Estate planning sounds like one of those “should do” tasks that a responsible adult does later. Somehow, it often ends up in the same procrastination category as “eat less dessert.”
What is estate planning? It’s a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives.
Estate planning can be as individual as you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs.
For example, you may have a small estate and may be concerned only that certain people receive particular things. In this case, all you’ll probably need is a simple will.
However, you may have a large estate and minimizing any potential estate tax impact is your top goal. Then you’ll need to use more sophisticated techniques in your estate plan, like a trust.
Choose Your Own Estate Planning Adventure
To help you understand what estate planning means to you, we’ve broken down this article into sections that address the common needs among some broad groups of individuals.
Think of these suggestions as a starting point. Then seek professional advice to implement the right plan for you.
Estate Essentials: Everyone over Age 18
Since incapacity can strike anyone at anytime, all adults over 18 should consider having:
Durable power of attorney
A durable power of attorney document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
Advance medical directive
The three main types of advance medical directives are:
- A living will
- A durable power of attorney for health care (also known as a healthcare proxy)
- A Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.
Young and Single: The Choice is Yours
If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will.
If you don’t have a will, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
Unmarried Couples: Get a Will
You’ve committed to a life partner, but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death.
Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing.
If you share certain property, such as a house or car, you may consider owning the property as joint tenants with rights of survivorship. That way, if one of you dies, the jointly held property will pass to the surviving partner automatically.
Married Couples: Consider Credit Shelter Trust
For many years, married couples had to do careful estate planning—like creating a credit shelter trust—to take advantage of their combined federal estate tax exclusions.
Yet, things have gotten less complicated in recent years due to portability rules. For decedents who passed in 2011 and later years, the executor of a deceased spouse’s estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning.
You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning.
However, portability should not be relied upon solely to use the first to die’s estate tax exclusion. Plus, a credit shelter trust created at the first spouse’s death may still be advantageous for several reasons:
- Portability may be lost if the surviving spouse remarries and is later widowed again
- The trust can protect any appreciation of assets from estate tax at the second spouse’s death
- The trust can provide protection of assets from the reach of the surviving spouse’s creditors
- Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses
Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $164,000 annual exclusion for 2022 is allowed).
If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
Married with Children: Estate Planning is Vital
If you’re married and have children, you and your spouse should each have your own will.
Having a will is vital because you can name a guardian for your minor children in case both of you die simultaneously.
If you fail to name a guardian in your will, a court may appoint someone you might not have chosen.
Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.
Consider establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.
You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.
Comfortable and Thinking about Retirement
If you’re in your 30s, you may be feeling comfortable. You’ve accumulated some wealth, and you’re thinking about retirement.
Here’s where estate planning overlaps with retirement planning.
It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death.
Keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years.
Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).
Elderly or Ill
If you’re elderly or ill, you’ll want to:
- Write or update your will
- Consider a revocable living trust
- Have a durable power of attorney in place
- Ensure you have a health-care directive
Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
Wealthy and Worried
Depending on the size of your estate, you may need to be concerned about estate taxes.
For 2022, $12.06 million is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.
Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2022, the GST tax exemption is also $12,600,000, and the top tax rate is 40 percent.
Note: The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and be cut by about one-half.
Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state where you live.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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James Curran works with individuals and businesses and is passionate about getting to know his clients and their goals, both personal and professional. He spends time with them, helping to identify and solve their most pressing questions and concerns.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.