How much in assets do I need to have to warrant setting up an estate plan?
Answer: Most people need a plan for one reason or another. Planning for death is necessary to make sure that your property will be distributed in accordance with your wishes in the most efficient way possible. Planning for incapacity is necessary to make sure that a person designated by you will make decisions on your behalf if you cannot do so, avoiding the need for a court-monitored guardianship.
What is a probate administration?
Answer: Probate, by definition, is the process whereby a decedent's individually owned property is distributed. If a person has a Will, the instructions in that Will are carried out, and the court supervises the administration and distribution of the estate property according to the Will’s provisions. If a person dies without a Will, the property will be distributed in accordance with state law, and the court supervises that administration. The probate estate consists of every asset that the deceased person owned in his or her individual name. Thus, a bank account owned by “Joe Smith” on the bank’s records will be a probate asset when Joe dies. If, however, the bank records show the account is titled “Joe Smith, POD (pay on death) to Sally Smith, the probate court does not need to determine the proper owner of the account following Joe’s death. The same would be true if the account were owned by “Joe Smith and Sally Smith, joint tenants with rights of survivorship." Sally, as surviving joint tenant, would receive the asset automatically upon Joe’s death without a probate court order.
If I have a Will do I still need to worry about probate?
Answer: Yes, the Will merely states how your individually owned property will be distributed. It is important at least to have a Will. Otherwise, your probate estate assets will pass to your heirs as specified under state intestacy laws. You would probably rather pick your beneficiaries than have the state default rules pick them for you!
However, probate administrations can be expensive, with attorney fees and court costs, and they are made public and don’t protect your privacy. Probate avoidance is desired.
How do I avoid a probate administration upon my death?
Answer: There are several ways to avoid a probate administration. The simplest way to avoid a probate administration is to designate beneficiaries on assets through beneficiary designations. This can be done on life insurance policies, qualified plan funds such as 401ks and IRAs, investment accounts, Certificates of Deposit, checking and savings accounts, and even real estate. You can designate a beneficiary on just about every asset you own.
Another way to avoid probate is to place your property in joint names with rights of survivorship with the intended beneficiary. This is not, however, the best means of avoiding probate. While it can be appropriate for spouses, if both spouses were to die simultaneously, there would still be the need for a probate administration. Additionally, if you add a person as joint tenant, the joint tenant immediately has a property interest in the property. Many problems can occur if the joint tenant gets sued and the creditor decides to attach this joint property or the joint tenant goes through a divorce and the joint tenant’s spouse asserts an interest in the property. For this reason, I recommend alternate methods to avoid probate.
A third method of avoiding probate is to set up a revocable trust, discussed below.
What is a revocable trust?
Answer: Entering into a revocable trust is another means of avoiding probate. To create a revocable trust, you enter into a written agreement between yourself as the “grantor,” or creator, of the trust, and usually yourself as trustee of the trust (unless a bank or trust company acts as trustee or co-trustee to help you manage assets). You then retitle your assets so that they are owned by you as trustee of your trust and not by you individually. While you are alive and competent, you can do anything you want with the trust property. Upon your death, the revocable trust avoids probate of the assets titled to the trustee because the legal owner, the trust, is a continuing entity. The successor trustee you appointed in the written trust agreement takes over, and the trust’s provisions govern the distribution of your assets to your beneficiaries (just like a Will). A revocable trust changes nothing about your lifetime ownership rights. “Revocable” simply means that you can terminate, or change, the trust anytime you want while you are living and competent. Revocable trusts also come in very handy in the event of incapacity because the successor Trustee can handle your assets in the event of your incapacity without the need for a court-monitored guardianship or conservatorship.
It is also possible to establish a “testamentary trust” under your Will that will take effect only following your death, but this type of trust does not necessarily avoid a probate administration.
What is the best way to plan for minor children?
Answer: If you have minor children, you should establish a trust (either a testamentary children’s trust under your Will or a children’s trust under your own revocable trust) that will be funded following your death (or following your and your spouse’s deaths). This will prevent a court-monitored conservatorship for your children’s inheritance. It also permits you to be specific about the distribution of the money (e.g., paying out principal following college graduation or at later ages such as 30, 35, and 40, rather than all of it at 18 or 21, which is what the law in most circumstances requires).
How do I avoid estate taxes?
