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Is Estate Planning Now Dead?

Thanks to the new tax law, that's what some people may think. But estate planning is about a lot more than just taxes.

With the passage of the Tax Cuts and Jobs Act of 2017 at the end of last year, the federal estate, gift and generation-skipping tax exemptions doubled to $11.18 million per person. That means that a married couple can now pass over $22 million of property estate tax-free on the federal level. Given these high exemption amounts, approximately 99.9% of all U.S. citizens and residents are no longer subject to these taxes.

With the death of the so-called "death tax" for so many people, some may be wondering whether estate planning matters anymore. While the reduction of estate taxes has long been a major goal for estate planning, the answer is a resounding YES, there are still many reasons why estate planning remains relevant. A well-considered estate plan can help reduce overall costs when a family member dies, ease family tensions and ensure an inheritance will be used as intended.

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Consider the following issues that can be dealt with by estate planning:

State Estate and Inheritance Taxes Exist for Many

Even though federal estate taxes may no longer be an issue, 12 states have an estate tax and six states have an inheritance tax. And just to be clear, there is a difference between estate taxes and inheritance taxes. Estate taxes are typically imposed at the estate level, while inheritance taxes are imposed based upon who inherits the property, with lower tax rates for individuals more closely related to the decedent.

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While spouses typically receive all property free of both estate and inheritance tax, children and other beneficiaries do not. Planning can help reduce, or possibly, eliminate these taxes. Some techniques to consider to help lessen the potential tax burden include:

  • The use of credit shelter trusts (which help to make sure you use all available state estate tax exemption amounts).
  • Changing domicile (to relocate to a state without an estate or inheritance tax).
  • Giving away property during your life (since most states do not have gift taxes and the federal gift tax limit is $11.18 million, so most people can give away property without needing to pay federal gift taxes).

Probate Can be Costly

When someone owns assets in their name (without a joint owner or a named beneficiary), probate is necessary to access the asset after death. Probate is a process where a court grants access to the property. Depending upon the state, probate can be costly and take many months or even years to complete.

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An estate plan can be set up to avoid probate and the fees associated with going to court. Revocable trusts can be very helpful to avoid probate because any asset owned by the trust or payable to the trust upon death avoids probate. By avoiding probate, families can have more immediate access to assets and save on legal and court fees.

Many Beneficiaries Have Issues

An estate plan determines who inherits your assets and when they will inherit them. The people you would like to benefit can have a whole array of possible issues, including creditors, divorce, mental illness, substance abuse, special needs, being too young to manage assets or just being bad with finances.

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Taking into account these issues in the estate plan can protect and preserve those assets so that your intended recipient(s) can benefit from the assets. For example, if you leave your assets outright to your son so that he controls the asset, and he subsequently gets divorced or is sued, he could lose the asset in the divorce or the lawsuit. A trust can help protect the assets in these situations.

Blended Families are Common and Can Be Complicated

Blended families — step-parents, half-siblings, step-siblings or children raised within the family but not legally adopted — are very common. A typical estate plan for married couples, where one spouse leaves all of the assets to the survivor, many times will create issues for blended families.

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After the death of the first spouse, if all the assets are left to the survivor, he or she can change his or her will and cut out the step-children. This scenario is quite typical — I have come across this type of situation many times and, in fact, am dealing with two such cases right now — and when this happens there is usually nothing the step-children can do to receive an inheritance. An estate plan that uses trusts can guarantee that all of the children inherit as intended by both spouses.

Nuclear Families Have Issues, Too

Many times it can be difficult for siblings to settle the parents’ estate after the death of the survivor. When settling an estate, resentments that have been buried for years can resurface after the parents are gone. These resentments can be exacerbated if the siblings need to cooperate with one another to divide up household goods and to deal with real estate.

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For example, if real estate is left to all children in equal shares, everyone needs to agree to sell the real estate, and they need to agree on the sales price as well. That’s a lot of agreeing that needs to be done, and during a stressful time as well.

Planning can help minimize or eliminate these issues. The estate plan can detail who is in charge, what assets should be sold and who receives specific property.

These are just a few of the issues that an estate plan can address and should accomplish. Too many people wrongly believe the fundamental purpose of estate planning is to avoid taxes. It is not. At its core, estate planning is about leaving a legacy and ensuring the wealth you have created will impact your family in a positive way — and not cause confusion or conflict. With that, it is clear that estate planning will indeed live on.

About the Author

Tracy Craig, Fellow, ACTEC, AEP®

Partner and Chair of Trusts and Estates Group, Mirick O'Connell

Estate attorney Tracy Craig is a partner and chair of Mirick O'Connell's Trusts and Estates Group. She focuses on estate planning, estate administration, prenuptial agreements, tax-exempt organizations, guardianships and conservatorships and elder law. Craig is a Fellow of the American College of Trust and Estate Counsel and an AEP®. She has received an AV® Preeminent Peer Review Rating by Martindale-Hubbell, the highest rating available for legal ability and professional ethics.

 

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