The current federal estate tax exemption, that is, the value of property that a person may possess at death without incurring federal estate tax, is currently $11.4 million, $22.8 million per couple. The author vividly recalls a time when that exemption was only $600,000, or $1.2 million per couple. In that unhappy time, a bit of family land, a modest pension, and some life insurance could push a person into having to engage in estate planning with an eye toward tax savings. Frequently, this was a frustrating and expensive process, as individuals were forced to confront estate planning documents which, at times, were nearly incomprehensible and which often forced people to adopt plans that did not always match their personal goals.
Fortunately, the existing large exemption means that most people can now focus exclusively on their planning desires.
The purpose of this article is to address several issues that individuals should focus on before visiting with their advisors to begin the estate planning process.
We find that often the most critical — and the least adequately considered — issue in estate planning has to do with proper planning for minor children. All of the following need to be carefully considered in proceeding with an estate plan which features minor children.
Bequests for Minor Children.
Many people address their estate plan according to the following paradigm: a husband and wife, who leaves everything to the other on the death of the first to die, and in the event of a common disaster or on the death of the second to die, everything to the children. Problems arise when one considers that leaving valuable or substantial gifts to minor or even naïve children may, for a variety of reasons, represent inadequate asset protection and, much more significantly, a child inheriting too much, too soon. Such a situation can present a substantial disincentive for a desirable education and an established work ethic. For this reason, it’s frequently preferable to leave children bequests in trust. In addressing this matter, one should consider the identity and experience of the trustee; events, whether presented by the vicissitudes of life or by the passage of time, will require a distribution of assets; and the disposition of trust assets, if a beneficiary dies or becomes disabled before his or her share of the trust, would otherwise become distributable. Further, one should consider substitute or successor trustees in case the trustee initially named becomes disabled or passes away during the term of the trust. Of course, it’s a good idea to discuss the potential trusteeship with the person to be named as trustee to be sure that she is up for the task, both as to her experience with asset management and her ability- and willingness- to refuse an improper distribution request.
Address Guardianship Issues Sufficiently.
We are all aware that we should appoint a guardian to take care of our children if we die while our children are still minors. The choice of guardian should always be discussed in detail with the person who is chosen to be the guardian. Further — and this is of critical importance –your will should provide a bequest to the guardian(s) to compensate them for what may be considerable expenses, including food, clothing, and shelter needs, that the guardian(s) will face upon assuming this critical duty.
Blended Families Create Complexity.
Many people desiring to enter into the estate planning process are in their second or third marriage and have children from previous marriages. Each of those children can possess markedly different characteristics when it comes to education, life experience, and financial abilities. Careful consideration must be given to achieving flexibility and, especially, not only fairness but also the appearance of fairness. If you find yourself in this situation, be prepared to spend time and effort in coming up with a plan that is workable and achievable within the bounds of your marriage and your relationships with your own and each other’s children.
Remember that Your Plan is Your Plan.
Frequently, we see people get tied in knots because they don’t want to hurt others’ feelings. None of us can please everyone. While it is always wise to try and consider the ultimate emotional effects of any particular plan, remember that your assets and your desires are of utmost importance in your planning process. Before doing much in-depth planning at all, step back and consider what you, after years of work and devotion to your family, want to achieve in your plan. Without addressing such high-level issues, dealing with matters such as those discussed above can create anxiety and unpleasantness which can derail the planning process.
The enhanced federal estate tax exemption signifies that most of us need not consider estate taxes when engaging in our estate plans. This leaves most of us free to consider what is important to us and how we want our beneficiaries treated. As discussed above, even that simplified focus features decisions which require considerable thought and reflection.