LAW FIRM BLOG
Reasons To Create Estate Plan
November 20, 2019
No matter how modest, everyone has an “estate.” It is comprised of everything you own--your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions--and you can’t take it with you when you die. When that happens you probably want to control how those assets are given to the people or organizations you care about. To ensure your wishes are implemented, you need to provide instructions stating whom you want to receive your property, what you want them to receive, and when they are to receive it. You will, of course, want this to happen with the least amount paid in taxes, legal fees, and court costs.
What is an Estate Plan?
What is an estate plan, and how does it differ from a will? A will may be a relatively simple document that sets forth your wishes regarding the distribution of property; it may also include instructions regarding the care of minor children. An estate plan is more comprehensive. Not only does it indicate the distribution of assets and legacy wishes, but it may help you and your heirs pay substantially less in taxes, fees, and court costs, as well as avoid probate: an expensive, lengthy, public process.
For these reasons a revocable living trust is preferred by many families and professionals. It can avoid probate at death (including multiple probates if you own property in other states), prevent court control of assets at incapacity, provide maximum privacy, is valid in every state, and can be changed by you at any time.
Assets can stay in your trust, managed by the trustee you selected, until your beneficiaries reach the age you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, spouses, and irresponsible spending. A living trust is more expensive initially than a will, but many people consider it to be a financial bargain.
Too many people don’t engage in estate planning because they think they don’t own enough, they’re not old enough, they’re busy, think they have plenty of time, they’re confused and don’t know who can help them, or they just don’t want to think about it. None of us really likes to think about our own mortality or the possibility of being unable to make decisions for ourselves. Unfortunately, we can’t predict how long we will live, and illness and accidents happen to people of all ages.
It is wise to create a basic estate plan at the minimum. Moreover, a comprehensive estate plan can do far more than simply provide a road map for the distribution of your assets after death. Estate planning involves using wills, trusts, advance directives and beneficiary designations on accounts. Nevertheless, most people have neglected to put such plans in place. According to a recent survey more than half of American adults—and 78% of millennials—lack basic estate planning documents like a will or living trust, according to the American Association of Retired Persons (AARP). If that is your case, here are reasons why you should create your estate plan today.
Appoint an Executor
Executors make sure all your affairs are in order, including paying bills, canceling your credit card accounts, and notifying the bank and other business establishments at your death. Because executors play the biggest role in the administration of your estate, you’ll want to be sure to appoint someone who is reliable, trustworthy, and organized (which may or may not always be a family member).
Prepare for Loss of Capacity
What happens if you become physically or mentally incapacitated and you are no longer able to make your own decisions? Without proper planning, nobody (not even your spouse) will be able to pay your bills, access your accounts or sign documents on your behalf. If your name is on the title of your assets and you can’t conduct business due to incapacity, only a court appointee can sign for you. The court, not your family, will control how your assets are used to care for you through a conservatorship or guardianship (depending on the term used in your state). It can become expensive and time consuming, it is open to the public, and it can be difficult to end, even if you recover.
Estate planning lets you decide who will manage your financial decisions if you become unable to. If you don’t plan for this possibility, you could end up with a court appointed social worker who will do what the court directs them to, regardless of how you feel. With a power of attorney, the choices are still yours. Incapacity, or even death, could strike anyone, at any time. In fact, you have a one in five chance of experiencing a period of incapacity prior to reaching retirement age. Without a plan the courts will select the person to manage your affairs. Alternatively, in your estate plan, you can authorize someone of your choosing to act for you in the event you can no longer act on your own, designating an individual as a power of attorney.
Plan for Minor Children
An estate plan allows you to make an informed decision about who should be caretaker of your minor children, if both parents pass away. Absent a will or trust, the court will take it upon itself to choose among family members or a state-appointed guardian. Having a will or trust allows you to appoint the person(s) you want to raise your children and, also, make sure it is NOT someone you do not want to raise your children. Questions often arise about who would be best to serve in those roles, and can even result in family infighting. Setting up an estate plan can prevent squabbling among family members and costly related legal expenses.
If you are leaving assets to minor children, you should not leave those assets to them outright. A proper estate plan will allow you to choose who will take care of the money you leave them. If you don’t create a trust for minor children, then the court will appoint a conservator to control the money for them until they turn 18. Establish an age for your children to receive their inheritance. And name someone you trust to manage your children’s inheritance should something happen to you.
