Times have changed.
When I entered the financial industry over 20 years ago “Estate Planning” primarily focused on two specific issues:
1. Having to endure the “Probate” process when settling an estate and,
2. Paying tax on the portion of an estate not covered under the “Federal Estate Tax Exemption”.
Then something happened.
1. People (and advisors) began to realize this feared “Probate” was not nearly as traumatic as many financial journalist and marketers would have you believe.
2. The “Federal Exemption” which determines how much of an estate can be left to heirs without incurring estate taxes increased from $600,000 in the late 90’s to $5,490,000 last year and doubled under the new tax law in 2018 to $11.2 million per person meaning a couple can now leave an estate valued up to $22.4 million without incurring a dime of estate taxes.
Then something else happened.
1. Divorce rates began to increase
2. Blended families became increasing prevalent
3. Parents began to worry about their spendthrift children
The focus of estate planning shifted from the need to avoid fees and taxes to keeping control beyond the grave.
Let’s run through a common scenario to illustrate:
1. Don and Ruth had a legacy plan that distributed their estate to Wendy, their daughter at the time of their passing.
2. After receiving her inheritance, Wendy tragically died from an auto accident leaving her husband, Randy and two children Ryan and Raleigh behind.
3. Two years later, Randy met a woman, named Kelly who had two children of her own from a previous marriage. They began dating and decided to get married 6 months later.
4. Five years into the marriage, Randy was mowing the back yard when he was hit by a massive heart attack and pronounced dead before the ambulance even reached the ER.
5. Upon his death, Randy’s estate passed to his new wife Kelly, who updated her financial records and established her two children as the sole beneficiaries in the event of death.
Do you see any potential issues with this scenario?
The two people who would have a problem is Ryan and Raleigh, who never inherited a dime of their grandparent’s money.
Situations like this are becoming more common every single day. Here are a few more examples that we often see:
1. Robert inherited his mother’s $175,000 IRA last year when she passed. He used it to pay off credit cards and student loans, took some friends on a beach trip, bought a new car, then remodeled his kitchen and bathrooms leaving him with just under $5,000. He then received a notice from the IRS stating he owed $75,250 in Federal & State income tax for the IRA amount which he never realized was taxable. This could have been avoided.
2. Ron and Lori left money to provide care for Melissa, their special needs child. Unfortunately, they established the inheritance incorrectly disqualifying her future receipt of her current income and benefits being provided by government programs.
3. Marcus’s will and trust was set up to leave everything to his wife, Sarah. However, his largest asset, his 401k went to his ex-spouse because he failed to set up the beneficiary forms correctly when he remarried.
4. Your daughter Becky finalizes her divorces. A month later you find out her agreement includes your ex-son-in-law’s ability to lay claim against a portion of her future inheritance you set up for her.
5. Your child gets caught up in the opioid epidemic. Leaving him money would only make matters worse. So, what should you do?
The list of examples we have experienced and scenarios we could introduce is endless.
For now it is important to at least understand the following:
1. A beneficiary form will override both a will and a trust.
2. Check your beneficiary forms. You should update ALL financial forms in the event of remarriage, death, or divorce
3. Consider leaving an income stream to your children rather than a lump sum.
4. A “Restricted Beneficiary Form” can help you keep control and carry out specific wishes after your gone without needing a trust.
5. Remember that doing nothing is still doing something. Leaving an estate with no will or trust will give control to others who will determine what happens to your hard earned money.
6. There are ways to protect money for future generations, which cannot be changed in the event of death or divorce.
7. Consider the use of Payable On Death (POD) and Transferrable on Death (TOD) provision with accounts that do not offer a beneficiary form.
8. Understand that different accounts vary concerning tax consequence and how these are left will determine how much is left to your loved ones vs Uncle Sam. For example, many people will leave a taxable IRA to children and tax-free life insurance policy to a charity. Instead, it can be a good idea to switch these accounts as IRA’s pass to non-profits tax free.
9. Ensure your IRA’s have a “Stretch” provision that will allow beneficiaries the option to keep the majority of money being received under the IRA’s tax protection if not needed.
The ultimate goal of Estate Planning in the new economy is to ensure your money goes where you want, how you want, and when you want in the most tax-efficient means possible.
As Ben Franklin once said, “The only thing certain is Death and Taxes”.
“Leave your kids enough so they can do anything they want but not too much that they don’t have to do anything at all.” – Warren Buffet
Disclaimer: This newsletter is a publication dedicated to the education of individual investors for informational service only. The information provided herein is not to be construed as an offer to buy, sell or hold a stock of any kind. All economic and performance data is historical and not indicative of future results.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
Advisory services offered through Enhance Wealth, a member of Advisory Services Network, LLC, 6600 Peachtree Dunwoody Road, Embassy Row 600, Suite 575, Atlanta, GA 30328. 770-352-0449 Insurance products and services offered through Enhanced Capital, LLC. Advisory Services Network, LLC and Enhanced Capital, LLC are not affiliated.