Estate planning can be a neglected part of financial planning. It's easy to delay answering uncomfortable questions such as "What happens to my assets and my loved ones when I die?" So it's no surprise that roughly half of Americans don't have a will, and even fewer have an estate plan.
How many of us could benefit from an estate plan? For that matter, what is an estate plan, and how does it differ from a will?
A will may be a relatively simple document that sets forth your wishes regarding the distribution of property; it may also include instructions regarding the care of minor children. An estate plan goes much further than a will. Not only does it deal with the distribution of assets and legacy wishes, but it may help you and your heirs pay substantially less in taxes, fees, and court costs. You should always consult a legal and/or tax advisor to discuss your unique situation to determine what may be a best approach for you.
Most people with assets or a family should execute a will. However, not everyone needs an estate plan. The decision is a personal one and depends on more than the potential size of an estate. Consider the following 8 key questions:
Let's go through these 8 considerations, under current law, one by one.
1. The arrival of children
A number of major life events help shape the need for and scope of an estate plan. Especially significant is the birth of a child. Consider a young married couple having their first child. How would the child be provided for if either or both parents were to die?
"Drafting a will provides the opportunity for a parent to name a guardian to take care of a child if something were to happen to the parent," says Sander Bleustein, vice president of Advanced Planning at Fidelity Investments. "But, while naming a guardian is important, it's just one step." In addition to a guardian who assumes responsibility for the care and custody of the minor child, a conservator (or "guardian of the estate") may also be necessary to manage any assets the minor child may inherit. The age of majority in a given state is set by state laws; generally, the age is 18 or 21.
Some assets can be distributed by the institution, such as a bank or brokerage firm, that holds them, so long as the owner has provided the proper instructions to the financial institution and has named the beneficiaries who will receive those assets. If the owner also has a will, the directions in the will should be consistent with the directives provided to the financial institutions. For example, if a beneficiary is named in a transfer on death (TOD) account at a brokerage firm, or payable on death (POD) account at a bank or credit union, the account can usually pass directly to the beneficiary without going through probate, and thus will bypass a will. In some states, a similar beneficiary designation can be added to real estate, allowing that asset to also bypass the probate process. For assets that do not have a beneficiary designation, the will is the instrument through which to designate who will receive such assets, and it can detail any related special instructions.
Although a will is a cornerstone of estate planning, some people may need something more extensive, and, if so, a trust may be beneficial. "Trusts can make sense for most assets, including financial assets, retirement assets, real estate, and life insurance," Bleustein says. "These assets could be handled within a trust for the benefit of the minor, and a professionally managed trust could theoretically produce better results than an account entrusted to a nonexpert guardian who might mean well but might lack the experience or knowledge to properly invest and protect assets."
Read Viewpoints on Fidelity.com: Do you need a trust?
2. The size of an estate and the state of residence
Another important factor is the size of the estate. Does the value of the estate exceed the estate tax exclusion? In 2019, for a legally married couple, generally each spouse would have the $11.4 million federal estate tax exclusion. At the death of the first spouse, their exclusion could be taken on by the surviving spouse, allowing the survivor to exclude $22.8 million (or more, because the surviving spouse’s exclusion will be indexed for inflation) from federal estate taxes. A thorough estate plan would also include provisions addressing what would happen in the event of a simultaneous death.
Estate planning strategies have been made more complicated in recent years by the introduction of state-level estate taxation. Currently, 17 states plus the District of Columbia impose either an estate or inheritance tax or both.*
"For the states that have estate taxes, it's easy to cross the threshold of estate tax liability," Bleustein acknowledges, "just by adding the value of a person's real estate, retirement assets, and life insurance policies."
Also consider other issues around how best to manage the intergenerational transfer of assets. For example, if children aren't old enough or mature enough to handle a large inheritance, an estate plan can address this by making provisions through a trust.
3. The value of "stretching"
When reviewing assets, it's not just the sum total that matters in designing an effective estate plan. Review where your retirement investments are located—in other words, what type of account they're held in and what the beneficiary options are for each account type. For instance, distributions from IRAs and Roth IRAs can be "stretched" so that they may last for the entire lifetime of the beneficiary, provided the recipient qualifies for that option and elects to receive it. If you're leaving money to a child or grandchild who is significantly younger than you, this benefit could be substantial, allowing tax-deferred or tax-free growth to continue for many years—even decades.
Let's say the owner of the IRA is age 70 and his daughter, Sue, is 35. If the owner of the IRA died 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 1 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. Probate and privacy concerns
Another good reason to have an estate plan is to minimize the probate process and its expenses, delays, and loss of privacy. Among the concerns with probate are:
5. Philanthropic goals
If an estate consists of sizable assets and the owner has a desire to give to charity, there are a number of ways to incorporate those philanthropic goals into an estate plan. Charities can be named as beneficiaries in a will.
"You could name your favorite charity or a trust as a primary or a contingent beneficiary. For example, a charity can be designated to receive a certain percentage of your retirement plan assets," Bleustein notes. "Or if you were seeking to establish an income stream for a charity throughout your lifetime, one possible option would be to establish a charitable lead trust (CLT)." Upon termination, if the CLT were properly established, the remaining balance would then go to the grantor's beneficiaries.
Read Viewpoints on Fidelity.com: Increase your tax savings on charitable giving
A properly established charitable remainder trust (CRT) would do the reverse, giving beneficiaries an income stream while the grantor (or the person who establishes the trust) is alive, with the remainder going to the grantor's favorite charity. Either option—CLT or CRT—can have multiple benefits, among which are:
An attorney or tax advisor can help you sort through the options that might be right for you.
Read Viewpoints on Fidelity.com: Year-end strategies for charitable giving
6. Business succession
If you own a business, have you considered how best to plan for the business once you have passed away? If you plan to keep it in the family, consider creating a structure that makes it easier to transfer the business’s assets to other family members, such as a family limited partnership or a family limited liability company.
There are many options; your attorney or tax advisor can help you select one that is appropriate for you in light of your specific situation.
Read Viewpoints on Fidelity.com: Get started now on business succession planning
7. Life stage
Engaging in estate planning can be an important activity at various points throughout your lifetime; there is no ideal age at which to begin the process. Certainly, new parents will want to consider their child’s welfare, and plan appropriately. As children grow, your financial life becomes more complex, and as your assets and needs grow and change, your existing estate plan should be reviewed to make sure it still meets your current needs, and that any future needs are anticipated.
8. Special circumstances
Two of the most common special circumstances that may affect estate planning decisions are blended families and concerns about families with special needs. Of course, there may be other factors that affect a particular situation.
Blended families can make estate planning more complicated. For example, a parent may want to leave a different inheritance to biological children than to stepchildren, or the parent may want to protect their biological family's inheritance in the event that a spouse remarries. A solid estate plan can help prepare for these and other scenarios. Consult an attorney to discuss your particular circumstances.
Regarding disabilities, there are specific trusts that are set up for the benefit of a beneficiary who is disabled, structured in a way that allows the beneficiary to continue to qualify for public assistance, such as Social Security Disability Insurance. Again, an attorney can help establish a trust that will meet your specific situation.
Read Viewpoints on Fidelity.com: Estate planning for special needs dependents
Next steps to consider
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