Estate Planning 101
An Introduction to Estate Planning
By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.
To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek the advice of your financial advisor and personal finance team to help implement the right plan for you.
If you’re over 18
Since incapacity can strike anyone at anytime, all adults over 18 should consider having:
If you’re young and single
If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
If you’re unmarried but committed
You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you might consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.
If you’re married
For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 allows the executor of a deceased spouse's estate to transfer any unused estate tax exclusion amount to the surviving spouse without such planning. This provision is effective for estates of decedents dying in 2011 and later years.
You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die's estate tax exemption, and a credit shelter trust created at the first spouse's death may still be advantageous for several reasons:
Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $143,000 annual exclusion, for 2013, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
If you’re married with children
If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets. You will likely also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.
If you’re financially comfortable and looking towards retirement
You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA). You may even consider speaking with your financial advisor about converting some IRA assets to a Roth IRA.
If you’re wealthy but worried about estate taxes
Depending on the size of your estate, you may need to be concerned about estate taxes. If this sounds like you, I certainly recommend conferring with a seasoned financial advisor.
For 2013, $5,250,000 is effectively exempt from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent. Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth that are made to grandchildren (and lower generations). For 2013, the GST tax exemption is $5,250,000 and the GST tax rate is 40 percent. Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.
If you’re elderly or ill
If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
Advantages of Trusts
Why you might consider discussing trusts with your attorney
Conducting a Periodic Review of Your Estate Plan
With your estate plan successfully implemented, one final but critical step remains: carrying out a periodic review and update.
Imagine this: since you implemented your estate plan five years ago, you got divorced and remarried, sold your house and bought a boat to live on, sold your legal practice and invested the money that provides you with enough income so you no longer have to work, and reconciled with your estranged daughter. This scenario may look more like fantasy than reality, but imagine how these major changes over a five-year period may affect your estate. And that's without considering changes in tax laws, the stock market, the economic climate, or other external factors. After all, if the only constant is change, it isn't unreasonable to speculate that your wishes have changed, the advantages you sought have eroded or vanished, or even that new opportunities now exist that could offer a better value for your estate. A periodic review can give you peace of mind.amount, whichever is smaller) should review your plan annually or at certain life events that are suggested in the following paragraphs. Not a year goes by without significant changes in the tax laws. You need to stay on top of these to get the best results.
Every five years for small estates: Those of you with smaller estates (under the applicable exclusion amount) need only review every five years or following changes in your life events. Your estate will not be as affected by economic factors and changes in the tax laws as a larger estate might be. However, your personal situation is bound to change, and reviewing every five years will bring your plan up to date with your current situation
Upon changes in estate valuation: If the value of your estate has changed more than 20 percent over the last two years, you may need to update your estate plan.
Upon economic changes: You need to review your estate plan if there has been a change in the value of your assets or your income level or requirements, or if you are retiring.
Upon changes in occupation or employment: If you or your spouse changed jobs, you may need to make revisions in your estate plan.
Upon changes in family situations: You need to update your plan if: (1) your (or your children's or grandchildren's) marital status has changed, (2) a child (or grandchild) has been born or adopted, (3) your spouse, child, or grandchild has died, (4) you or a close family member has become ill or incapacitated, or (5) other individuals (e.g., your parents) have become dependent on you.
Upon changes in your closely held business interest: A review is in order if you have: (1) formed, purchased, or sold a closely held business, (2) reorganized or liquidated a closely held business, (3) instituted a pension plan, (4) executed a buy-sell agreement, (5) deferred compensation, or (6) changed employee benefits.
Upon changes in the estate plan: Of course, if you make a change in part of your estate plan (e.g., create a trust, execute a codicil, etc.), you should review the estate plan as a whole to ensure that it remains cohesive and effective.
Upon major transactions: Be sure to check your plan if you have: (1)received a sizable inheritance, bequest, or similar disposition, (2) made or received substantial gifts, (3) borrowed or lent substantial amounts of money, (4) purchased, leased, or sold material assets or investments, (5) changed residences, (6) changed significant property ownership, or (7) become involved in a lawsuit.
Upon changes in insurance coverage: Making changes in your insurance coverage may change your estate planning needs or may make changes necessary. Therefore, inform your estate planning advisor if you make any change to life insurance, health insurance, disability insurance, medical insurance, liability insurance, or beneficiary designations.
Upon death of trustee/executor/guardian: If a designated trustee, executor, or guardian dies or changes his or her mind about serving, you need to revise the parts of your estate plan affected (e.g., the trust agreement and your will) to replace that individual.
Upon other important changes: None of us has a crystal ball. We can't think of all the conditions that should prompt us to review and revise our estate plans. Use your common sense. Have your feelings about charity changed? Has your son finally become financially responsible? Has your spouse's health been declining? Are your children through college now? All you need to do is give it a little thought from time to time, and take action when necessary.
As always, please do not hesitate to contact me with any questions pertaining to this article or your own financial planning needs.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.