The doubling of the estate exemption under the Tax Cuts and Jobs Act of 2017 means that only the wealthiest of Americans will now be subject to the estate tax. Those without a taxable estate may erroneously conclude that an estate plan is unnecessary and/or can be accomplished without deliberate and strategic planning. This view will result in intra-family hostilities, inadvertent beneficiaries, missed opportunities to save on taxes, and the squandering of significant inheritances.
Below, we have outlined 10 critical issues that must be addressed even when not planning around an estate tax. Contact us to schedule a consultation to start creating your personalized plan.
Executing a will as part of an estate plan allows parents to select a guardian for their minor child(ren) should something happen to the parents. Absent formal instructions from parents, a court will have little information to rely on when deciding who should be granted custody and will use its own discretion to determine what it believes serves the best of interests of the child.
Aside from naming a guardian of the person to care for the child’s needs, parents can also appoint someone to manage the assets left to the child while the child is a minor and beyond.
2. Beneficiary Planning
Assets left directly to beneficiaries are exposed to that beneficiary's creditors. Should that beneficiary get into an accident, get divorced, or have creditor issues, all of those assets may be exposed and subject to forfeiture. A well-crafted estate plan can segregate these assets so the inheritance is protected from outside predators while still accessible to those it is intended to benefit.
3. Special Circumstances
No matter what social or economic atmosphere one finds oneself, addiction, and substance abuse are unfortunate everyday realities. Leaving assets to a loved one with these issues may not only result in an inheritance being squandered but may even further enable the beneficiary’s addiction. Through the use of creative planning techniques, an estate can be protected and used to incentivize and reward constructive and healthy behaviors.
4. Special Needs
Beneficiaries with physical and developmental disabilities are often entitled to government assistance for treatment, therapy, and vocational training. Leaving an inheritance directly to these beneficiaries can disqualify the beneficiary from the services they are entitled to until the inheritance is depleted. With proper planning, an inheritance can supplement existing government assistance, providing additional funds for needs not being addressed in support of a vulnerable loved one.
5. Blended Families
Blended families inherently have complications that need to be addressed purposefully. One may want to differentiate between the inheritance received by biological and step-children or provide for a new spouse while reserving an inheritance for children not related to that spouse. These and other scenarios should never be addressed with handshake agreements between family members and may require sophisticated planning to ensure the client’s wishes are respected.
For charitably inclined individuals, philanthropic goals incorporated in an estate plan can provide tremendous returns for charities while simultaneously creating significant tax savings for the client. Many otherwise charitably inclined individuals concerned about having enough for retirement can leave bequests to charities upon their passing. Those concerned about leaving an income stream for beneficiaries can create charitable remainder trusts (CRT) with the remainder of the trust going to charity after a set period, or alternatively, establish a charitable lead trust (CLT) providing the charity with an income stream and the remainder to the grantor’s beneficiaries.
CRTs or CLTs can reduce built-in capital gains tax, create income tax charitable deductions, and reduce estate tax if that is a concern. Using insurance in a well-crafted plan with some of these techniques allows for greater leverage and even more significant gifts to charity.
7. IRA Planning
A significant portion of many Baby Boomer's wealth is tied up in IRAs and other qualified assets. With proper designation and election, IRAs can be “stretched” to extend over the course of a beneficiary's lifetime providing substantial tax-deferred growth. This valuable strategy must be incorporated with other areas of one’s estate plan to ensure other estate planning objectives are met including beneficiary planning and asset protection.
Additional tax efficiencies can be realized by utilizing IRA qualified charitable distributions and income in respect of a decedent (IRD) property for charitable gifts and bequests.
8. Avoiding Probate
Probate, the process of a court administering and distributing a decedent's assets is an expensive, time-consuming, and public process. Many clients are unaware that having a will alone is not enough to avoid probate. Revocable trusts, however, allow a successor trustee to step in and administer the grantor’s estate upon passing as well as act to manage trust assets should the grantor become incapacitated. Revocable Trusts will usually include expansive provisions that permit the successor Trustee to make payments on the Grantor’s behalf for all medical, social, and financial needs.
9. Business Succession Planning
Many families have their wealth tied to a family business. These unique assets create complex planning questions including whether to keep the business for the next generation, whether an exit strategy is appropriate, how to divide the business fairly between beneficiaries involved and those not involved in the business operations and how to continue the business in the absence of a critical founder. Waiting until it’s too late to create a strategy for addressing these concerns can destroy a successful venture and extinguish a source of stable revenue and family pride.
10. Health Care Decisions
In case of a medical emergency or if you become incapacitated, you should have the requisite health care documents prepared to direct your family as to how to care for you. Some of the health care documents you should ensure are in place as part of your estate plan include a medical power of attorney/health care proxy, a living will, a HIPAA waiver, and a declaration of a pre-need guardian. Planning for these sorts of situations can sometimes be difficult, but pales in comparison to the onus of requiring a loved one to make life or death decisions on your behalf without knowledge of your wishes.