Estate planning is not merely for the top 1% anymore; every single one of us can benefit from an estate plan, regardless of the amount of wealth we expect to have when we die. An estate plan can be thought of more simply as, “a plan for the future.” Planning for the future will alleviate much of the stress that family members feel when a loved one passes away. Disagreements will be assuaged, and more importantly, family members will rest easy knowing that they are following their loved one’s wishes. Even without valuable assets to pass on, there are a few estate planning steps you can take to ensure you leave your family without a mess to clean up after you’re gone.
Get a Will
Without a will, State rules will dictate where your assets end up. And most likely, your State’s inheritance laws will not align with your preferences. Work with a trusted lawyer to create this document. It is in this document that you’ll need to name an executor – somebody who will carry out your wishes as outlined in your will. You can choose a family or friend to be your estate’s executor, but if you have a more complex arrangement, you might want to pay a professional to act in that capacity.
You should also consider creating a “living will,” or an “advance directive.” This document will tell your medical care providers your preferences on life-sustaining treatments should you ever become incapacitated. Along with a living will, assigning a medical power of attorney can be beneficial. This person will be able to make medical decisions on your behalf and act as your advocate when discussing your directives with the medical team.
Parents should state clearly who will care for their children in the event of their death or incapacitation. Without a legally-binding document, the courts will make that determination, and their decision may not align with your intent or what you consider to be best for your child. You will also need to assign a guardian if you have other types of dependents – an ailing parent, for example. This information can easily be included in your will, and a lawyer can help you draft the necessary clauses.
Update Your Beneficiaries
Keep your beneficiary designations up to date. Make a list of the accounts you have (401(k)s, annuities, life insurance policies, etc.), and keep these updated as you get older. If your assets are significant, think about the tax implications of transferring them directly to your beneficiaries at your death. Would alternative tax-deferral mechanisms save you or your dependents tax money in the long run?
Create a Living Trust
There are many benefits to opening a living trust: (1) you can avoid your assets going through probate, which can be a very lengthy process; (2) you can amend your trust much more easily than you can amend your will; (3) you can maintain your privacy since a trust document is private, unlike a will; and (4) you can take advantage of certain tax laws. For example, with an irrevocable living trust, you may be able to avoid the Federal estate tax or any estate/inheritance taxes that your state imposes. There are many different types of trusts available to taxpayers, so it is best to work with a CPA you trust to help you pick the right one.
Understand Your Taxes
Less than 1% of all estates are subject to the estate tax, so for most of us, the estate tax is not something we need to worry about. You may, however, need to think about gift taxes. Each year, you are able to gift a certain amount of money to any one person without incurring a tax liability. In 2018, this amount is $15,000. If your gift does exceed the annual exclusion, (1) you will have to fill out a bit of paperwork (Form 709, United States Gift [and Generation-Skipping Transfer] Tax Return), and (2) the excess will eat away at your lifetime gift tax exclusion. In 2018, the lifetime exclusion was $11.2 million. Because of this high-dollar threshold, you will most likely not owe gift taxes in your lifetime, either, but make sure you don’t overlook the filing requirements.
As you can see, estate planning is about more than just money and taxes; it’s about outlining your goals and intentions and protecting your assets. Keep in mind that some of the considerations we listed above will require a bit of leg work to set up, and most will require paperwork, but that’s where we can help. Our CPAs are well-versed in estate, gift, and trust taxes, and we know just what to do to ensure you are compliant. If you would like to discuss your own estate plans with an experienced advisor, GBQ can help! For additional information please contact us directly. We look forward to speaking with you soon.