Estate Planning in a Nutshell

Estate planning is all about four things:

1. Staying in Control
2. Minimizing the tax, administrative expenses, and other headaches associated with handling an estate,
3. Getting your stuff where you want it to go, and
4. Protecting vulnerable beneficiaries.

Staying in Control

While everyone knows they will die someday, most of my clients did not realize that they will most likely be disabled for some period before they die. In this blog, I am using the word “disabled” as a term of art meaning “legally incapacitated,” to the point where somebody needs to handle your affairs. Children under age 18 are also “disabled.” When that happens you need to have a legal mechanism in place for this. Usually some form of a power of attorney or trust will work. Otherwise you will find yourself going through the “living probate” of a guardianship and/or conservatorship. Staying in control also means you want to designate who will be the guardian for your children and who will be managing your estate after you die. For that you need a will and often a trust where you designate your personal representative and trustee.

Minimizing the tax, administrative expenses, and other headaches associated with handling an estate

You never have to deal with the consequences of your own death so why bother to plan for it? Because you care about those that do. Any while you may not find administering an estate troublesome, your surviving loved-ones might. Estate planning is not about you, it is all about taking care of your survivors. As with most things in life, planning ahead makes things easier in the future.
The federal estate tax and generation-skipping transfer tax is not a concern anymore for most people. You need to have an estate larger than $5,430,000 (or twice that if you are married) before needing to plan for that. Many states, e.g., Virginia, do not have an estate tax at the state level. Other states, however, do and some also impose an inheritance tax which taxes transfers more if they are to unrelated people. Probate can be expensive, time consuming, public, and burdensome to your survivors. Typically a will and a trust are employed to minimize the tax and other expenses and headaches associated with administering your estate.

Getting your stuff where you want it to go

If you die without a will, the state has one for you. It is typically very generic: “To Spouse if living, if not to children.” That is if you die having been married only once. If you have children from a previous marriage the will is different, depending on what state you live in. If that plan does not work for you, you need to specify otherwise in your will or trust.

Protecting vulnerable beneficiaries

Most wealth these days is transferred by beneficiary designations and rights of survivorship. Think life insurance, 410(k) and IRAs for beneficiary designations, and joint accounts or houses for rights of survivorship. The problem with counting on these forms of property transfer is what happens if the person you are transferring to is dead or disabled? Now what? Let’s say you leave a $1 million insurance policy to your spouse as the primary beneficiary and your children as the backup. Your spouse predeceases you and your children are teenagers. Can they accept the $1 million? No, they are under a legal disability called “minority.” They cannot open up a bank account or cash checks until they turn 18. So, the check will be paid into the court and the court will open a form of probate known in most states as a conservatorship. Once the child turns 18, however, the conservatorship is terminated and the funds paid to the child. I often ask my clients “How many financially responsible 18-year-old orphans do you know? What do you think would happen to this child if he/she suddenly received $1M?” Most of my clients predict the child will self-destruct. If you want to protect a vulnerable beneficiary you need two things: (1) a trust; and (2) the assets need to be set up so that they will fund the trust upon your death. Your attorney can take care of the first, but you need to work together with your attorney and/or financial planner to handle the second matter and make sure the plan actually works.



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