Avoid Dying Without a Will
If you leave no will when you die, it is called dying “intestate” and your assets will be distributed according to the probate laws in your state. In many states, if you are married and have children, your spouse AND children will each receive a share. That means your spouse could receive only a fraction of your estate, which may not be what you want. Without a plan, your assets pass to your heirs according to your state’s laws of intestacy. Your family members (and perhaps not the ones you would choose) will receive your assets without benefit of your direction or of trust protection. The reality is, if you don’t make the decision now about who should receive your assets, the court will do it for you. If the court is required to do this for you, it can take years to complete and often leads to family disputes. Moreover, an estate plan allows you to customize inheritances for certain beneficiaries, especially those who might be young, immature or irresponsible. Each state has a succession formula for who receives money and property left behind. The last person on that list happens to be the state. If the court can't find anyone, it goes to the state where you passed away. You don’t want to do that. With a plan, you decide who gets your assets, and when and how they receive them.
What if your family is the result of multiple marriages? Without a plan, children from different marriages may not be treated as you would wish. For example, a parent may want to leave a different inheritance to biological children than to stepchildren, or the parent may want to protect their biological family’s inheritance in the event that a spouse remarries. With a plan, you determine what goes to your current spouse and to the children from a prior marriage or marriages.
Protect Children with Special Needs
Children with special needs require specialized planning to avoid losing government benefits. Leaving assets to a “special needs child” would not only disqualify them from those state funds, but also cause them to have to spend that inheritance down before they would qualify again. Proper planning can ensure that the child will still qualify for state assistance and allow the inheritance to supplement those funds and make sure the child receives the best care for years to come. Without a plan, a child with special needs risks being disqualified from receiving Medicaid or SSI benefits, and may have to use his or her inheritance to pay for care. With a plan, you can set up a supplemental needs trust that will allow the child to remain eligible for government benefits while using the trust assets to pay for non-covered expenses.
Keep Assets in the Family
Would you prefer that your assets stay in your own family? Without a plan, your child’s spouse may receive your money if your child passes away prematurely. If your child divorces his or her current spouse, half of your assets could go to the spouse. With a plan, you can set up a trust that ensures that your assets will stay in your family and, for example, pass to your grandchildren.
Maintain Financial Security
What would happen to your spouse and children if something were to happen to you? Would they have the financial means to survive? Without a plan and the income replacement provided by life insurance, your family may be unable to maintain its current living standard. With a plan, life insurance can mean that your family will enjoy financial security. You can skip life insurance if you have no one to support or you have enough money invested to provide for your spouse or children. Otherwise, you’ll need enough coverage to meet your family’s expenses when you can’t. Term life insurance, which carries a fixed premium over the life of the term (usually 20 years), can be surprisingly affordable, even for large amounts.
Protect Against Lawsuits
As people grow wealthier, they often become more susceptible to frivolous lawsuits. Estate planning helps preserve your family’s wealth by removing your name from your assets and putting them into legally-protected vehicles, such as trusts or limited liability entities. Asset ownership, insurance, limited liability entities, irrevocable trusts and asset protection trusts are all methods designed to protect your assets from creditors in the event of frivolous claims.
Review Retirement Accounts
Do you have an IRA or similar retirement account? Without a plan, your designated beneficiary for the retirement account funds may not reflect your current wishes or may result in burdensome tax consequences for your heirs. With a plan, you can choose the optimal beneficiary. When reviewing assets, consider what type of account they’re held in and what the beneficiary options are for each account type. For instance, distributions from IRAs and Roth IRAs can be “stretched” so that they may last for the entire lifetime of the beneficiary, provided the recipient qualifies for that option and elects to receive it. If you're leaving money to a child or grandchild who is significantly younger than you, this benefit could be substantial, allowing tax-deferred or tax-free growth to continue for many years—even decades.
Control Business Ownership
If you own a business and have no estate plan, who will take it over? Will the company continue? Will your family or partners lose control of the business. If you plan to keep it in the family, consider creating a structure that makes it easier to transfer the business’s assets to other family members, such as a family limited partnership or a family limited liability company.
Perhaps your spouse doesn’t want to inherit the business, but would rather receive, for example, a life insurance benefit and leave the business to a partner or key employee. Without proper planning, the business can be left to someone who doesn’t want it. With a plan, you choose who will own and control the business after you are gone.
Generally, “probate” is the court proceeding that takes place after someone dies to determine who will receive the deceased’s property and appoint someone to transfer it. Contrary to common belief, all estates must go through probate, with or without a will. Having a will, however, speeds the probate process and informs the court how you’d like your estate divided.
Probate is a manageable process, but it is usually time consuming, public, and costly. The probate process, by which your executor settles your debts and disburses your property, could be a simple matter of filling out forms and paying a few hundred dollars in filing fees. But it could also be a many months-long ordeal that costs thousands of dollars in legal fees and other expenses. An estate is subject to probate if the assets exceed $30,000 or real estate is owned. If you have assets valued at more than $30,000 that are not in trust or other instrument which avoids probate, then in New York your estate will need to go through probate proceedings.
