top of page

Everyone Needs an Estate Plan®

Updated: Dec 5, 2020

It is that time of year when people want to get their affairs in order.  No one wants to talk about what will happen to them when they die.  However, when you pass away, a legal process is started to determine who gets your assets.  Most people think that estate plans are only for wealthy people.  In this article, I am going to dispel that myth and hopefully give you something to think about in the process. 

Everyone Needs an Estate Plan®.  That saying is so true that we trademarked it.  Let’s take some time to discuss what happens when you pass away.

At death, you leave an estate.  Your estate consists of your assets. 

Your assets consist of the following:

  1. Your checking and savings accounts

  2. Your brokerage accounts

  3. Your home

  4. Your car

  5. Your business

  6. Your personal effects

  7. Your jewelry

In short everything that you own is part of your estate.  When you die, your estate goes through the process of probate.  Each state is a little different, and it is important to point out that I am a Certified Estate Planner, and not an attorney.  I will discuss the generalities of probate, but for a more detailed explanation you should contact an attorney.

Probate is a legal process where a court makes decisions on who will get your assets.  If you die without an estate plan or a Will, you die as something called intestate.  The probate process is public.  What that means is that the probate court will advertise your death and creditors will be notified.  The court will hear claims against the estate, such as mortgage companies, credit card companies, auto loan companies, and other creditors.  The court will first divide the liquid assets among the creditors, and order your fixed assets, like homes and cars sold to satisfy the liens that they have on them.  The remaining estate will be divided up amongst your next of kin.

If you have a Will, that is a little better.  The Probate Court will validate the Will, and make it public.  The court will then hear arguments against the estate, and pay the creditors first, and then follow the Will second.   The problem is that this whole process is public and everyone will know your business.

My recommendation to most clients is a Revocable Living Trust (RLT).  A trust is a legal document that has three parties: the grantor, the trustee, and the beneficiaries.  There are Revocable Trusts, meaning they can be changed, and Irrevocable Trusts, meaning they cannot be changed.  The grantor of the trust is the person writing the trust, they are granting property to the trust.  The trustee is the person that follows the trust document.  They are the owners of the property that is granted by the grantor.  The beneficiaries are the people that the assets of the trust go to.

In a RLT you are the grantor and the trustee.  You would put all of your assets into the trust.  Some assets that would go into the trust would be your checking account, your brokerage accounts, you businesses, and other assets.  You can use the property in the trust until your death.  When you die, the trust closes, and becomes irrevocable and the contingent trustee (usually your spouse or other trusted individual) will disperse the funds to the beneficiaries.  This process avoids probate, and is private.  Further, you can put restrictions on how the assets are passed to the beneficiaries.  For instance, if you have children you can have the assets pass to them under certain conditions, like a 3.0 GPA, if they go to college, etc.  You can also put a drug and alcohol provision in your trust that wouldn’t pass the assets to your beneficiaries if they had a substance abuse problem.  You can’t make these provisions with a Will.  In conjunction with your trust, you would have a Pour Over Will that will take care of any assets that didn’t make it into the trust.

These are just basic estate plans.  Estate plans can get very complicated.

There is an Estate Tax.  If your estate is worth $5.34 million or more in 2014, then you are subject to the Estate Tax.  The Estate Tax is a tax on the right to pass your assets on to the next generation.  $5.34 million sounds like a lot, but it really isn’t.  Let’s do some math:

If you have a home that is worth $500,000, a life insurance policy worth $2 million, a small business that is worth $2 million, and a retirement account that is worth $1 million, you have a taxable estate.

If you have a taxable estate, then there needs to be planning to avoid the estate tax.  For instance, let’s say that you are married, have two children, you have gone through your assets and your estate is worth $7 million.  After you have deducted the $5.34 million exclusion, your taxable estate is $1.66 million.  The estate tax is 40 percent of this amount so your estate tax is $664,000.  How do you get out of paying this money to the government?  Simple estate planning.

You can gift $14,000 per year to one individual.  If you are married and you and your wife elect to split your gifts, you can gift $14,000 to a person and your wife can gift $14,000 to the same person totaling $28,000.  That is one way to get rid of your taxable assets is through a gifting strategy.  The next way would be through trusts.

We talked about trusts a little earlier, but I wanted to touch on them again.  If you form an Irrevocable Trust, the assets being granted are no longer yours.  For instance, let’s say that you want to start a trust for your children.  As grantor you would dictate the terms of the trust, and then grant the property.  Once the property is granted, then it is no longer yours.  It belongs to the trustee of the trust.  Let’s say that you have a $1 million life insurance policy.  This asset would be added to your taxable estate.  However, if you were to form an Irrevocable Life Insurance Trust (ILIT), then that asset is removed from your estate, and you can put restrictions on the use of the money from the life insurance.

The estate tax is very complicated and there are literally thousands of ways to avoid paying it.  In this article, I was trying to express why you need to think about your estate.  Dying without an estate plan is not pretty.

bottom of page