The Wealth Counselor
Did you know that April is National Financial Literacy Month?
This is the perfect time to sit down with your loved ones to discuss your financial and estate planning objectives. To help you move the discussion forward, we would like to suggest three action items:
(1) Gather around the computer monitor with your family and view this webinar recording “The Family Estate Plan: Why You Should Have One and What Happens If You Don’t”
(2) Register for the June 21 webinar “Life Expectancy and Health Care Planning”
(3) Download this Six-Step Checklist Toward Successful Estate Planning, and then make a “to do” list of action items.
Your loved ones are counting on you to preserve the family legacy and to minimize the confusion and chaos that can occur when families fail to have a plan in place. For more information, we recommend that you visit www.estateplanning.com
Why Estate Planning Is Still Important
With the federal gift and estate tax exemption currently at $5.25 million per person ($10.5 million for married couples), some with “smaller” estates may wonder if they need to do any estate planning. But there are many reasons to do estate planning other than to avoid estate taxes. In fact, for most Americans, the recent tax legislation has brought incredible freedom: instead of jumping through hoops to avoid estate taxes, we can now concentrate solely on the real reasons we need to do estate planning: to take care of ourselves and our families the way we want.
In this issue of The Wealth Advisor, we will examine why proper estate planning is still important, regardless of the size of your estate. We will also address issues to consider if you have already done your estate planning.
Avoid State Inheritance/Death Taxes
Ensure Your Assets Are Distributed the Way You Want
Even with a will, it is probable that not all of your assets will go through probate. Assets with a valid beneficiary designation pass outside probate to whoever you have named as beneficiary(ies) and property owned jointly with right of survivorship will automatically transfer to the survivor. But if your beneficiary or joint owner is a minor or is incapacitated when you die, the court will get involved to protect their interests. If your beneficiary or joint owner has died before or simultaneously with you or the designation/title is otherwise invalid, those assets will have to go through probate and will be distributed according to your will or, if you don’t have one, the default state law.
Many older people add an adult child to the title of their assets (especially their home) as joint owner, often to avoid probate. But this can create all kinds of problems:
Planning Tip: Probate can often be avoided by using joint ownership and beneficiary designations, but, in our experience, it most often leads to unintended consequences and has unintended risks. A far better way to avoid probate is to establish and fully fund a revocable living trust. With a living trust, you keep control over your assets, avoid uncertainty and unintended consequences and avoid the risks associated with joint ownership. That’s why a living trust plan often is preferred by many clients and professionals alike.
Provide Responsibly for Minor Children or Grandchildren
In most states, a parent may nominate a guardian for minor children in a will or by a separate document. If both parents die before a child reaches legal age, the court will have to decide whether to accept the nomination or appoint someone to raise that child. If the last parent to die has made no nomination, the court will act without knowing whom the parent would have chosen.
On the other hand, establishing a trust for your children’s or grandchildren’s inheritance lets you (not some court) keep control of the inheritance, decide when each child or grandchild will receive it, determine what controls will be put in place to protect the beneficiaries’ inheritance from themselves and others, and select someone you know and trust to manage it.
Protect Inheritances from Creditors and Predators
Provide for a Second Spouse and Your Children
Naming a spouse who is not the parent of all of your children as a joint owner or beneficiary of life insurance or retirement accounts can be a problem because that means your spouse will have control of the proceeds if you die first. Promises may be made now to include your children that are not your spouse’s children, but that may not work out if you are the “glue” holding your children and their stepparent together.
Planning Tip: Lifetime trust planning is often the best solution. Through a trust, you can provide your spouse with lifetime income (or income until remarriage), yet keep control over to whom, when and how whatever assets are not needed for that purpose are distributed.
Provide for a Loved One with Special Needs
Planning Tip: A special needs trust can provide for a loved one without jeopardizing valuable government benefits. It is carefully designed to supplement and not jeopardize the benefits provided by local, state, federal or private agencies.
Plan for Disability
Planning Tip: You can give someone power of attorney, but sometimes a power of attorney will not be accepted by whoever has control of your assets. That, and the fact that a living trust will provide detailed instructions and directions that a power of attorney will not, is why a living trust is much preferred to reliance on a power of attorney in the event of incapacity.
Health care documents are critical. You need to give someone the power to make health care decisions for you if you are unable to make them for yourself. A living will can speak for you if you are unable and tell your doctors whether you want to be kept alive in a vegetative state or allowed to die. Federal and state laws control to whom your doctors can disclose your medical situation in the absence of your written direction, so you need to give those directions while you are able.
Finally, the exorbitant costs of long-term care, most of which are not covered by health insurance or Medicare, can wipe out a lifetime of savings. Consider long-term care insurance to protect your assets.
Protect Your Business and Other Assets
Planning Tip: Asset protection planning can and perhaps should be included in your estate planning. The time to plan for asset protection is before there is any potential threat. Once the threat of a claim arises, it may be too late.
Planning Tip: If you are a business owner, business succession planning also should be a part of your estate planning. Nobody lives forever, so someday, your business will pass out of your control. Planning ahead can provide the time needed to grow and develop your business, groom a successor and look for a potential buyer if desired. If an adult child will take over the business, proper planning can also help you provide fairly for any children not involved with the business.
Make Meaningful Charitable Gifts
Pass Down Your Values to Future Generations
If you have young children, you can select someone who shares your views to manage their inheritance, and you can provide a letter of instruction to your chosen guardian with your views on the care of your children. Grandparents can provide for private or religious education. Even end-of-life and funeral/burial instructions can be personal and convey your values. We can help you with other ways to pass on your accumulated intellectual, spiritual, and human wealth, too. Final gifts to your church or synagogue, university, hospital or other favorite cause will let your family know that giving is important to you.
If you have already completed your estate planning, this is an excellent time to review your plan and make sure it is what you really want, especially in light of the changes in the income tax law that went into effect on January 1. Now that we have “permanent” estate and gift tax laws, you and your estate planning professionals have more certainty under which to plan than you have had in the past 12 years. If your estate is larger, be sure to take advantage of the high exemptions and techniques that are currently available. With the President looking to close more loopholes, many longstanding techniques may not be available much longer.