We know many people struggle to find time and energy to spend on estate planning, but we hope that doesn’t cause you to overlook the importance of having a good plan in place.
Because it involves thinking about what will happen to us and our assets if we are incapacitated during life and/or what will happen to our assets when we die, estate planning forces us to acknowledge and confront our mortality. That unpleasantness alone is often enough to keep people from starting in on a plan. And even if you can get past that barrier, estate planning can seem unimportant and remote to many people.
Why should someone who is healthy or who doesn’t have much in savings plan for something that is unlikely to occur for many years or which may not have a significant financial impact even if it does happen? As we will discuss below, there are good reasons for everyone to spend at least a little time thinking about estate planning, because a good plan can give you peace of mind now and make life easier for you and your loved ones in the future.
People may think that estate planning is only about deciding what will happen to our assets when we die, but there are many instances in which an estate plan can take effect and be beneficial even during life.
Do you know what would happen if you were injured and unable to make your own health care decisions? If you didn’t put a plan in place before you were injured, someone might need to go to court on your behalf to have an agent appointed to make health care decisions for you. That process not only takes time, it is also usually more expensive than the proactive measures you can take while you are still healthy. More importantly, there is no guarantee that the court would appoint the person you would have chosen for yourself if you had planned ahead and signed an Advance Directives document (sometimes also called a “living will”).
The Advance Directive allows you to give health care instructions to your family and doctors in the event that you lose decision-making capability because of an accident or illness. In an Advance Directives document, you can appoint trusted family members and friends as health care representatives to make medical decisions on your behalf if you are unable to do so, and you can give them detailed instructions about your wishes, including whether you would want to remain on artificial life support indefinitely if you were unconscious and there was no chance of recovering. You can also say whether you want to be an organ donor.
Another important disability planning document is a Power of Attorney. In this document, you can appoint agents to manage your financial affairs if you are unable to do so for any reason. Again, this document can save your family or friends from having to go to court to have someone appointed to manage your assets if you are injured or otherwise lose the ability to manage your own property.
So far, we’ve discussed planning for events that can happen during life. It is also wise to plan for the transfer of assets at death. If you were to ask someone what should happen to their property when they die (yes, a morbid question, and definitely not one to ask a random stranger on the street, but we are speaking hypothetically), most people would probably have something in mind. However, if that person hasn’t done any estate planning, what will happen in reality is quite unlikely to match their expectations.
If a person dies without a plan in place, state law will determine who receives the person’s property. These state laws, called “intestacy statutes”, vary from state to state, and although they try to mimic what lawmakers have decided is most likely to be a person’s intent, these statutes often have unintended results. For example, in Connecticut, if a deceased person has a spouse and children, the spouse might inherit only half of that person’s property, with the rest going to the children, regardless of their ages, number or needs. It’s more likely that this person would have wanted everything to go to the spouse, or to be held in trust and used for the spouse during his or her life, with anything left over going to the kids when the spouse dies, but that would have required putting a plan in place during life.
Planning can be crucial when a person’s heirs include young children or someone with special needs. Any assets passing under a state intestacy statute pass outright and free of trust. Imagine an 18-year-old receiving a check for thousands or even millions of dollars or the deed to a house. That is not likely to be a recipe for success. Or, if an heir designated by the intestacy statute has special needs and is receiving support from the state, the inheritance could disqualify that person from receiving further state benefits. A good estate plan could avoid both of these undesirable results, probably by creating trusts to hold the assets for the benefit and use of these heirs, rather than writing each of them a very large blank check without regard for the potential consequences, as the state intestacy statutes would do.
For people with considerable assets, planning is important to avoid adverse estate tax consequences. For example, in Connecticut this year, each person can pass up to $2 million to heirs without being subject to state estate tax. New York has a similar exemption of $2,062,500 this year, but it is set to increase over the next several years and eventually match the Federal estate tax exemption, which is $5.34 million this year. However, the state exemption amounts are not “portable” like the Federal exemption, meaning that if one spouse does not use his or her full state exemption, the amount left over will not be around to be used by the surviving spouse’s estate.
This difference in portability can create large state estate tax costs for married couples with assets in excess of the state exemption amount. For example, assume a Connecticut couple has $3 million in total assets, split $1.5 million in each spouse’s name. If one spouse dies this year and leaves everything to the surviving spouse, there would be no Connecticut state estate tax on the first spouse’s estate because it is under the $2 million exemption. However, the surviving spouse would now have $3 million in his or her own name, and there would be Connecticut state estate tax on $1 million of those assets when the surviving spouse dies, assuming the Connecticut exemption amount does not change. There are fairly straightforward planning techniques that could have utilized the first spouse’s state estate tax exemption in order to avoid Connecticut state estate tax when the second spouse died, saving thousands of dollars for the couple’s heirs.
Many Types of Planning
We’ve referred throughout this article to “planning” very broadly. Planning can take many forms and must be tailored to suit a person’s specific circumstances, but what is important is to be intentional about planning and to seek professional advice when necessary. For many, planning can be as simple as confirming that the state intestacy statute is consistent with their wishes and signing an Advance Directive and Power of Attorney. Other people can accomplish most of their planning by designating beneficiaries or co-owners on their bank and brokerage accounts, IRAs or 401(k)s and life insurance policies. However, for a significant number of people, there is no substitute for having a will or an inter vivos trust to carry out their wishes.
Also, no matter how simple or complex your plan, changes in your assets, relevant laws and relationships with family and friends can quickly make a good plan obsolete. For example, in just the last four years, the Federal estate tax exemption and rates have changed twice, and Connecticut and New York exemptions and rates have each changed once. Because wills often use formula language that refers to such exemption amounts, a will signed only four years ago may result in a completely different disposition of assets today than it would have when it was signed, and it may no longer operate in a tax-efficient manner. Any estate plan should be reviewed every few years, plus whenever there is a significant change in life circumstances, such as marriage, birth of children, divorce or move across state lines.
At Mead, Bromley & Bishop, we recognize that every client is an individual with a unique set of circumstances and needs. We listen carefully to each client’s wishes and together develop a complete understanding of the steps that are advisable to best achieve the client’s goals, and then we work quickly and carefully with the client to help ensure that those steps are completed. If you would like our assistance in putting together a plan for you, or in reviewing an existing plan that may be out of date or need revising, please contact us by calling 203-325-4477 or contact us here.