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Estate Planning: What You Need to Know

A comprehensive estate plan is an integral component of your overall financial plan. There are tax and non-tax reasons for having a comprehensive estate plan, so it applies to you even if you might not be subject to federal or state estate tax. Yet, it is estimated that over half of Americans do not have an up-to-date estate plan to protect themselves or their families in the event of sickness or death! That can cause your loved ones hardship, financial or otherwise, that usually can be minimized or eliminated by making a plan in advance. Sickness happens. Accidents happen. You just never know. Some basic estate planning documents would even apply to your young adult children.

What is estate planning?

Estate planning is an ongoing process that includes much more than just a will.

It is an important activity of financial planning that can give you peace of mind from planning in advance. It outlines what will happen to your assets when you die, minimizes estate and/or income taxes for you or your heirs, protects assets, provides for your loved ones, designates who can make financial and health care decisions on your behalf during life if you can’t and expresses your wishes on use of life support and donation of your organs.

Estate planning involves many considerations based on your situation, including your goals, the make-up of your assets and family, federal and state tax, probate, how your legal documents should be structured, who should take care of your dependents, how assets should be titled, who should be named on beneficiary designations and how, if any trusts should be used during lifetime and/or at death, insurance, charitable giving, gifting during lifetime, etc. Definitely more than just a will.

Estate Taxes

Federal estate/gift tax– The 2023 federal estate/gift exclusion is temporarily high at $12,920,000 per person, or almost $26M for a married couple with portability (surviving spouse can use their spouse’s leftover exclusion). That high exclusion is set to sunset 12/31/25 when it cuts in half. Now is the time for wealthy individuals to review their succession and estate plans to see if there is anything they should be doing to take advantage of this high estate/gift exclusion before it’s gone.

New York estate tax – New York’s 2023 estate exclusion is $6,580,000. There isn’t portability between spouses, so it’s “use it or lose it.” The NY exclusion is subject to phase-out and would be fully phased out if your taxable estate exceeds the exclusion by 5%. Then you have none! This emphasizes the importance of carefully structuring your estate planning documents, beneficiaries and asset titling to take advantage of each spouse’s NY estate exclusion, or at least one spouse’s if you have a large estate.

Note that New York doesn’t have a gift tax, but gifts would be pulled back into your estate if you don’t live at least 3 years after the gift.

Your Estate Plan

Your estate plan includes legal documents such as a will, power of attorney, health care proxy, living will and may include trusts formed during lifetime. It also includes the titling of your assets and your beneficiary designations to be sure it all would work the way you intend.

If you own a business with others, buy-sell provisions in business agreements determine what will happen to the business at your death or disability, trumping your will. Those agreements are important estate planning legal documents. The implications to your business, estate and family need to be understood and planned for.

Will

Your will is a legal document stating how you want your executor to distribute your assets when you die. It is also where you name who will be the guardian of your minor children. Your will might have provisions that form certain trusts when you die.

Your will only controls the distribution of probate assets which are assets you individually own at death that don’t have a beneficiary designation. Therefore, it doesn’t control the distribution of accounts owned joint tenant with right of survivorship (JTWROS) or beneficiary designated assets such as retirement accounts, life insurance, annuities or bank accounts that have a transfer-on-death (TOD) beneficiary designation on them.

Those assets pass outside your will, which could foil your estate plan if not carefully coordinated. In some cases, the will won’t direct the distribution of any of your assets depending on what you own and how your assets are structured, no matter how well your will is drafted.

You can see that your estate plan is about more than the legal documents. The beneficiary designations and asset titling are just as important in how your estate plan would work.

If you die without a will, you die intestate and state law decides what happens to your probate assets – not you. For example, in New York, your spouse gets the first $50,000, then 50% of the balance. Your descendants receive the other 50%. Is that what you would want to happen? Perhaps that might not be enough for your spouse’s financial security.

If you die without a will, the courts also decide who will be guardian of your minor children. It might not be who you or your children would want for that important role.

Without a will, the probate process can be more time consuming and expensive.

Power of Attorney

The power of attorney (POA) gives your agent(s) the authority to manage your financial affairs. This can help when you’re out of town when something needs to be signed, for example, or you become incapacitated.

