A Few Words Before You Go; Estate Thinking and Planning
I wanted to talk with you about a topic most people usually don’t want to discuss: planning for death. Or to put it into more polite terms, Estate Planning. The subject is troublesome because most of us can’t predict when it will happen. But it will happen, to all of us. And when it does, there is usually no asking the Grim Reaper for ten more minutes to make last minute arrangements. The term “estate planning,” may sound grand, something only the ultra-wealthy have the time for, but the truth is quite the opposite. If you have anything worth passing on to your loved ones, taking a few minutes to think about it is more than worthwhile…it is necessary. For those of us with much to leave, it will require more complex planning. When planning your exit, you should consider what you want to happen and how you would like for it to be carried out. You must design a plan that instructs your wishes after death. Along with choosing who you would like to leave your assets to, individuals otherwise known as beneficiaries, your biggest chore is thinking about how you would like those beneficiaries to receive the assets. For example, you may have a child whom you dearly love, but believe they need time to learn how to handle money responsibly. Perhaps they would benefit more from a monthly check rather than a lump sum of anything.
Or you may want to have access to all of your assets while living, and leave what you have left to your beneficiaries. And once these decisions have been made, a few more questions arise - Should you use a will or a trust…or both? Whom do you appoint as the executor or trustee? Should you remove assets from your estate while alive? As you can see, a strategy for leaving assets is only part of the struggle. Because of the taxes and expenses that can occur upon death, your primary goal when drafting an exit strategy is to have assets remaining to actually transfer. So how do we get there? Let’s clarify some basics to point you in the right direction.
A Will is perhaps the basic cornerstone of estate planning. A will provides instructions regarding your assets well beyond the grave; how they will be distributed, who will administer your wishes (also called an executor), who will be named as the legal guardian, etc. It also allows you to designate end-of-life medical decisions (otherwise known as medical directives). One potential drawback is that Probate (going to court) is required. Along with making your bequest public information, your estate will be responsible for court fees. This should be considered as your will may be contested by another family member (remember, it is public).
However, a will can serve as your “quarterback,” so to speak, and can prove vital when used in combination with other tools. It is a bare essential for anyone with anything to leave behind. It is certainly better than dying intestate or not having any kind of successor instructions. Though intestacy laws vary by state, they generally distribute property to surviving spouses or descendants upon death. This may work for married couples with no children, however most families are much more complex. The use of a will is a great starting point but there are also other tools worth considering.
A second option is a trust. A trust is a legal entity used to pass along assets and avoid probate. They are also managed by an administrator (referred to as a trustee) usually of your choosing. There are at least 5 primary types of trusts. A Living Trust is a viable alternative to a will. When utilized properly, it can be used in conjunction with a will or take place of one entirely. Again, one key difference between a will is that a Living Trust avoids probate entirely, allowing you to leave bequests uncontested! Since 3 – 8% of assets are taken in court fees and probate costs, and 6 months to 2 years is the average time it takes for a modest estate to get through probate, this can be a very beneficial option. It can streamline the experience and expedite the distribution of your estate.
However, a downside of a Living Trust is that you must be alive while the trust is active, (hence the name). In many cases, you can name yourself a trustee. Just remember, because you still have decision-making capabilities, and are directly benefiting from these assets while alive, they still belong in your estate. This could be an issue if you have many assets and a large enough estate to incur estate taxes. At the moment, the estate tax exemption is $12.06 million for individuals or $24.12 million for married couples. This may not seem like a problem for those with less than tens of millions, but congress has discussed lowering the exemption to $5 million, or lower! Keep in mind, should you go over that limit, your estate (the limit) could easily end up being taxed at 40%.
An answer to a potential estate tax issue is the use of an Irrevocable Trust. This vehicle avoids probate but also takes assets out of your estate while you are alive in the form of a gift. Consider this option if you do not need to live on these assets, and giving them away to beneficiaries while alive is acceptable to you. There are other types of trusts with many different objectives. There are retirement accounts, joint accounts, and many other strategies one can use to pass along assets while minimizing taxes and expenses. Estate Planning can be very complex. We strongly suggest coordinating with not only a proficient financial planner but also a tax and estate attorney. The Financial planner/advisor can suggest a strategy, while an attorney can create the actual Will and/or trust(s) needed. While there are many choices at your disposal, the correct choices are the ones that will fit your specific needs.
You might think this article simply reaffirmed what you already know. Before you proceed, consider these statistics:
55% of Americans die without a will or estate plan each year
71.6% of Americans do not have an up-to-date will
Only 50% of Americans over age of 65 have an up-to-date will
Only 15% of Americans earning over $150,000 have an up-to-date will
33% of Older Americans have not discussed end-of-life plans with family
Chances are, you probably had beforehand knowledge of estate planning. But, more importantly, have you acted on it? I share these numbers knowing that 47% of individuals say that they have not taken the time to either create or update their arrangements. The remaining don’t believe their assets are worth worrying about. Still, simply thinking about and reviewing your assets is worth the time. Many come to realize they have more than they initially believed. It is critical that you implement some sort of plan, no matter how small or limited. Fortunately, there is a collection of legal arrangements at your disposal and an array of professionals that can help you through the planning process.
Ultimately, the answers to these questions must be provided by you, your personal situation, and your thoughts and wishes. Hopefully, this has been enough to spark an interest and get you started on what you already know you should. Or perhaps you are confused, have questions, or want some guidance through the maze of information. If you still have questions or concerns about your portfolio, whether you are on the correct path, or whether you think “all is lost” we can help! Contact me through our website or call us at 1-800-310-2828. We can help you maintain growth during these times!
