5 Questions Every Estate Plan Should Answer
1. What will happen to my kids?
In the event of a tragedy, this is the first thing that goes through every parent’s mind. Yet, despite this important concern, we often prepare more detailed instructions to our babysitter who will be watching our kids for an evening, than we do to whoever will take care of them if we are ever gone for good.
Perhaps it is one of those issues we’d rather not think about. But that doesn’t take away from its importance. Who do you want to have first priority as the guardian of your children if you are gone? What resources do you have now and how will those resources be used to help take care of your children?
If your children are already grown and living independent lives of their own, there may be other questions you need to consider. How will inheriting your assets help or harm your children? Is your child unwise with spending decisions or does he have creditor issues that would only be exacerbated by receiving a lump sum inheritance? Do any of your children receive government benefits that could be disrupted or threatened by a sudden (but non-sustaining) increase in wealth?
These are things that can and should be addressed in your estate plan. If you have children and you don’t have answers to these questions, please make arrangements to see someone about this today.
2. What happens to my stuff when I die?
For many of us, this is the first question that we consider when building an estate plan. But what many people don’t realize is that there is more to be planned here than a simple list of who gets what.
Some people may want all of their property to be distributed immediately in lump sum payments to each of their children. Others may want to make payments gradually over time or at the discretion of a trusted friend, family-member, or advisor. Others want to make distributions to friends, charities, schools, churches, or others.
With no estate plan, your assets will be distributed through a court process known as probate, according to the default rules of the state. If you have a will, your assets will be distributed by the probate court, according to the directions in your will. With a trust-based estate plan, you may be able to avoid probate all together, and you can give yourself and your loved ones the flexibility to plan the management and distribution of your property according to changes in circumstances.
There are a variety of options in estate planning, but if you want a say in the way your property will be managed and/or distributed when you die, it is important to have a plan.
3. Who makes decisions on my behalf if I am unable?
An often-overlooked aspect of estate planning is planning for disability. Most simple estate plans contain instructions for the distribution of assets upon death (often in a simple will), but often don’t contain any direction on what to do in the event of incapacity.
If you are injured in a life-altering accident, who do you want to make health care decisions for you? Who will have access to your medical records or be authorized to make medical decisions on your behalf? Who will make important financial decisions regarding tax filings, sale of assets, and/or investment decisions? Who will determine whether or not you are capable of making decisions on my own? (Should this determination require a single letter for a doctor? A determination by a court? A unanimous decision by a committee of family members? )
As medical advances continue to increase our life expectancy, there is an ever-growing likelihood that we will suffer some type of temporary or permanent incapacity while we are still alive. A good estate plan—often including a Revocable Living Trust (RLT) and/or other type of trust agreement—will l make arrangements for these scenarios and not just for death.
4. How will I limit my tax liabilities?
Before 2012, most estate plans were crafted primarily to avoid unnecessarily paying federal estate taxes. The estate tax starts at 40% (and used to be even higher!), so it makes sense to avoid paying this hefty tax if at all possible. Under the current tax regime, however, if you have less than $5 million dollars (or $10 million if the assets are shared by a married couple), then you are not likely to have any estate tax liability when you die. What this means, is that old estate planning techniques are often outdated. Sometimes these tax planning techniques can even be harmful—because they unnecessarily expose your assets to unnecessary income tax.
In today’s tax environment, income tax planning is often just as important as estate tax planning. Old estate tax planning strategies emphasized a need to get as many assets out of a person’s estate as possible before that person died. This often included lifetime gifts and the creation “bypass trusts.” However, because assets that are transferred upon death generally receive a “step-up” in basis, there are often very different income tax consequences for income generated by assets that are gifted versus assets that are transferred at the time of a person’s death. In many cases (especially with assets that have greatly appreciated in value) it makes more sense to keep assets in one’s estate and to make any transfers effective upon the death of the owner.
The bottom line is that tax planning requires a careful analysis of your assets and is generally best-achieved through careful consultation with your other financial advisors. When selecting a Mesa estate planning lawyer, you should consider whether that attorney is willing and able to communicate with your other advisors (such as CPAs, financial planners, investment advisors, bankers, etc.)
5. How will my plan adapt to changing circumstances?
A key part of every estate plan is determining who you trust to make important decisions on your behalf. A well-crafted estate plan will also provide for ways to make corrections if the person you trust is unable or unwilling to carry out your plan.
There are innumerable ways these types of situations can play out. For example, you may appoint a Trustee to make important decisions for you and your family. What happens if, after your death, your family no longer has confidence in your Trustee? Should your family be able to replace that person? Under what circumstances, if any, should that replacement be allowed?
In another scenario, your plan may direct your Trustee to manage your assets according to today’s tax laws. What if the laws change? Are there any circumstances where the trust’s instructions should be amended or altered? Should the Trustee or another trusted individual be able to step in and make those changes?
No estate plan can anticipate every future problem, but most people want a plan that is flexible enough to adapt when there are drastic changes in circumstances. A well-crafted estate plan will incorporate that level of flexibility.