Health Care Proxy/Living Will

The health care proxy (HCP) gives authority for your health care agent to make health care decisions on your behalf when you are unable to do so yourself, for example when you are unconscious and need surgery. The HCP usually incorporates a HIPAA authorization to enable your agent to get your medical information and speak with your doctors when needed.

Your living will states your end-of-life wishes related to procedures you do or don’t want, i.e. do-not-resuscitate (DNR), life support, etc. Having this in place not only ensures your wishes are known but it also takes the weight off your family’s shoulder in that they aren’t having to make the decision. Rather, they are just carrying out your wishes.

This document can also express your wishes regarding organ donation.

Beneficiary Designations

Your beneficiary designated accounts, i.e., IRAs, employer retirement plan, annuities, life insurance personally owned and through work, are distributed according to the beneficiary designations, not your will.

The primary and contingent beneficiaries need to be carefully coordinated with your overall estate plan to be sure the money goes to who you want, when you want and in the way you want. You might have trust provisions in your will for asset protection purposes, but the trusts don’t get funded because the assets don’t go through your will.

Bank and investment accounts having a Transfer-on-Death (TOD) designation is a beneficiary designation and will be distributed accordingly. There are implications you might not realize when adding this designation.

Asset Titling

The type of asset and how it is owned dictates what will go through your will and who your assets will pass to and when. It also determines how estate exclusions will be used. The titling needs to be carefully aligned with your legal documents.

Trusts

There are many different kinds of trusts for different purposes and may be formed during lifetime or in your will at your death. There are revocable and irrevocable trusts. Some trusts remove assets from your estate and may provide asset protection.

A revocable living trust is your alter ego. Is can only be formed during your lifetime. In all respects, it’s like it’s you, provides no asset protection and assets aren’t excluded from your estate. It is often called a will substitute because it includes all the provisions you would have in your will, which means your will could be very simplified. This type of trust can be useful when you have property in multiple states or live in a state with high probate fees, like Florida.

Irrevocable trusts are just that…irrevocable. There are many types of irrevocable trusts that may be formed during life or at death through your will. They may be used during lifetime for wealth transfer or asset protection purposes. If you have a special needs child, you may decide to form a supplemental needs trust during your lifetime, or you may form it at death in your will.

Estate Planning Documents Your Adult Children Should Have

Once your child turns age 18, they are an adult and therefore you are no longer privy to their medical information, and you no longer have authority to act on their behalf.

Your child should have a financial power of attorney, a health care proxy/living will, and current beneficiary designations that name both a primary beneficiary and a contingent beneficiary. Joint account ownership on bank accounts is something to consider since it can avoid probate of their estate if something were to happen to them.

Wealth Transfer Planning

For those who can afford to gift, wealth transfer planning can save estate taxes and allow the donor to see the benefit of their gifting while they’re alive. There are numerous techniques, but the strategy needs to fit you and your heirs’ tax and financial situation.

Business Succession Planning

The smooth and orderly transition of your company’s ownership and management needs to be carefully planned for well in advance. In the meantime, what will happen to your business if you die? Will your business interest get bought out and with what money? Or does the ownership pass through your will? What will your family receive and when? Are there other children not involved in the business that you want to provide for in your plan? Your business directly impacts your estate plan and needs to be coordinated.

Life Insurance

What would happen to your spouse and family if you were to die? Do you have dependent children relying on you? Would your spouse have financial security? Perhaps you have a mortgage or still need to fund your children’s college education or provide for a special needs child.

If you are subject to estate tax, how will it get paid and from where? Does that leave enough for what you intended to leave to heirs? Is there liquidity to pay the estate tax? Some individuals have enough resources to cover all their needs, so they’re in a position of choice.

Careful planning can prevent family members or other beneficiaries from being subjected to the time and expense of complex legal and administrative processes and at a time when they’re grieving. Having a plan can greatly reduce confusion or even animosity among family members or other heirs upon the death of a loved one.

Don’t leave things a mess for your family. Attend to your estate planning and continue to work at it over time. Just like the rest of your financial planning, it’s a process, not an event. Your overall estate plan can become outdated pretty easily from a shift in your finances. The legal documents may need updating periodically or your finances and beneficiary designations may need to be realigned even if your legal documents are fine.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.