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 of Incapacity
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 Roberts Means, LLC can provide you with the assistance you need. Call us at 888.211.3888 to connect with our team.