Answer: Estate taxes, which are different than property taxes and income taxes, are assessed on the value of a person’s property upon death. The current federal estate tax exemption for 2023 is $12,920,000 with a top rate of 40% and will increase in the future at the inflation rate. This federal estate tax exemption amount is not permanent and is slated to go back to approximately $7,000,000, adjusted for inflation, in 2026. A married couple has twice the exemption amount available.
If a deceased person has less than this amount on death, there will be no estate taxes. A married couple can shield up to twice the amount of the exemption. And because of a law put in place in 2013, called “portability,” it is much easier to take full advantage of both spouse’s exemptions. It is important for a married couple to put in place the right plan for them to maximize both spouse’s exemptions and that will depend on the nature of their assets, their personal situations, and the total value of their assets.
What assets are subject to estate taxes?
Answer: Included in a your estate for estate tax purposes is everything you have an ownership right in, including home equity, retirement plans, IRAs, stocks, bonds, business interests, other real estate, tangible personal property such as jewelry, artwork, and furniture, the proceeds from life insurance policies, and interests in certain trusts over which you have control.
Will my beneficiaries have to pay income tax on what they inherit from me?
Answer: With the exception of qualified retirement accounts, IRAs, and certain annuities, your beneficiaries will not have to pay income taxes on the value of the assets that they inherit. This includes the proceeds from life insurance. However, retirement plan proceeds, certain annuities and IRAs (except for Roth IRA proceeds) are included in the beneficiary’s gross income upon distribution when that beneficiary withdraws the assets from the retirement plan.
Whom should I designate as beneficiary of my retirement account or IRA?
Answer: Generally, it is best to name your spouse, if married, as primary beneficiary of retirement plan benefits and IRAs. Retirement plans and IRAs are subject to income taxes when the beneficiary withdraws the funds from the plan. However, under many retirement plans and all IRAs, a spouse can roll over the funds into a “spousal IRA,” and elect not to withdraw assets until he or she is 72 years of age. At that time, the spouse can withdraw the funds over his or her life expectancy. There may be other circumstances in which you do not want to name a spouse, such as a second marriage, a need to protect the asset from creditors, or a desire to name a charity as beneficiary, which will need to be evaluated when setting up your estate plan.
If you are interested in including a charitable distribution within your plan, naming a charity as beneficiary of all or a percentage of your retirement plan or IRA is an excellent idea and worth considering because the charity will not pay the income tax on the proceeds that other beneficiaries will pay.
You can also name a trust as beneficiary of your retirement plans and IRAs. It is preferable, when possible, for clients to name adult children as the contingent beneficiaries (or the primary beneficiaries if you are not married). These adult beneficiaries would have the right to roll the funds into an “inherited IRA,” and elect to spread the payments from the funds over 10 years. This allows for the deferral of income taxes for 10 years. However, if a trust is very carefully drafted, it too, can elect to take out distributions over a maximum of 10 years. It might be advisable to designate the trust as the beneficiary for creditor protections and to provide for the possibility of failed marriages of the beneficiaries.
Can I make gifts without paying taxes?
Answer: You can make annual gifts without any estate or gift tax consequences if they are below the gift tax annual exclusion, which is currently $17,000 and is indexed for inflation. Additionally, such gifts are not considered income to the recipient. If you make a gift that exceeds $17,000 per year per donee, you will need to file a gift tax return and the amount above the annual exclusion will be applied against your lifetime federal estate tax exemption. If you are married, you and your spouse can gift $34,000 per year per donee.
How do I plan for incapacity?
Answer: By putting in place a health care power of attorney and a financial power of attorney. A durable power of attorney gives your appointed agent the power to make health care decisions and financial decisions on your behalf. The durable power of attorney simply appoints another person to act for you. Even if you have a revocable trust, a durable power of attorney for both health care decisions and financial decisions still is important to cover personal financial and medical matters outside of the financial matters that your successor trustee can handle for you. If you don’t have a revocable trust, you need a durable power of attorney to cover all of your financial and health matters.
What is a living declaration?
Answer: A Living Will Declaration, sometimes also called a “health care treatment directive” or an “advance directive,” is a written statement making your wishes known regarding whether you want life support if you are in a terminally ill situation or a vegetative state. It is important to state your wishes in written form if you do not want life support measures under these circumstances.
This material is designed to provide general information only and does not constitute legal advice. Every situation is unique, so be sure to consult your own professional advisor about how the items in this material might apply to you.