Having a substantial nest egg to pass on to heirs holds both promise and pitfalls. The promise is the financial security that a substantial inheritance can offer loved ones. The pitfalls lie in the lack of planning to protect those assets.
That’s why comprehensive estate planning is so critical to ensuring intergenerational transfer of assets with the least disruption possible. That applies to everyone, regardless of the size of their estate.
Unfortunately, that’s a responsibility that the majority of Americans are keen to avoid. According to a 2017 Caring.com survey*, only 42 percent of U.S. adults have core estate planning documents in place. That may be understandable, as contemplating one’s own demise isn’t the most pleasant topic. However, avoidance of these critical issues can lead to potentially devastating repercussions.
Perhaps the most recognizable concern involves onerous tax consequences. Although individual estates valued at $5.49 million or less (or $10.98 million or less for married couples) enjoy a lifetime exclusion from federal estate taxes, one may be liable for state estate taxes based on their state of residence. For some estates that are even below the exemption amount, that means the possibility of a major tax impact.
Giving hard-earned assets to Uncle Sam is just one issue. A well-designed estate plan safeguards from not only financial losses, but also protects individuals and families from problems and issues of all sorts—things such as the unexpected death of a family member or making certain the transfer of property and other assets happens quickly, efficiently, and with whatever level of discretion a family wishes to have.
To that end, there are four core documents critical to the success of an estate plan:
- Will. While an obvious necessity, a will all too often receives inadequate attention. A will should be meticulously crafted to reflect specific goals and priorities, and an executor should be appointed. One should have confidence in this executor’s knowledge of financial and legal affairs.
- Living trust. Also known as a revocable trust, this document lays out how assets should be handled upon the passing of the decedent. As the name suggests, this document is drawn up while one is still living and may be changed at any time. Among other advantages, a living trust can avoid the potential headaches (and publicity) that often come from the public probate process.
- Durable power of attorney. This is the “ace in the hole” should one become incapacitated and unable to make legal and financial decisions. Durable power of attorney even allows someone to open and read one’s mail, should that prove necessary.
- Healthcare proxy and living will. Somewhat similar to durable power of attorney, a healthcare proxy empowers a designated person to make health care decisions when one cannot. A living will lays out specific instructions regarding the issue of artificially prolonging one’s life.
Of course, even though these documents are “must haves” in any comprehensive estate plan, there are still other missteps to avoid. One common oversight is failing to keep documents current. With births, deaths, divorces and other events that can significantly impact any family, it’s essential to review all documents on a regular basis—ideally, when a major family event or life change takes place.
Another point of concern is making a poor choice in the people you grant legal and financial authority. For instance, while a spouse may seem like the most logical choice to handle an estate after one’s passing, the emotional toll of losing a spouse may impact his or her ability to make the best choices. When choosing people such as executors or trustees, one should make certain the person they select is positioned to be as objective and clear-headed as possible.
One final caution is making certain to work with the most qualified professionals possible in drafting and reviewing a complete estate plan. At AdvicePeriod, we work with our clients and attorneys to create comprehensive estate plans that address their goals and needs, potentially reduce or eliminate an estate tax burden, and ensure they have the peace of mind that comes from being as prepared as possible.