Why Everyone Should Have an Estate Plan

By Stuart G. Schmidt, Esq.

Estate planning is the process of addressing your potential incapacity and specifying where you’d like your assets to end up at your death. It is important to identify the taxes and other costs that might reduce the amount and to arrange for one or more of the estate planning tools (wills, trusts, guardianships, beneficiary designations and life insurance) to get your property where you want it to go at the lowest possible cost. While many people refuse to consider the inevitability of their death, there are reasons to plan and take action.

When you do nothing in the way of estate planning your state of residence, in effect, writes your Will for you. The court, not you, will determine who will get your estate. Additionally, your loved ones will bear the burden of unnecessary legal fees, probate court costs and increased taxes. Perhaps the most tragic outcome of doing nothing is that if both you and your spouse die the court will select the guardian of your minor children. When overloaded courts are asked to decide battles over custody and money, the fate of your children can be left in limbo for months.

Leaving Property to Young Children

Most parents, at one time or another, give serious thought to what would happen to their children in the unhappy event that one or both parents die prematurely. Who would raise the children? Would they have enough money and who would manage it for them until they became adults? The worst possible situation in families is when the parents die with no will, no provision for a guardian, no arrangement for adequate money to see the children through school and into adulthood, and no arrangement for managing the children’s inheritance.

Appointing the right guardian is critical. Upon your death, the guardian acts as a surrogate parent, making all the major and minor decisions one makes in raising a child. A guardian may be appointed to act for the person and for the estate. Usually it is best to appoint a guardian for the person, and allow the child’s estate (which generally consists of the inherited property) to be held in a trust.

A trust can be created to hold property for the benefit of your children under any specific terms you desire. The person you choose to manage the property (the trustee) will provide the financial support for your children under the written direction of the trust instrument. While property is held in trust, the trustee can be given authority to distribute funds to provide your children with an education, cover medical expenses or provide them with their first residence. In addition, you can direct the trustee to distribute the entire principal or portions of it when a child reaches a certain age. For example, a trustee can be directed to financially provide for a child and then distribute 50% of the trust when the child reaches age 25. The remaining amount can be held in trust until the child reaches age 30. The variations in planning your estate are endless. However, not all plans meet all needs. It is important to ensure that your estate plan is specifically tailored to address the unique facts of your family.

A Living Trust to Avoid Probate and Taxes

The best way to illustrate the value and importance of an Estate Plan in regards to estate taxes and the costs of probate is through an example of a married couple, John and Elizabeth. As you will see, their failure to have an estate plan will cost their children $2,565,134.00 in estate taxes and $121,814 in unnecessary probate fees. With proper planning, the payment of any estate tax could have been avoided as well as the cost and delay of probate. More importantly, an estate plan will ensure that their assets, along with the near $3,000,000 in savings, will go to their beneficiaries in the manner they choose.

John and Elizabeth are both in their early-forties, have three minor children and an estate valued as follows:

• $1,000,000. – Home equity
• $200,000. – Vacation property equity
• $1,500,000 – Life insurance
• $2,000,000 – Cash and various investments
• $4,700,000 – Total Estate

If we assume a 6% rate of growth (excluding the life insurance which does not appreciate) and that no additional assets will be acquired, within 20 years John and Elizabeth’s estate will be worth $10,262,834.00.

Death of John & Elizabeth Without an Estate Plan.

If John and Elizabeth died within a year or two of each other at the end of this 20 year period, the federal estate tax would be based on the $11,762,834 value of their estate, including life insurance. Without an estate plan in place at death, their beneficiaries may owe $2,565,134.00 in estate taxes. The failure to have an estate plan to accomplish essential tax planning may result in the forfeiture of one of the couple’s basic exclusion amount; unless the surviving spouse elects to use the “portability” of the first spouse’s basic exclusion amount which is currently $5,340,000 for the year 2014. This tax credit allows every person to pass $5,340,000 to his or her beneficiaries tax free. Absent an extension to pay the tax, this money will have to be paid within 9 months of the date of death. If cash is not available then property of the estate, whether a family home or business, may have to be sold.

In addition, by not creating a Living Trust to avoid probate, John and Elizabeth’s beneficiaries will have to suffer the delay and expense of a probate proceeding. Probate fees would further reduce the estate, and thus the amount the beneficiaries receive, by $121,814. Half of this fee would be paid to the executor of the estate and half would go to the attorney who completes the probate legal work.

Death of John & Elizabeth with an Estate Plan

If John and Elizabeth had prepared an estate plan to accomplish the desired tax planning, they could have utilized both of their tax credits to pass $10,680,000 to their beneficiaries tax free. With basic estate planning, the total estate tax could be limited to $433,134. With the additional planning of a Life Insurance Trust, John and Elizabeth could have totally avoided the payment of estate tax.

Provided John and Elizabeth decided to create a living trust as a part of their estate plan, the time and expense of probate would also be avoided. While, there would be some cost to have the trust administered upon a death of a spouse, it rarely approaches even half the cost of probate.

Addressing Incapacity

Another important focus of estate planning is addressing your potential mental or physical incapacity. Through the use of power of attorney documents you can designate the person(s) you want to physically take care of you, make your health decisions and manage your property during life, should you be unable to do so. Without such documents, your loved ones will have no ability to manage your personal property or control your medical treatment in accordance with your wishes. The failure to have a power of attorney for health care can result in years of expensive and often useless medical treatment. In many cases families are forced to bring legal action in an attempt to get the unwanted medical treatment stopped. This necessary legal recourse can be extremely expensive and take years.

It is time to review your estate plan. If you don’t yet have an estate plan, it’s time to get it done. Your death or incapacity will be emotionally traumatic for your family; don’t make it legally difficult as well. Contact one of our estate planning attorneys, Stuart G. Schmidt or David J. Lee, to assist in the creation, review and/or update of your estate plan. Our job as your attorneys is to make this process easy and painless and, most importantly, put a proper plan in place. Call us today at (408) 356-3000 or send us an email at sschmidt@smwb.com.