The main purpose of estate planning is to exert some control over the distribution of your assets after your death. One of the most commonly cited benefits of estate planning is to avoid probate, which is the legal process by which your assets are allocated by the court system. Probate should be avoided when possible because it is time consuming and expensive. It is also a public process, which means that anyone can access the court records and see what your estate was worth and how it was divided, potentially attracting unwanted attention for your heirs.
Another benefit of estate planning is to optimize tax efficiency. Although the federal estate tax exemption was increased to $11.2 million in 2018, this is a moving target. The exemption is scheduled to revert to its previous level in 2026, with an adjustment for inflation, and there’s a good chance that future administrations will change the law anyway. Depending on your state of residency, you may also be subject to state estate taxes and inheritance taxes. A well-constructed estate plan allows you to pass along your assets in the most tax efficient manner through a variety of strategies, such as revocable living trusts, life insurance trusts, and tax-free gifting.
Leaving your children a large financial windfall right after you die may not be doing them any favors in the long run. With an estate plan, you can control the timing and size of your children’s distributions. For example, you could specify an annual distribution beginning at age 30, or three equal installments at ages 30, 35, and 40, etc. You can include incentives to reward accomplishments, such as getting a college degree, working full-time, or starting a business. Contingencies can also be added to discourage things like unemployment, substance abuse, and criminal behavior, or to pay for drug or alcohol rehab, if needed.
Once your estate plan is established, there are some important items to follow up on. All too often, estate planning documents are just thrown in a drawer and forgotten. There are two main repercussions of a forgotten estate plan. One is that your family’s assets are never properly titled in the name of the trust and therefore the trust is never funded. In order to avoid probate, every bank account, investment account, life insurance policy, real estate holding, business interest, and motor vehicle should be titled in the name of the trust or have the trust named as a beneficiary. If this is not done, probate will not be avoided. The second major ramification of a forgotten estate plan is that your family situation may have significantly changed since the plan was initially drafted. For example, you may no longer wish for a sibling to be in charge of your children’s assets, or now that your children are older, you may wish to delay distribution of assets to them or concentrate instead on distributions for your grandchildren’s education. A thorough review with your estate plan attorney can avoid these common mistakes.
While a last will and testament does not avoid probate, most estate plans include a will. If you have a trust, this is typically referred to as a pour-over will since it normally states that all assets in your sole name are left to your trust. Your will is a safety net in case an asset is not properly titled in the name of your trust.
A financial power of attorney is another important estate planning tool. A financial power of attorney handles all assets outside of your trust in case you become incapacitated. Certain assets cannot be placed in your trust during your lifetime, such as a retirement account. Without a valid financial power of attorney, your heirs will have to apply to the probate court for permission to access these funds for your benefit, an expensive and time-consuming process. A simple financial power of attorney avoids this expense and insures that you can choose who is making financial decisions on your behalf. Another important component of your estate plan is a healthcare power of attorney, which expresses your preferences with regard to medical care should you become incapacitated and appoints a trusted person to make healthcare decisions on your behalf.
This article was co-written by Misty A. Watson, an estate planning attorney in St. Louis. Misty is licensed in both Missouri and Illinois, but can assist clients with estate planning services through the U.S. in conjunction with a local attorney. Along with her law degree from Washington University, Misty also has a master’s degree in taxation. Prior to becoming an attorney, Misty was a social worker who worked to find permanent homes for children with special needs. This unique experience allows Misty to craft an estate plan that addresses the financial and emotional issues that arise in planning the distribution of your estate along with minimizing the tax consequences involved.
Jeffrey J. Brown, MD CFA
Principal, Shearwater Capital
Misty A. Watson
Principal, Danna McKitrick Attorneys at Law