1. Avoiding Intestacy
The main reason you should have an estate plan is ensuring your assets
are distributed according to your wishes. If no plan exists when you die,
your assets are distributed by the rules of intestacy. These rules can
cause unwelcomed surprises for beneficiaries expecting an inheritance,
and result in distributions contrary to your wishes. Many people intend
for everything to go to their spouse, however, intestacy rules may result
in the spouse receiving considerably less. If there are surviving children
of the marriage, the spouse will be entitled to only 50% of the net estate.
Even worse, if there are surviving children from the deceased spouse’s
preceding marriage and no children from the current marriage, that surviving
spouse is only entitled to 25% of the estate’s real estate value.
Additionally, cohabitants have no rights under intestacy. Intestacy also
does not discriminate between descendants. Regardless of their involvement
in your life or your wishes, your children will receive the same amount
from your estate under intestacy. The final thing to note is if no surviving
family can be found, then your property will go to the state, rather than
a preferred charity or friend. To avoid intestacy, a will, trust, or combination
of both can be utilized.
2. Avoid Unwanted Distributions by Your Spouse
For many people, the default estate plan is to leave a few specific items
to their children and grandchildren, and simply leave the rest to their
spouse. While this may work for some people, there are some significant
considerations regarding this plan. First, this could subject your personal
assets to your spouse’s creditors. Secondly, your spouse may not
follow the plan you decided on, and would be free to allocate bequests
as they see fit. Additionally, even if your spouse doesn’t change
the beneficiaries, it is still possible that they could spend most or
all of the assets, leaving nothing for your intended beneficiaries. Finally,
having the assets in your spouse’s name can result in their disqualification
for Medicaid and other entitlements. As with the first reason, a will
and trusts can be utilized to address these concerns.
3. Medicaid Planning
As previously mentioned, estate planning can have a tremendous effect on
your Medicaid eligibility. In order to qualify for Medicaid, your income
and countable assets must be below a certain threshold. This is especially
important for older couples who may need the money for nursing home care,
or children with special needs. These types of care are very expensive
and, without proper planning, result in the drying up of an estate and
other resources. Also important is the fact that in determining Medicaid
eligibility any assets transferred by gift will be penalized resulting
in a longer period for eligibility. Therefore, it is important to start
planning for Medicaid well before any issues that might require it arise,
otherwise you or your spouse will have to pay for the care from your assets,
reducing the size of your estate.
4. Establishing a Guardian for Your Surviving Children
Asset planning is not the only considerations for why you should have an
estate plan. Without an estate plan, the process of determining who should
take care of any surviving children is a messy one if there are no surviving
parents.The court will consider various family members and weigh the options
and other factors to determine the child’s best interest. The person
selected may not be the guardian you would prefer to be taking care of
your children in the event of your death. To avoid this, a will can be
used to establish not only a guardian, but a alternative guardians should
your primary guardian be unable to perform.
5. Providing for the Health, Education, Maintenance and Support of Your
Spouse, Children or Grandchildren
Additionally, it is important to plan for the well-being of your surviving
dependents. While social security death benefits may be available for
this, they are often very small and short-lived. Primarily, life insurance
is the go-to vehicle for providing life-long support for your dependents.
Additionally, trusts can be implemented to manage your assets and produce
income for your loved ones throughout their lives. Even better is the
ability combine life insurance proceeds and trusts to provide long term
care and management of assets for your dependents.
6. Reducing Conflict Between Your Loved Ones
While the relationship between your loves ones is most likely an amicable
one, emotions can run high after a death in the family, resulting in people
acting in ways they normally would not. This can lead to fighting over
who should get what personal effects, who should live in the family house,
and other disagreements. Creating a will can help alleviate many of these
arguments by providing a certainty as to who is entitled to these items.
Alternatively, trust planning can also serve this purpose, and even create
a system where multiple beneficiaries are entitled to enjoy the item.
7. Provide Instruction for Funeral and Burial Desires
The distribution of estate assets is not the only source of family tension
after a death. Several arguments can arise simply from the planning of
the funeral and burial services. Additionally, without proper instructions,
the funeral and burial can easily be conducted in a manner contrary to
your personal beliefs. Finally, all of these plans can be very expensive.
Without planning, these expenses will be paid from estate funds reducing
the assets available to make intended distributions. A combination of
wills, insurance policies and trust planning can all help address these concerns.
8. Establish a Source of Payment for Fees and Costs Relating to the Settling
of an Estate
In addition to funeral and burial expenses, there will also be a myriad
of additional expenses incurred in settling your estate. Primarily, the
executor and their attorney will be entitled to fees for services. Additionally,
there will likely be some form of taxes incurred. Finally, creditors must
be notified and claims paid before the estate can distribute the remaining
assets. These expenses can greatly reduce the size of the net estate if
not properly planned for by a will or trust.
9. Provide for the Management of Assets and Medical Decisions in the Event
Not every benefit of estate planning comes after you die. There are some
benefits to consider in your lifetime, such as having a plan in place
if you become incapacitated. In this event, you will want someone in charge
of manage your assets and medical decisions for you. Additionally, these
plans will greatly alleviate family tensions regarding who should make
the decisions, and what decisions should be made The simplest way to deal
with these issues are by assigning Power of Attorney (for assets) and
Health Care Power of Attorney (for medical decisions) to trusted person.
However, living wills and living revocable trusts provide more specific
instructions regarding these decisions; particularly for choices regarding
the provision of life support.
10. Protect Assets from Creditors
Similar to Medicaid planning, various estate planning techniques can be
used to shelter assets from creditors, while retaining a beneficiary interest.
Irrevocable trusts are the primary tool for this type of planning; however,
they require careful execution and cannot be designed solely as a means
of defrauding creditors. Another important consideration is that placing
assets in these vehicles will greatly reduce the amount of control you
personally hold over the asset.
11. Income and Estate Tax Planning
The last reason for estate planning is tax considerations, while important
consideration, should generally be the last consideration. Because of
the tax code, very little Americans ever incur any estate tax. Additionally,
income tax consequences are also minimal. Most commonly, tax consequences
arise upon the receipt and subsequent sale of bequested property. The
taxable income from such a sale is the amount realized minus the basis
in the property. The basis can vary depending on how the property was
transferred. If transferred as a gift, the basis remains the same; however,
if it is an estate gift, the basis in the property is increased to the
fair market value of the property. This results in a lower amount of taxable
income. Additionally, there may be other tax consequences and you should
always consult with your estate planner as to what those may be and what
options are available.
It is important to begin estate planning today rather than wait. Even if
you already have an estate plan, it’s important to remember to review
it every year to ensure its conformity to your wishes. If you are looking
to create an estate plan or revise one, Hollingsworth & Zivitz can
provide you with the assistance you need. Call us at 888.211.3888 to connect
with our team.