There are also expenses for attorneys’ fees and court costs. Legal costs and probate fees can be quite substantial, even for the most basic case not involving any conflict. Attorney’s fees and court costs may possibly take up to 5% of an estate's value. With a plan, you can structure an estate so that probate can be avoided entirely.
Privacy is another consideration for most people in wanting to avoid probate. Aside from the cost and delay, the proceedings are matters of public record. Information filed with the court in a probate proceeding, including the provisions of your will, along with lists of what property and belongings you owned, is freely available to anyone looking for the information. For example, relatives and creditors could get your probate information to challenge your will. Probate requires that your executor notify your relatives and give claimants time to challenge your will. If you don’t want meddlesom eyes looking at what you left, or your prodigal child upset at what you didn’t leave, make arrangements to avoid probate.
Consider also non-probate transfers as some property isn’t subject to probate at all. Jointly-owned property and assets that let you name a beneficiary (for example, life insurance, IRAs, 401(k)s, annuities, etc.) are not controlled by your will and will transfer to the new owner or beneficiary without probate. Life insurance death benefits and the money in retirement accounts pass directly to your named beneficiaries, and property owned jointly with the right of survivorship--say, a house or a car--transfers automatically to the co-owner. You can also arrange for bank and other accounts to be transferable or payable on death, giving the recipient immediate access to the money. Reduce your estate enough and you could qualify for small-estate treatment, which is much simpler than regular probate. Most states offer simplified probate or waive it altogether for estates valued at $200,000 or less, depending on the jurisdiction.
Make Health Care Decisions
Spare your loved ones from difficult medical choices during your lifetime. With proper planning, you can make medical decisions now, and spare your loved ones the anguish (and possible disagreement) of making those decisions later. How would you feel if your family ended up in court battling over the right to make healthcare decisions for you? What if they ended up keeping you on life support despite the fact that you would want to be taken off? If you’re unable to make medical decisions for yourself, having a healthcare proxy and living will can help make sure that you receive the care you need and desire. A health care proxy names a representative to make medical decisions on your behalf. A living will specifies the medical treatment you do or do not want if you are unable to communicate.
Avoid Family Squabbles and Potential Legal Challenges
Unless you provide specific instructions in your estate plan, your executor will be left to decide how to distribute your personal property. An estate plan can help you to avoid family fighting over your possessions, after you die. Memorializing your wishes minimizes the family discord because there can be no possible disagreement about what you wanted and what happens after you’re gone.
A will sometimes leaves such tangible personal property to a spouse or children, leaving them to sort out who gets what. The process may be acrimonious. To avoid family conflict, state in your will a list of bequests and update your list frequently. You can also specify a strategy for divvying up the rest of your property. From your survivors’ point of view, an equitable distribution may have nothing to do with monetary value. Discuss your plans in advance, or better yet, give gifts now, while you can still receive the recipients’ thanks.
Reduce Estate Taxes
Another major goal of estate planning is to transfer your assets to your heirs while maintaining the smallest tax burden possible. It doesn’t take major planning to reduce or even eliminate estate taxes, if the right exemptions and deductions are used. But, without an estate plan, your heirs will likely be forced to pay the government quite a bit. If you leave behind an estate in excess of $11.4 million, you need to make a plan for estate taxes, or the so-called “death tax.” Some states also have an estate or inheritance tax with a different threshold. In New York, the threshold is $5.85 million (in 2020). If you or your family has accumulated a substantial amount of wealth and you plan to transfer it to loved ones upon your death, the estate planning process can help you develop an approach to do so in the most tax-efficient way possible.
There are three types of taxes to consider when transferring your money: the estate tax, gift tax and generation-skipping transfer tax. Since the IRS places limits around how much money you can transfer and to whom without being taxed, a good estate plan outlines a wealth transfer strategy that attempts to minimize the taxes owed by you or your estate. Yes, the federal estate tax exemption is quite high now, but states have not raised their exemption to match the federal exemption. This means that some estates may be left paying estate taxes which can be completely avoided with proper planning. Currently, New York and 16 other states plus the District of Columbia impose either an estate or inheritance tax or both. Maximizing the wealth you transfer to your beneficiaries (and minimizing transfer taxes) can be an important component of the estate planning process. The Tax Cuts and Jobs Act of 2017 expanded the amount that individuals may give away at death—or during life—without triggering transfer taxes. The new law offers several advantages, including an increased exemption amount until 2026 and portability, which means spouses can share one another’s exemption. You can make annual tax-free gifts up to $15,000 in 2019 (and double this amount for married couples). Additionally, you can pay medical and educational expenses for someone else without incurring the gift tax. Also consider other issues around how best to manage the intergenerational transfer of assets. For example, if children aren’t old enough or mature enough to handle a large inheritance, an estate plan can address this by making provisions through a trust.
