Your age, health, wealth, lifestyle, life stage, goals and other personal factors determine your particular estate planning needs. When you are 40, chances are you are not the same person you were at 20, and your estate plan should reflect the changes you have experienced. By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control the distribution of your assets according to your goals and objectives after your death.
What estate planning means to you specifically depends on your stage in life and your circumstances. To help you understand what estate planning means to you, the following “life stages” address various estate planning needs and tools that are common among very broad groups of individuals. We encourage you to think of these tools as suggestions or a point in the right direction, and advise you to seek professional guidance to implement the right plan for you and your situation.
Foundational Estate Planning Documents
All adults over the age of 18 years old should consider establishing a basic estate plan. If you own something of value that you would like to pass on to someone else upon your death, you have an estate. Below are foundational estate planning documents that we encourage all adults to establish and revise from time to time depending on your stage in life and current situation.
- Durable Power of Attorney: This document lets you name someone to manage your property and finances for you in case you become incapacitated and cannot do so.
- Advanced Medical Directive: The three main types of advance medical directives are (1) a living will, (2) a durable power of attorney for health care or health-care proxy and (3) a Do Not Resuscitate (DNR) order. These documents essentially designate who will make medical decisions on your behalf, and lay out your wishes regarding life-sustaining medical treatment. Not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.
- Health Insurance Portability and Accountability Act (HIPAA) Release: This document allows your designated agent to discuss your medical condition without violating patient privacy laws.
- Will: A will is a legal document that sets forth your wishes regarding the distribution of your property and the care of any minor children. If you are a younger adult with sizable personal investment accounts, a will is something you should consider drafting. If you don't currently have a will, your loved ones may not receive the assets you wish to leave them in the event of your death.
Early Adult: Young and Single
Once your child or loved one turns 18 years old, a parent no longer has the legal right to make financial and medical decisions. Since incapacity can strike anyone at any time, all adults should consider establishing their foundational estate planning documents. If you have material possessions or property, establishing a will is of utmost importance. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity). If you die and you do not have a will, the assets you leave behind will be parceled out to your nearest relatives based on the state of residence’s intestate succession laws.
You have committed to a life partner but are not legally married. In this situation, a will is essential if you want your property and possessions to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you may consider owning the property as Joint Tenants with Rights of Survivorship (JTWROS) as jointly held property will pass to the surviving partner automatically.
We also strongly suggest each partner review their outstanding estate planning documents such as durable power of attorney, advanced medical directive and HIPAA release to reflect their wishes and give authority to your partner. While not an estate planning document per se, you may want to update your beneficiary designations on such things as health insurance, bank accounts, retirement plans and investment accounts so they may pass to your partner.
For married couples with or without children: first you will want to name your spouse to be your durable power of attorney, health care proxy and HIPAA release if you want there to be no question as to who should control your financial and medical decisions if you become incapacitated. Also, consider changing your beneficiary designations on such things as life insurance, bank accounts and retirement plans so they may pass directly to your spouse. If you do not already have one, this is also the time to consider a will or trust to definitively state who should receive your assets.
Some couples may consider additional estate planning tools in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 now allows the executor of a deceased spouse's estate to transfer any unused estate tax exclusion amount to the surviving spouse. This provision, known as portability, is effective for estates of decedents dying after December 31, 2010. You may be inclined to rely on these portability rules for estate tax avoidance, however, portability should not be relied upon solely for utilization of the first to die's estate tax exemption, and a credit shelter trust created at the first spouse's death may be advantageous for several reasons:
- Portability may be lost if the surviving spouse remarries and is later widowed again
- The trust can protect any appreciation of assets from estate tax at the second spouse's death
- The trust can provide protection of assets from the reach of the surviving spouse's creditors
- Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses
- Portability does not apply to state estate tax exemptions
Married with Children
If you are married and have children, you and your spouse should each have your own will to nominate a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone that you might not have chosen.
Additionally, a revocable trust should be established to avoid the situation in which your child inherits assets at the age of 18. A revocable trust allows you to appoint a trustee to handle any money your child inherits. The trustee can use the funds to support your child as the child ages, and you may specify specific ages and reasons for when your child can receive the money. We suggest including spendthrift clauses in the trust that may specify when the trustee has the power to withhold distributions if the beneficiary has an addiction problem, is in the midst of a divorce, or another unfortunate situation.
