An Introduction to Estate Planning Strategies
Do you have a will or estate plan? Many individuals and families overlook the need for estate planning in the belief that if they don’t possess significant wealth or a complicated situation, a plan is not required. At Cary Stamp & Co., we believe every individual and family should establish some level of “estate plan,” whether simple or sophisticated.
Ever heard the saying, “He’s going to try to control the money from his grave?” Well, to a great extent, that can be done. A will is a legally enforceable document that states how an individual would like their affairs handled after death. A will usually specifies who will receive the deceased individual’s money, property, investment accounts, other assets, etc. A disadvantage of a will is that it will usually go to court and be reviewed/approved by a judge; for older wills this can be a challenge. The court will ultimately decide whether to approve the will or to (possibly) disinherit beneficiaries (check your state laws for the specific details about this). Another disadvantage of a will can be the costs involved with hiring an attorney to prepare it. An estate on average may decline by 2-4% after going through the probate process. Thus, due to the high costs of probate, it is usually beneficial to avoid it through the use of Trusts and setting up proper Transfer on Death accounts (TOD).
A trust is a fiduciary relationship given to another party to handle your assets. The four advantages of a trust are:
1) The trustee handling your assets can continue managing the assets in a manner that can be enforced and recognized by you;
2) The trust can also include provisions that specify the management of the assets in the event of your incapacity;
3) The trust continues after the death of the individual; and
4) Unlike a will, a trust does not go through probate, which can eliminate future expenses for heirs and beneficiaries. A disadvantage of a trust is that it is usually more expensive to create upfront.
TOD Accounts – Property Titling
The manner in which an asset holder titles property and sets up investment accounts can have a huge impact on the outcomes of an estate plan. I find that most financial advisors do not incorporate this next section, focused on property content, into their regular practice of gathering client data, which can lead to the client incurring unnecessary state/federal taxes, estate planning issues, and family conflict. The main advantage of proper asset titling and setting up TOD accounts is that these assets will usually pass outside of probate. In most cases TOD assets can also bypass a will’s directive.
Community Property versus Non-Community Property
Community property is a form of ownership that can only be held by spouses in states that are deemed to be community property states. When spouses hold assets in a community property state, each spouse legally owns an equal interest in that property. Unlike non-community property, there are no survivorship rights, which means that instead of the deceased spouses share going to the surviving spouse upon death, the deceased spouses share will be subject to probate, forcing community property residents to present a will.
Primary Advantage of Community Property
The main advantage of community property is that the entire property gets a full step-up in basis. This full step-up in basis is only present in long-term capital gains property such as investment accounts, real estate, home sale, etc.). Consult with your trusted financial advisor regarding step-up in basis property.
Property that is not considered community property are:
- Assets held by a couple in a non-community property state.
- Income earned by one spouse prior to marriage.
- Property inherited by one spouse.
- Property received as a gift by one spouse.
NOT: Even if the property was earned prior to the marriage, inherited, or received as a gift, any money commingled and transferred into a joint account with the spouse WILL be considered as joint property.
Other forms of property ownership:
- Joint tenancy with right of survivorship (JTWROS) – JTWROS property can be held by almost anyone (spouses, friends, parents, children, and business partners). With JTWROS, control and asset ownership is shared equally by all “joint tenants.” The main advantage of JTWORS is that upon the tenant’s death, the assets immediately pass to the surviving tenant(s) in equal shares. This allows the assets not to have to go through the probate process.
- Tenancy by the entirety (TBE) – This form of ownership can only be owned by spouses. Unlike JTWORS, severance and cancelation of TBE must be consented by both spouses. The primary advantage of TBE is that the assets are protected from the other spouses’ creditors.
- For example, a husband is sued because of an at-fault traffic accident. The investment account he owns with his wife should not be subject to the claims of creditors because the account is held in TBE with his wife.
- The only way for spouses to severe and cancel TBE is for both spouses to mutually agree to terminate the ownership, through a divorce decree and divorce proceedings, or by death of an owner.
- Tenancy in common (TIC) – Tenancy in common enables property to be owned by several owners at the same time, at certain undivided interest amounts.
- For example, Joe, Mary, and Lisa start a business and established TIC. Joe owns 50%, Mary owns 30%, and Lisa owns 20%. At Joes death the business is valued at $1,000,000. Joe’s heirs will receive $500,000.
The planning never stops. You’re in great health now, but what happens if something happens to you in the future? Are you currently set-up for success?
Powers of Attorney
A power of attorney is a written document by which an individual empowers another individual to act on his or her behalf in situations that may not involve incapacity. Powers cannot be given to another to execute or revoke a will or a living will. Powers of attorney include non-durable power of attorney, durable power of attorney, and springing durable power of attorney.
- Non-durable power of attorney – This power ceases when the principal becomes incapacitated.
- For example, Ryan, age 60 creates a non-durable power of attorney with his son Chad as the attorney-in-fact. Chad can immediately start making decisions on behalf of his father Ryan, but when his father becomes incapacitated, his power will cease.
- Durable power of attorney – This power starts immediately and continues for the life of the incapacitated individual. The power ceases at the principal’s death. This is the most common type of power of attorney.
- Springing power of attorney – This power only becomes effective in the event the principal becomes incapacitated.
- For example, Ryan, age 60 creates a springing power of attorney with his son Chad as the attorney-in-fact. Chad is not able to immediately make decisions on behalf of his father. When his father becomes incompetent Chad will then be granted the power.
A living will, or advanced medical directives is a legal document that directs your physician to discontinue life-sustaining procedures. Consider a living will as a final expression of your right to refuse medical treatment.
Guardianship or conservatorship – A guardian is responsible of caring for another individual. Parents can name a guardian for their minor children. A guardian of the property is most times referred to as a conservator who is responsible for making financial decisions. Both parties are outlined in a person’s will and are usually followed by the court, but it is up to the court to legally determine who the parties will be.
There is more complexity to planning for high net worth clients, especially those that own businesses. We’re here to help with expert estate planning services and strategies.