Provide for Pet Care
Senior citizens are often reluctant to get a pet because they are concerned about what will happen to the pet when they die. Pets will need to be cared for in the event that the owner passes away. You want to indicate who gets custody of pets in death and leave money in a “pet trust” to make sure animals are taken care of.
Plan for Philanthropic Giving
Charitable planning is often included in the estate planning process. This includes establishing philanthropic intentions and developing a plan to ensure that such goals are implemented into the future. You may decide to create a family foundation, set up a charitable trust, or participate in a donor-advised fund to support the causes important to you. The sooner you start to plan, the more you can make your intentions known to your family members and incorporate them into the process. If you have philanthropic goals—whether from a personal fulfillment, or a tax-planning perspective—an estate plan can help make sure your objectives are met. Going through the planning process allows you to choose a charitable cause that’s important to you, select the assets you wish to give and determine the best way to make your gift. There are a number of ways to incorporate those philanthropic goals into an estate plan.
Charities can be named as beneficiaries in a will. You could name your favorite charity or a trust as a primary or a contingent beneficiary. For example, a charity can be designated to receive a certain percentage of your retirement plan assets. Or if you were seeking to establish an income stream for a charity throughout your lifetime, one possible option would be to establish a Charitable Lead Trust (CLT). Upon termination, the remaining balance would then go to the grantor’s beneficiaries. A Charitable Remainder Trust (CRT) would do the reverse, giving beneficiaries an income stream while the grantor is alive, with the remainder going to the grantor's favorite charity. Either option—CLT or CRT—can have multiple benefits, among which are: reducing or eliminating capital gains tax on assets that have appreciated, claiming income tax deductions for charitable giving and reducing estate taxes.
Disinherit Individuals Who Would Otherwise Inherit
Another reason for having an estate plan is to keep your property from transfering to someone you don’t want to have it. Yes, you may wish to disinherit individuals who may otherwise inherit your estate if you die without a will. Because wills specifically outline how you would like your estate distributed, absent a will your estate may end up in the possession of someone you did not intend (such as an ex-spouse with whom you had a bitter divorce).
Choose Burial or Cremation
You may already have a strong sense of how and where you'd like to rest for good, based on your religious beliefs or personal preferences. If you don’t, the decision may come down to price. The average cost of a funeral, not including cemetery expenses, was $6,560 in 2009 (the most recent year for which data was available), according to the National Funeral Directors Association. Choosing cremation could save money, depending on whether you have a viewing before the cremation and where you want the remains to be interred or scattered. A direct cremation--one that doesn't include a visitation or funeral service--typically runs $1,500 to $1,800. You can spare your family some headaches by signing a legal authorization for your cremation in advance. Otherwise, depending on your state's laws, each of your children may have to give consent for cremation, which could be a hassle if your family members are spread across the country or disagree about whether you should be cremated. A burial without a viewing could also save money, but you’ll still have to factor in costs for a casket and any cemetery-related expenses, such as a plot, marker or vault. In most states, including New York, you can designate an “agent for body disposition” -- a person who has legal rights to make your final arrangements -- which can override next-of-kin rules.
Plan your Memorial
The tone of funerals has shifted. It used to be an event where people came to mourn. Now it's an event where we come to celebrate a life. You can personalize your “party” by leaving your family with photographs, music and objects to include in a service. And you’re not limited to the usual ideas. In lieu of a viewing, you could request that your friends and family commemorate your life at a place you love: a restaurant, a beach or a park. Most states don’t require you to use a funeral home’s services. But don't let your deliberate plans go unseen. If you include them in your will, your survivors may not see the instructions until it’s too late because they may not be able to get the will from your lawyer or safe-deposit box in time. Make a separate list detailing your funeral and burial wishes, and give copies to your family.
Gift Family Heirlooms
Most of us have personal belongings that hold significance to us, such as family heirlooms or sentimental items. We tend to promise those items to people we care about. If you have the family’s photo album or your great grandfather’s pocket watch, you have probably already promised to pass them down. You need an estate plan in place to fulfill those promises. Absent gifts made by you in a will or trust your intended beneficiaries will have no legal right to the property you promised upon your death.
Provide One Last Gift for Your Family
A thoughtful estate plan is a beautiful way to show your family that you cared enough to plan for them. Knowing you have a properly prepared plan in place--one that contains your instructions and will protect your family--will give you and your family peace of mind. This is one of the most considerate acts you can do for those you love.