One of the most common “myths” or “misunderstandings” about Estate Planning is that it is all about “reducing your taxes.” While this is certainly a significant benefit of proper planning, it isn’t the only thing…in fact, it’s only 1 of MANY benefits you will gain from proper estate planning.
Taxes are important…but not the only thing
When we actually plan our lives and our estates, it’s about quality of living and a legacy, not estate taxes. We want our prized possessions to go to certain people. We want to make sure our kids are well taken care of (regardless of age) during and after our deaths. We want to continue our legacy of values and beliefs. We want to make sure no one is burdened by us at the end of life. And so many more things that estate planning helps all of us accomplish.
Estate taxes, however, should be taken into consideration as well. Just because we have the “temporary” doubling (until the end of 2025) of the amount which can be passed free of estate tax (to $11.18 million in 2018) does not remove the need for estate planning. Whether the exclusion amount is $11 - $12 million or a much smaller number after 2025 (which is the most likely scenario) is irrelevant to the vast majority of people. Estate planning is about your life, not taxes.
Here are 10 other reasons why it is about more than taxes.
- Incapacity: Your Estate Plan MUST include provisions for your potential future “incapacity,” not just for your death. It’s increasingly likely that the average person will experience one or more periods of incapacity during their lifetimes. A trust and well- crafted powers of attorney can allow for the seamless management of assets and your health care during those periods of incapacity and keep you out of a guardianship (living probate).
- Management: Your plan should consider the need for the continued management of the assets after your death. For example, if the beneficiaries aren’t of sufficient age or maturity (children under the age of 21) you may not want them to inherit large assets prior to age 30 or 35 so they can make wiser decisions. The assets could continue in a trust for their benefit until you deem it would be appropriate.
- Divorce Protection: The plan should consider the potential need for divorce protection for your children and other heirs. Nearly half of all marriages end in divorce. Even if your beneficiary appears to be happily married now, it does not necessarily mean this will last their lifetime. Having divorce protection is just a safety net for your heirs that is available should it be needed. This helps you avoid having half of your estate be inherited by “other people’s kids (or OPK’s as we call them!)
- Asset Protection: Your plan should consider whether the beneficiaries will have creditor issues or when they will be financially mature. For maximum asset protection, the assets for the beneficiary can be left in a fully discretionary trust with a third-party trustee or sprinkled to your heirs over 10-15 years after they are over the age of 25 or 30. You can (and should) define this in a way to help your children, not encumber them.
- Long-Term Care Planning: It is prudent to consider your potential need for Long-Term custodial care (nursing home or assisted living) in the future. At a minimum, your plan should protect some of your assets from exposure to Long-Term Care expenses if you become disabled. You might want to purchase insurance to ensure you have coverage for long term care in the future.
- Beneficiary Designations: Always review your beneficiary designations for your assets and how they fit with your wishes and your estate plan. Let’s say you intend to divide your assets equally among your three children, Jane, Susan, and Michael. You have a home, valued at $500,000 and $1,000,000 in other assets. You sign a Will and Trust to divide the assets equally. But, you have a beneficiary designation on your home. That designation sends it to one of the children, Jane. Unfortunately, the beneficiary designation will thwart the plan. This would result in Jane getting the house and 1/3 of the other assets, or $833,000, while Susan and Michael would each get only $333,000. If you intend to divide the value between your three children, you could transfer your home to the trust and then divide your assets among your three children.
- Special Needs: If any beneficiaries have special needs, the plan should consider whether the preservation of their needs-tested benefits is desired. If so, the plan should leave the assets to the Special Needs beneficiary in a carefully designed sub trust or stand-alone trust for their protection.
- IRAs/ Retirement Plans: IRAs and Retirement Plans are an increasing portion of wealth as we grow older. Who you choose as your beneficiary and how you designate them will dictate how rapidly they will be required to withdraw those assets (and pay taxes on them) after your death. If you designate a trust as beneficiary, you could obtain asset protection for the assets, depending upon the trust’s terms, and also “stretch out” the income, possibly over decades, dramatically increasing the overall inheritance. Your plan should take this into consideration.
- Income Taxes: The plan should consider the impact of the beneficiaries’ income tax brackets. For example, a Roth IRA (which is income tax-free) may have significantly more value to a beneficiary in a higher income tax bracket. The same is true with a life insurance policy. These two assets are INCOME TAX FREE FOREVER, unlike all other assts. A traditional (income taxable) IRA may be better to left to a beneficiary in a lower income tax bracket, or via an IRA Trust, because the income taxes would diminish it by less and the after-tax value would be greater.
- Property taxes: The plan should consider the impact on property tax value of giving the property to different beneficiaries. Some states freeze the value of certain property for local property tax purposes. In some states, if the property is inherited by the owner’s child, the child may also keep the owner’s property tax basis. This may result in much lower property taxes on an ongoing basis. Of course, this may not matter if the beneficiary is not going to retain the property. “Tax Basis” of the property is a very important component of any inheritance.
What to do Next...
As you can see, Estate Planning is much more than simply “reducing taxes.” It has tremendous potential to carry out your wishes, help your loved ones in very specific ways, and allow you to carry out your wishes and desires exactly the way you want. This is effective estate planning from my perspective. If you ever want to know more and have some questions, just ask and I’ll give you my thoughts and insights into your situation. Or if you have more than just a question, let’s get together and chat, it’s complimentary so no need to worry about fees. Whichever way works for you, I want to make sure everyone understands the power of estate planning in their life. When you do, you will have NO.MORE.TEARS.
