Introduction
Every American who is 18 or older needs an estate plan. Many people can suffice with a simple will, a durable power of attorney, and an advance directive, while others with a complex estate may require using trusts and other advanced succession-planning options. Regardless of your situation, here are 10 important benefits of taking the time to formulate an estate plan.
1. Protecting your assets
When discussing estate planning, many people rush straight to a will and what happens after they die. These are certainly important topics, but a proper estate plan should also include a few provisions for your assets during your lifetime. For example, if you own a business, have property that is leased or rented out, or if you are a professional who is subject to malpractice lawsuits, an irrevocable trust can help protect your personal assets from lawsuits and creditors.
Any assets you transfer to an irrevocable trust are permanently removed from your estate, placing the assets outside the reach of your personal creditors or lawsuits. Some irrevocable trusts are intended to protect assets for future generations, but you can use a credit-shelter trust to temporarily remove property from your estate, and reclaim the property down the road when your legal liabilities have subsided.
2. Preparing for potential incapacity
Another aspect of estate planning that’s commonly overlooked is preparing for potential incapacitation during your lifetime. Wills and trusts can handle your assets after you die, but they have no effect on your estate as long as you’re alive. If you spend the last part of your life incapacitated in a hospital or care facility, that could be a problem.
To prepare for this, it’s best to issue a durable power of attorney to a family member or friend to serve as your legal agent. If you become incapacitated, this individual (known as the attorney-in-fact) will have the authority to manage your finances, pay your bills, access your medical files, and make important healthcare decisions on your behalf. The power of attorney contract can widely authorize full access for the agent, or it can restrict their access to certain assets or situations in case you wish to keep certain matters private.
It’s also a great idea to draft an advance directive (also known as a living will). If you are incapacitated and cannot communicate important medical decisions to your doctors, healthcare professionals can reference your advance directive to determine what types of treatment you approve of. An advance directive can broadly authorize any and all treatments to save and sustain your life, or it can address different topics and treatments individually. A few commonly-addressed topics include palliative care (treatments to alleviate pain and suffering), resuscitation, and artificial life support.
3. Making the transition easier for your surviving loved ones
It’s never easy to lose a loved one. When you pass away, you don’t want to make an already difficult time of mourning even harder by leaving your loved ones guessing as to your funeral and burial wishes. The best thing to do is to purchase pre-need services from a cemetery or crematorium.
If that’s not financially feasible, you should at least leave instructions for how your family should handle your funeral and burial. Write these instructions down in a letter of instruction, and leave the letter with a family member who can open it when you die. A letter of instruction is not a legally-binding document, but it definitely helps to eliminate disputes if your family has differing opinions of what to do.
4. Providing for your dependents
If you’re married, you’ll want a financial plan to ensure your spouse is provided for as long as they live. If you have children, you’ll also want to make sure they are at least provided for until they turn 18. However, you can’t gift assets directly to your children, as minors cannot legally own property.
Instead, provide for your children by funding a trust for their benefit. A trustee will hold and manage the investments, distributing income as necessary until the child turns 18, at which point the trust can be liquidated and transferred to the adult child.
5. Naming a guardian for minor children
On a similar subject, it’s far better to name a guardian for your children than to rely on next-of-kin to take them in of their own accord. Choosing a guardian means you get to decide who will raise your children, hopefully very similar to how you would raise them yourself. Without a selected guardian, the court will try to place your children with next-of-kin, such as your parents or siblings. If no next-of-kin are available, your children could end up in foster care.
6. Nominating an executor and (if applicable) a trustee
An executor is the individual chosen to manage your estate when you die. This person—also known as a personal representative—will be tasked with opening probate proceedings, gathering your assets, settling your liabilities, distributing your assets, and closing your estate. As long as you nominate an executor in your will, you’ll get to decide who will take on this important role. If you fail to nominate an executor in your will, a probate judge will appoint a third-party administrator. The administrator should be counted on for fair and unbiased work, but they’ll have no regard for your wishes—their mandate is simply to distribute your estate according to intestate succession laws.
If you establish a trust as part of your estate plan, you’ll also need to select a trustee. The trustee will be in charge of managing the assets inside the trust, and distributing principal and/or income to the trust’s beneficiaries. For living trusts (the most common type of trust), you (the grantor) usually retain ownership as the trustee and beneficiary. When you die, the trust would pass into the hands of a successor trustee and successor beneficiary.
7. Save money by avoiding probate
Many people haven’t had to endure probate, but it’s universally understood that probate can be a long, costly process. Some assets are naturally structured to bypass probate, but individual bank accounts, brokerage accounts, personal possessions, and property held as tenants in common will usually require probate.
Unless you have a small estate that qualifies for Arizona’s small estate exemption (personal assets less than $75,000 and real property less than $100,000), you may want to consider placing probate assets in a trust to bypass probate court. You’ll also want to make sure your non-probate assets are correctly dispositioned with the right beneficiaries listed on the account. Non-probate assets include:
- Bank and brokerage accounts with a transfer-on-death (TOD) or payable-on-death (POD) beneficiary
- Retirement plans (401k, IRA, etc.)
- Life insurance policies
- Real property held as joint tenants, or as tenants by the entirety
8. Save time by avoiding probate
If nobody objects to your will, informal probate will usually take about 4 – 6 months to wrap up and ultimately distribute your assets to your beneficiaries. If you’d like to get your assets to your beneficiaries sooner, you’ll want to position your assets to avoid probate (as discussed previously).
9. Minimize estate taxes
Less than 0.2% of Americans make enough money to qualify for estate taxes, but for the select few who do, estate taxes can significantly impact how much money you can leave for your heirs. Personal estates valued over $5.49 million and joint estates valued over $11 million are subject to estate taxes, and the tax can be as high as 40%. To minimize your exposure to estate taxes, you may want to consider transferring assets to an irrevocable trust.
The amount that you initially transfer to the trust will count towards the lifetime estate/gift tax exemption, but it comes down to the principle of taxing the seed versus the harvest. It’s far better to claim $5 million in assets today than to claim the $20 million that investment has grown to in 15 – 20 years.
10. Leave a legacy
Everyone loves the prospect of leaving a legacy for others. Parents take pride in passing hard-earned assets to their children; grandparents relish the opportunity to pay for their grandchildren’s higher education, and just about anybody likes the idea of leaving a portion of their assets to charity. In each of these cases, a trust can be an extremely valuable estate planning tool to not just gift your assets, but to place stipulations and parameters on the assets that ensure your legacy funds are used as intended.
For long-term peace of mind, contact us to set up a consultation today. We look forward to helping with your will and other estate planning needs.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.