Death and Taxes: Estate Planning

Copyright: <a href=Retirement planning is a subject familiar to Cutter Family Finance readers. Equally important and included in that, is estate planning. Everyone can benefit from some sort of estate plan. Although many people believe that it is only necessary for those who are very wealthy or who have complicated family situations, it is an essential piece of a retirement plan, regardless of wealth or family situation. By having one in place, you can be confident that your wishes are carried out when you can no longer speak for yourself. Having one in place also helps your loved ones navigate through an already difficult and emotional time.

That being said, you may be surprised to learn that most Americans do not even have a will, according to a 2016 Gallup poll. In fact, 42% of Baby Boomers, now in or approaching their 70s, have not put their affairs in order. 64% of Gen Xers, now either approaching or in middle age, lack an estate plan. The numbers are even lower for Millennials, who are now having families, buying homes and building legacies.

As Benjamin Franklin famously said, “in this world nothing can be said to be certain, except death and taxes.” Estate planning helps us to plan for both. But in addition to asset distribution and tax minimization, a thorough estate plan makes provisions for if and when we become incapacitated and unfortunately, many of us will become incapacitated before we die.

To that end, a Durable Power of Attorney and a Health Care Proxy are two vital documents to have prepared. A Durable Power of Attorney grants a trusted individual the ability to conduct your financial affairs on your behalf. A Health Care Proxy appoints someone you trust with the ability to make medical decisions for you if you are unable to do so yourself.

In order to plan for the distribution of your assets, it is important to understand that everything you own must be distributed to someone else when you die (which you likely already know). How you own as asset will determine how it is distributed. Some assets can be distributed directly to another person or organization, while others must go through the court-supervised probate process.

Insurance policies, annuities, and retirement accounts, like IRAs, allow you to name a beneficiary. Most bank accounts and other non-retirement accounts also allow you to name a beneficiary, but these accounts are usually called “Transfer on Death” (TOD) accounts. Any such policies and accounts will pass directly to the named beneficiaries.

Assets placed into trust can also be distributed directly to the beneficiaries of the trust, pursuant to the trust’s terms.

Similarly, any assets owned jointly with others, with rights of survivorship, will pass directly to the other joint owners. Take your house, for example. If you own your house with your spouse as joint tenants with rights of survivorship, then your share of the house will go directly to the joint owner upon your death.

Any other assets, that will not pass directly to another owner, or for which you have not identified a beneficiary or have arranged to pass through a trust, are distributed through the court-supervised probate process, usually pursuant to the terms of your will. If, however, you do not have a will, then those assets will be distributed pursuant to your state’s intestacy laws. That’s when things can get tricky.

Prince is an example of this. As you probably know, Prince was a very famous singer and songwriter who died in April 2016. He appears to have died without a will and now numerous parties are claiming to be rightful heirs to his vast estate. If a valid will is not found, Prince’s estate will be distributed in a manner laid out by Minnesota’s intestacy laws, regardless of what Prince may have wanted.

A state’s intestacy laws employ a formula that is primarily based on a family tree to determine the distribution of an estate, once creditors’ claims have been settled, and estate taxes have been paid. If you have a non-traditional family, for example, or if you want to make sure that specific people or charities receive assets, it’s vital to have a will that provides for any such distributions.

It is important to understand, however, that the instructions set out in your will only apply to the assets that must pass through probate. Any assets distributed directly to a beneficiary (outside of probate) will be distributed to the named beneficiary. That is why it is so important to periodically review your beneficiary designations on any and all accounts.

Lastly, as mentioned above, estate planning can also incorporate strategies to minimize taxes.

You may have read about some changes to the federal estate tax resulting from the Tax Cuts and Jobs Act; the new tax law enacted this year. Congress doubled the federal estate tax lifetime exemption with that new law, exempting estates valued up to $11.2 million per person. The new law preserves the concept of portability, the ability of a surviving spouse to use his or her deceased spouse’s unused lifetime exemption. By electing portability, the last surviving spouse of a married couple can avoid federal estate tax on estates valued up to $22.4 million.

You may be thinking that these numbers are so large, that you do not need to worry about it, but bear in mind that Massachusetts imposes its own estate tax. The Massachusetts estate tax applicable exclusion amount is $1 million. And please understand that the calculation of any estate tax (federal or state) is based on any assets that you own or control. When you consider the value of real estate, as well as any retirement or savings accounts or life insurance policies, you can reach that $1 million mark sooner than you would think. By having an estate plan in place, you may be able to minimize your state estate tax burden. Although portability is a provision specific to the federal estate tax, there are strategies available, primarily through the use of trusts, that can maximize both spouse’s lifetime exemption for state estate tax purposes as well.

As hopefully you can all agree now, having an estate plan is essential for everyone. But it is equally important to make sure it is updated to reflect the continued changes in your life – the birth of new grandchildren, for example, the acquisition or distribution of assets, marriages, divorces, and other major life events.

As Jeff always says, be vigilant and stay alert, because you deserve more.

Have a great week.

Susan Roman is an Investment Advisor Representative at Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Susan can be reached at susan@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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