It’s been awhile since I wrote about a question as simple as “do you need an estate plan?” However, yesterday I received a call from a potential client who was frustrated because his wife of 40 years needed to be hospitalized and the doctors and staff at the hospital would not provide him with any information about her condition.
The problem was that even though they were married, his Wife hadn’t signed a healthcare power of attorney or a HIPAA release authorizing this man to review any of his Wife’s medical records or even talk to her doctors.
Because he and his wife had failed to prepare even a basic estate plan, he was now being shut out of all decisions related to her medical care.
He didn’t know who to call, so he called my office.
What is the Primary Goal of Estate Planning?
In my opinion, the primary goal of estate planning is to put your affairs in order so that you never have to worry whether things are being taken care of the way you would want after you are either incapacitated or worse.
Estate planning is a gift we give to our loved ones. I tell all my estate planning clients that they are never going to realize the benefit of their estate plan. When it is needed the most they will either not realize it is needed (due to their incapacity) or they won’t be here to see the gift that they left their family and loved ones.
I recently came across an article from Fidelity that discusses 8 key life events that may prompt you to put an estate plan in place. Today I thought I would go through those life events them one by one.
1. You Are Having Kids
One of the primary reasons many young families decide to put an estate plan in place is that they are having or have recently had, a young child.
The reason that you need an estate plan if you have children is two-fold. First, an estate plan will allow you to decide, ahead of time, who should take custody of your child in the event that you can no longer care for them. Failure to make these decisions when you are well could lead to expensive and lengthy court battles, not to mention tension and fighting among your family members.
Related: Do you have an emergency plan in place for your kids? Read about how to KEAP your kids safe with a Kids Emergency Action Plan.
A second reason that you need an estate plan after you have children is to provide for their financial well-being. One of the number one mistakes we see from young families is that they name their minor child as a beneficiary under their life insurance policies or retirement accounts. Although well-intentioned, by doing this, you are basically forcing the courts to get involved in appointing a financial guardian for your child. This requires annual accounting to the court, legal fees, and then when your child turns 18 they receive anything that is left over outright.
If you have young children, we typically recommend that you name a guardian in your estate planning documents, and then leave all of your funds to your child in trust to be managed by someone you name in your estate plan. These assets or funds can be left in trust for a period of time (i.e. until your child reaches a certain age), or for their life while making them the trustee of their own trust at a certain age.
2. You Have a Sizable Estate
Fidelity mentions the size of your estate as a reason to get an estate plan. This is definitely a consideration, but since North Carolina no longer has an inheritance tax, a married couple would need to have more than $22.4 million in assets to trigger the federal estate tax. While we don’t know what this tax will look like in the future (it could stay the same, be eliminated, or drop back to previous levels), and all of our plans provide flexibility for that unknown, for most people the federal estate tax is not a concern in North Carolina.
3. You are Interested in “Stretching” Your Retirement Assets
Most people don’t realize that with the right type of estate plan, you can actually “stretch” out your retirement accounts to last for the lifetime of your beneficiaries.
This can be done by either naming an appropriate trust (aka a Standalone Retirement Trust) as the beneficiary of your retirement account or in some cases, naming your adult children as beneficiaries.
The way this works is the value of your retirement account would be divided by the life expectancy of the person inheriting the funds. They would then be required to take a required minimum distribution for that amount every year for the rest of their lives. Here is how Fidelity explained it:
Let’s say the owner of the IRA is age 70 and his daughter, Sue, is 35. If the owner of the IRA were to die in 2018 and designated Sue as the beneficiary, Sue would inherit the IRA at age 36. Based on the Internal Revenue Code table, Sue’s life expectancy would be an additional 47.5 years. By stretching distributions over her entire life expectancy, and by taking her first distribution by December 31, 2019, Sue would receive a portion of the account balance (the entire account balance divided by 47.5) in the first year. For each subsequent year, she would subtract one year from her previous year’s life expectancy and divide that new life-expectancy factor into her previous year-end account balance. The account could potentially last more than 40 years.
4. You are Concerned about Probate and Privacy Issues
Another reason some people come to see us is that they are concerned about the two P’s, probate and privacy.
Probate is the process that your estate will need to go through if you don’t have an estate plan in place when you die (or if you have a will-based estate plan). This is a very public process, can take a long time to wrap-up, and can be costly (typically 3-5% of the value of your estate).
However, with a proper estate plan in place, you can reduce or eliminate many of these concerns.
5. You Have a Sizable Estate and Philanthropic Goals
If you find yourself in the enviable position of having a large estate and you intend to give a significant amount of your wealth to charity, then estate planning is the perfect way to accomplish these goals.
One strategy that we endorse for families in this situation is to look into the drafting of a charitable remainder trust (CRT). This is a trust that, when funded, would provide your named beneficiaries with a lifetime stream of income. Upon your passing, the remainder of the assets in trust would transfer to a charity of your choice (or even several charities).
I’ve written extensively about charitable remainder trusts here, but to summarize, here are some of the key benefits of this strategy:
- An immediate income tax deduction for the amount of the gift
- Elimination of capital gains taxes on assets sold within the trust
- Decreasing your taxable estate by the amount of assets that were funded into the trust
- Allowing the flexibility to give to the charities your choose
Dollar for dollar, using a charitable remainder trust is one of best estate planning strategies for high net worth individuals that want to give a significant amount of their wealth to charity.
6. You Own a Business
If you own a business, then you absolutely need to do some planning about how that business will be managed in the event you become incapacitated or unexpectedly pass away.
Failure to undergo even basic estate planning can have devastating financial effects on the families that came to depend on the income from the business to live off of. Some of the strategies we recommend to business owners include:
- Having a power of attorney in place that grants someone the authority to take over and run the business if you are incapacitated
- Purchasing life insurance to replace your income in the event of an untimely or unexpected passing
- Updating the operating agreement or shareholder agreement for your business to provide for what should happen if you are incapacitated or worse
- Fund your share of the business into your living trust
7. You Receive a Significant Medical Diagnosis
Nobody wants to think about what will happen in the future, but the truth is that we are all on this planet for a limited time.
If you have recently received a medical diagnosis that could end your life, and you don’t have an estate plan in place, then there is no better time than now to plan for your future.
By preparing an estate plan, you are giving a significant gift to your family and beneficiaries. In addition, you are making it easier for them to manage your health-related and financial affairs when you are no longer able to.
8. Other Situations that Will Necessitate Estate Planning
This list is just the tip of the iceberg. Although everyone should have an estate plan, there are so many scenarios where estate planning is especially important. Here is a short list:
- You are getting married
- You are getting divorced 🙁
- You recently had a child
- You have a child with special needs
- You are getting remarried and both you and your new spouse have children from a prior relationship. This is considered a “blended” family and has special estate planning concerns.
- You or your spouse or parent has been diagnosed with dementia or early onset Alzheimers
This list is just the beginning.
The Bottom Line – Do You Need an Estate Plan?
I’m amazed at how many people come to see us who are in their 50’s and 60’s and have never had an estate plan in place. In my opinion, this is just playing with fire. Life is precious, and in the blink of an eye, it can change or even be snatched away from us.
If you are interested in learning more about estate planning and scheduling a time to meet with us, please feel free to call our office at (919) 883-4861 or use this contact form to schedule a time that works for you.