The Need for an Estate Plan

Question:  When should you have an estate plan?  Is it when your estate has a value of more than $5.49 million, more than $10.98 million, or some other number?

There is one purpose and one purpose only for an estate plan and that is to deal with the division and distribution of your assets upon your death.  That’s it – period.  Nothing more, nothing less.

First of all, the $5.49 million is the net value your estate can be WITHOUT having to pay a tax to the IRS.  For 2017, once the value of your estate exceeds $5.49 million, the IRS wants a cut of your estate.  They want to collect a tax of approximately 40% of the amount over $5.49 million.  As an example, if your net estate is $5.59 million, then you are over the threshold by $100,000 and the IRS wants approximately $40,000.  This is the threshold for an unmarried person.  For a married couple, assuming they have done it right, the value of the estate can be $10.98 million before the IRS puts out their hand for a tax payment.

For 2018, the numbers have increased to $5.6 million for a single person and for a married couple assuming they have done it right, the threshold is $11.2 million.

What does “assuming they have done it right” mean?  Several years ago, the IRS gave us a new term called “portability”.  Portability means that the amount of the $5.49 million or $5.6 million that is not used at the death of the first spouse can be transferred to the surviving spouse and used upon their death.  Everyone was tickled to have that provision because it removed the need for a marital/credit shelter/A-B trust, whatever term you want to use.  Many estates did not realize that the IRS must be told of the amount that the decedent is using and the amount that is being transferred to the surviving spouse.  These estates did not do it right.  The IRS must be informed of this information by filing an estate tax return when the first spouse passes away.  Without this return being filed, the IRS has no idea of the amount of credit being used and the amount of credit being transferred.  Assuming they have done it right means the need to timely file an estate tax return with the IRS when the first spouse passes away and advising the IRS of the estate credit being used and the estate credit being transferred to the surviving spouse.

Your estate planning starts with your first dollar.  The purpose of an estate plan is to plan for the distribution of all of your assets upon your death.  Without an estate plan, your assets are generally distributed according to state law.  This may or may not be what you want to happen.  If you don’t leave instructions for the division of your assets, then you are agreeing to accept your state’s distribution schedule.  These instructions can be left in a will, in a trust, or in the specific titling of the asset itself.

So, what drives an estate plan?  If you get the beneficiaries right, you will have a pretty successful estate plan.  Step number 1 is to identify the beneficiaries you want to remember.  This includes those who are not family members.  If you have a near and dear college friend or a close buddy you served in the military with and you want to remember them, they have to be specifically mentioned and provided for in your estate plan.  A verbal comment to someone to give Bob, your Army buddy, the sum of say $5,000 doesn’t cut it.  Bob has to be included in your estate planning documents to make it official.

Step number 2 is to decide how much of your estate will go to each beneficiary.  Remember to allow for the IRS to take their cut if your estate is greater than the threshold amounts discussed above.

Step number 3 is to decide how each beneficiary is to get their inheritance.  You may want them to have it as soon as possible after your death.  Or, you may want to use a trust and leave instructions in the trust as to how the assets are to be paid out.  With a trust, the sky is the limit with the payout instructions.  I have seen some wild and crazy distribution stipulations.

Do you need a will as a part of your estate plan?  If you want to direct the disposition of your assets, then you very likely need a will.  This is the basic estate document and your first line of operation for the distribution of your assets.  However, the will and the titling of the ownership of the specific asset must be coordinated and work together.  Suppose your spouse has passed away and you are now a single person.  Your will leaves everything to your son.  However, your life insurance policy that has been earmarked for your funeral expenses names your brother who you haven’t seen in 15 years as the beneficiary of the life insurance policy.  Who gets the life insurance money?  Is it the son who needs the money for your funeral expenses or is it paid to your brother that you haven’t seen in several years?  The insurance company will pay the money to whoever you have listed on the policy regardless of what your will says.  In this case, the insurance proceeds will go to your brother that you haven’t seen in 15 years.

Remember, if your assets exceed the thresholds referenced above, your asset distribution plans must allow for the money that will be demanded by the IRS.

Your estate plan needs to consider the beneficiaries and the titling and beneficiary designations that are tagged to each asset.  Get this part right and chances are that you are on the way to creating a successful plan.

You should check all of your beneficiary designations on assets such as bank accounts, stocks and bonds investment accounts, real estate, retirement accounts, life insurance as examples and get them aligned as you want them so there are no issues regarding their distribution upon your death.  Remember, you will not be able to settle any arguments with your heirs once you have passed away.

Regardless as to how large or small your estate may be, it is extremely important to spell out clearly and distinctly who you want to inherit your assets upon your death.