It can be burdensome to wonder what will happen to your estate upon your passing. However, there are plans you can put in place, with the help of professionals, to alleviate some of that weight. Estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your passing.
This can mean specific things to each individual, depending on many factors. If you have a modest estate with only a few assets, a simple will may be all you need. As the size and complexity of your estate grows, you may become more concerned with minimizing potential taxes on your estate and preserving your hard-earned legacy for the benefit of others, which will require a more sophisticated estate plan – often utilizing trusts.
To help you understand what estate planning means for you, the following sections address some common needs for broad groups of people. Think of these suggestions as simply a point in the right direction, then seek professional advice to implement the right plan for you.
Life can bring unexpected events, so all adults over 18 should consider having:
- A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
- An advance medical directive: The three main types of advance medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.
Young and single
If you are young and single with no children, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you do not, the wealth you leave behind will likely go to your parents, regardless of your true wishes. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
If you have committed to a life partner but are not legally married, a will is essential if you want your property 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. That way, when one of you passes, the jointly held property will transfer to the surviving partner automatically.
For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, to take advantage of their combined federal estate tax exclusions. For decedents dying in 2011 and later years, the executor of a deceased spouse’s estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning.
You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die’s estate tax exclusion, and a credit shelter trust created at the first spouse’s death may still be advantageous.
Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $164,000 annual exclusion for 2022 ($159,000 for 2021) is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
Married with children
If you are married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name 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 you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.
You may also want to consult an attorney about establishing a trust to manage your children’s assets if both you and your spouse pass at the same time.
You may also need life insurance. 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.
Comfortable and looking forward to retirement
As your career progresses and you accumulate some wealth and begin thinking about retirement, estate planning can go hand-in-hand with retirement planning. 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. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).
Wealthy and worried
Depending on the size of your estate, you may need to be aware of estate taxes.
For 2022, $12,060,000 ($11,700,000 for 2021) is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.
Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations) or to unrelated persons more than 37 ½ years younger than you. For 2022, the GST tax exemption is also $12,060,000 ($11,700,000 for 2021), and the top tax rate is 40 percent.
The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and be cut by about one-half.
The size of your estate and the tax laws in effect in the state in which you are domiciled will determine if your estate is subject to state death taxes.
Elderly or ill
If you are elderly or ill, you will want to make a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
While it can be challenging and uncomfortable to talk about estate planning, it can alleviate much of the anxiety you may be feeling and the burden your surviving loved ones experience. The comfort of knowing there is a well-thought-out plan in place, can bring a sense of peace, despite unexpected events. Further, estate planning professionals, such as Arvest Wealth Management Trust Officers, can offer guidance over time to help you adjust your plan as major life changes occurs. This helps ensure you are prepared in each stage of life. Make an appointment today to discuss your trust and estate planning needs.
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Arvest Wealth Management does not offer tax or legal advice – consult a professional.