Each time you have another child, be sure your estate planning documents address all of your children. Also, if you have a special-needs child, you may want to set up a special-needs trust which allows you to provide for your child without disqualifying the child from government benefits. Another consideration is life insurance if a spouse passes. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family’s lifestyle.
If you are separating or divorcing, you will want to revoke documents such as durable power of attorney and healthcare proxy to limit your former spouse’s authority to make decisions on your behalf and access your medical and financial information. Additionally, you will want to change beneficiary designations and bank and investment account titles as a divorce decree will not simultaneously do it for you. You should also consider revising your will and trust to reflect your individually owned assets.
If you remarry, revise your will and trust documents to reflect the current beneficiaries such as your new spouse and your children. You may want to designate which assets you want to leave to your spouse and which to leave to your children at your death. We also recommend pre-nuptial agreements for second marriages to ensure that your assets go to your heirs.
Comfortable and Looking Forward to Retirement
If you are an empty nester in your 40s and 50s, you may be feeling comfortable. Perhaps you have accumulated some wealth and you're thinking about retirement. This is when your estate planning strategy and retirement planning efforts must complement one another. It is just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA) or voluntary deferred compensation if available through your employer. Additionally, you may consider gifting to your children and grandchildren up to the annual exclusion amount of $15,000 per donee (or $30,000 per couple). Setting up college savings plans such as a 529 Plan for your grandchildren is a great vehicle to begin accumulating college savings. If you are able, you can also assist with your grandchildren’s education expenses by paying tuition directly without impacting your ability to gift annually (at the $15,000 per donee rate).
Wealthy and Worried
Depending on the size of your estate, you may need to be concerned about estate taxes. For 2019, $11,400,000 is effectively exempt per person from the federal gift and estate tax. For married couples, the exemption doubles to $22,800,000. Estates over that amount may be subject to an average rate of about 16.5%. Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled. For example, in Massachusetts this exemption is $1,000,000 per individual, or $2,000,000 per married couple. While the federal exemption covers an overwhelming majority of the US population, it is important to put together a strategy for a state estate tax. These strategies may involve sophisticated estate planning techniques such as domiciling your residency to a more favorable estate tax regulations.
Similarly, there is another tax, called the generation-skipping transfer (GST) tax, which is imposed on transfers of wealth made to grandchildren (and lower generations). For 2019, the GST tax exemption is also $11,400,000, and the top tax rate is 40%. Above this level of wealth, you may see more sophisticated estate planning techniques implemented to minimize estate taxes. Some of these vehicles include Irrevocable Life Insurance Trusts (ILIT), Limited Liability Company (LLC) and Intentional Defector Grantor Trusts (IDGT), just to name a few.
If you consider yourself to be wealthy and worried, we strongly urge you to strategize with your financial advisor and estate planning attorney to implement sophisticated estate planning techniques available to you and your family.
Elderly or Ill
If you're elderly or ill – or have parents that are in this life stage – you will want to be sure your estate planning documents are up to date and reflect your current assets. Many elderly people have multiple accounts spread around different banks and custodians. We advise you to put together a balance sheet of all accounts to look for opportunities to simplify and consolidate. Additionally, consider drafting a revocable living trust and placing property and investment and banking accounts into the name of the trust. This will help your executor and family avoid the lengthy probate process, and ensure your wishes are kept upon your passing. If you have a taxable estate from a federal ($11,400,000) and or state perspective ($1,000,000 in Massachusetts), you may want to give consideration to accelerating your gifting strategy to family members such as children, grandchildren, nieces and nephews to avoid hefty estate taxes.
This is also the time to have frank yet informative discussions with your family about your wishes, and make sure they have copies of your important papers or know where to locate them. It’s also helpful to share your final wishes for religious, funeral and burial services.
If you believe you are in one of the life stages – or about to move into a different situation – please follow up with your estate planning attorney or your Sandy Cove Advisor to explore next steps and strategy.
Sources: Broadridge/Forefield, Everbank, Sandy Cove Advisors