giving.
Plan for retirement
It’s just as important to plan to care for yourself during your retirement as it is to plan for your beneficiaries after your death. This is where estate planning overlaps with retirement planning. Social Security benefits alone may not provide enough income for your retirement. Consider saving for retirement by establishing an IRA or other tax-deferred vehicles.
Giving to charity is not only personally rewarding, the federal government allows certain tax deductions for donations made to qualified charities. Thus, charitable giving can be smart estate planning. There are numerous options for making charitable gifts, whether during lifetime or at death. From simple outright gifts to charitable trusts, an experienced estate planning attorney can help you choose the technique that’s most appropriate for you and your family.
We live in the most litigious country in the world. You do not need to be rich to be sued. Protecting what you have from liability is an important part of estate planning. After all, if you lose your assets to a creditor, there may not be an estate to plan. Asset protection planning is not just about having adequate property and casualty insurance – it also entails taking advantage of those asset categories that are automatically protected from creditors under state and federal law (e.g., retirement plans and life insurance). And, for assets that fall outside protected categories under state and federal law, an asset protection lawyer can help you design and implement a customized asset protection plan (e.g., family LLCs, domestic asset protection trusts, and offshore asset protection trusts). Plan for cottage succession
Many cottage owners want to make sure the family cottage stays in the family. They would like future generations to have the same opportunity for family bonding and memories that they had. This cannot be accomplished by simply deeding the cottage to the children at death and hoping that it is not lost to creditors or ex-spouses. Another problem is the potential for dissension among the children (and their descendants) in figuring out how to share the cottage fairly (e.g., who gets to use the cottage during the major holidays) and paying for its upkeep, utilities and property taxes. An experienced attorney can help establish a cottage trust or cottage LLC to assure that the handing down of the cottage is not left to chance.
Plan for business succession
It is not uncommon in a family business for one or more children to be active in the business, while others are not active. An estate plan can assure that the active children succeed to the business while, at the same time, treating the inactive children fairly (if not equally). If there are no children likely to succeed to the business, then the estate plan can address who will manage the business (in the event of the owner’s death or incapacity) until the business can be sold. A common approach is to create a management committee of three to five persons (e.g., key employees, advisors, family members, etc.) to operate (or sell) the business upon the owner’s death or incapacity.
Create special needs trusts
When a person with a disability depends on government assistance, his/her benefits will be in jeopardy if they receive an inheritance other than in a qualified special needs trust (SNT). The assets in an SNT are not considered owned by the beneficiary in determining eligibility for public benefits like Social Security income, Medicaid and subsidized housing. In addition to preserving such benefits, the SNT provides the beneficiary with items not covered by public benefits, such as assistive technology, clothing and entertainment. For this reason, SNTs are also referred to as supplemental needs trusts.
Minimize state death taxes
If you live in one of the 20 or so states that imposes a death tax or an inheritance tax, tax planning is still relevant. All of these states have varying levels of exemptions against the tax. There are four ways to avoid state death taxes. First, you can move to a state (like Florida) that does not impose a state death tax. This is commonly done by persons spending the winter months in such states. Second, the credit shelter/family trust (for the benefit of your spouse) that was used in the past to shelter the federal estate tax exemption amount can be used to shelter the state estate tax exemption amount. Third, a spousal lifetime access trust (SLAT) can be used to shelter your $5.25 million gift tax exemption, lessening your estate for state estate/inheritance tax purposes. Finally, you can make lifetime gifts using your $14,000 annual gift tax exclusion and $5.25 million gift tax exemption to reduce your estate and, therefore, your state death tax. Plan for pets
While you cannot leave property to your pets, you can make arrangements for them to be taken care of after you die. You can do this in one of two ways. In your will or living trust, you can leave your pet – and the funds to take care of your pet – to a trusted caregiver. Alternatively, in most states, you can establish (in your will or living trust) a pet trust. Under this arrangement, the trustee (usually someone other than the caregiver) holds, administers, and distributes the trust funds (to the caregiver) as needed for the pet’s health, care and maintenance. The pet trust can also compensate the caregiver for his/her services.
Organize financial records
To make it easy on your fiduciaries, list account numbers and pertinent information about your bank accounts, investments, life insurance, auto and personal loans, credit cards, mortgages, safe deposit boxes, etc. List the location of valuable documents (e.g., deeds, car titles, military records, birth and marriage certificates, divorce decrees, estate planning documents, tax returns, etc.). In addition, list your personal data, such as Social Security Number, driver’s license, VA claim number, etc. If you store any of the aforementioned information on your computer, make a list of all passwords and where the information can be found.
Plan your funeral
Most people have a strong sense of their burial desires, whether based on religious beliefs or personal preferences. Decisions such as cremation or interment, viewing or no viewing, and religious service or a memorial, should be reduced to writing. But, if you include your wishes in your will, your survivors may not read them until it’s too late. Instead, make a separate writing detailing your funeral and burial wishes and give it to your spouse and family.
Title assets properly
Since retirement plans, annuities, life insurance and some other assets pass by beneficiary designation, they are not affected by your will or living trust. The same is true of jointly-titled property, which passes automatically to the surviving joint tenant. Thus, these assets must be coordinated with your will and/or living trust so the assets pass according to your wishes. Particular attention must be given to retirement plans in order to stretch the payments over the longest period of time allowed.
While other non-tax issues could be addressed, those listed above are most commonly considered when putting together a well-designed estate plan. In general, everyone who owns property should have an estate plan. It is best to consult with an experienced estate planning attorney to ensure that your goals for your family and wealth are properly accomplished.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.