Estate Planning: A Family Affair

If estate planning were just cold, hard numbers, it wouldn’t be one of the financial tasks that people avoid the most. Not only does creating an estate plan force you to confront your own mortality, but it also forces you to decide who gets your assets, whether all heirs should be treated equally and who will play the key roles in settling your estate.

“With the possible exception of divorce work, emotions come out more in estate planning than anywhere else,” says Gary Botwinick, an estate-planning lawyer in Denville, N.J. To help get past the uncomfortable thought of your own death, remember that if you die without a will, state law will govern the distributions of your assets—and it may not go the way you want.

If you haven’t yet written a will or created the other documents that every estate plan should include, see below. If you have those documents but your assets have grown and your life has become more complex, it may be time to review and update your plan.

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Revisit your estate plan

Review your estate plan every five years or whenever there is a major change in your life, such as a birth, death, or financial windfall or loss, or if there’s a change in estate laws. It’s particularly important to revisit your plan once you reach your fifties or sixties. By that time, your assets may have become much more complicated, your heirs have grown older (you may have grandchildren now, too), and your wishes may have changed. Rather than focusing primarily on protecting your family if you die early, you may now be in a position to use your estate to help the next generation and build a legacy.

Also, you may no longer need some of the estate-planning strategies you used in the past. The new tax law more than doubled the federal estate tax exemption, letting each person give up to $11.18 million without it being subject to the estate tax. The number of people who have to worry about federal estate taxes has plummeted. (However, the federal estate tax exemption is scheduled to drop to about $5.5 million in 2026.)

Several states have changed their estate tax laws, too. New Jersey, which had a notoriously low $675,000 estate tax exemption, eliminated its estate tax in 2018. New York’s estate tax exemption, which was just $1 million in 2014, is $5.25 million in 2018. Delaware eliminated its estate tax at the end of 2017.

“Some of the planning we had done not only doesn’t make sense anymore, but it could also be counterproductive,” says Botwinick. For example, people who bought life insurance to help cover estate tax bills are reassessing whether they need the coverage.

Instead of creating estate plans primarily to avoid taxes, more people can now focus on what they want to accomplish with their money. “Back in the early 2000s, people were very focused on estate taxes. Now they’re looking at trusts for probate avoidance, privacy and planning,” says Foster Friedman, an estate-planning attorney in Alexandria, Va.

Those were the key issues that Mike and Karen Lucero, both age 54, focused on when they updated their estate plans this year. The Seattle couple did their first round of estate planning 18 years ago, writing a will and designating a guardian soon after their two oldest children were born. But when they were working on retirement planning last year, they realized that their estate plans were out of date—their daughter wasn’t even included in their original estate plans, and her two older brothers are now legally adults. Their estate had become larger and more complicated, and they could afford to give more to charity, too.

They updated their will, health care proxy and advance directive for end-of-life care, but they also wanted to do more than just pass a lump sum to their children, who are now ages 16, 19 and 21. Instead, they created a trust that will give 11% of the money to charity after they die and will split the rest equally among their children, paying out a portion when they reach ages 30, 35 and 40. Before then, the trustee can make discretionary payments for education, health care, emergencies and a house down payment, which will be subtracted from the children’s future distributions.

The Luceros will reassess those plans as their kids get older and have more financial experience. “It doesn’t end with the first document,” says Mike. “You have to take stock of your priorities.”

Do you need a trust?

Rather than just divvying up money when you die, a trust can help you control what happens to it for years afterward. With a trust, you can specify when your heirs will get the money and how it can be used. Money in a trust can also avoid probate, the process of passing assets through a will. That can be expensive, time-consuming and public—and the Luceros are experiencing that firsthand. Mike’s mother died in August and left most of her estate through her will. She lived in California, which has a time-consuming and expensive probate process, which didn’t even start until October.

A trust can also protect money from your heirs’ creditors or an estranged ex-spouse if your children get divorced. If you have a child with disabilities, you can set up a special-needs trust that can be used for the benefit of your child after you die without jeopardizing your child’s eligibility for government benefits.

“Trusts are really powerful,” says Tracy Craig, the chair of law firm Mirick O’Connell’s trusts and estates group in Worcester, Mass. “I call them the workhorses of the estate plan because they can do so much for you.” She recommends that families with minor children have a trust, which lets you appoint a trustee to manage the money until they’re legally adults and gives you the opportunity to specify how the assets can be used as your children grow up.

In states such as Massachusetts, which taxes estates valued at $1 million or more, Craig also recommends a type of trust known as a credit-shelter trust, which allows spouses to double their estate tax exemption.

A trust can be particularly helpful for blended families. You can set up a trust to pay out income to your current spouse as long as he or she is alive, then pass the remaining assets to your children from your first marriage.

Julie Tappero, 65, of Gig Harbor, Wash., sold her staffing agency business in April 2018 and updated her estate plans a few months later. She became aware of the importance of estate planning when her first husband died unexpectedly from an illness in 2007. Because she had worked on an estate plan with him a few years earlier, she already knew his wishes for health care and financial decisions. “I’m glad we had done that because I didn’t have to guess,” she says.

Tappero remarried in August 2017 and created a new estate plan because she has two daughters, ages 30 and 38, and her husband has children and grandchildren. She wanted her daughters to inherit money from her estate but didn’t want them to be overwhelmed with a potentially life-changing lump sum. She also worked with her financial adviser to make the distribution fair while taking into account each daughter’s needs, because one is disabled and unable to work.

Now she needs to decide who will manage the trust. She doesn’t want the trustee to be a family member because she has seen that cause stress in other families. She’s looking for a bank or trust company that her daughters will be comfortable working with.

You can choose a family member, trusted friend, or financial institution to manage your trust—or a combination. “A lot of people hire us as the co-trustee,” says Kevin Ruth, head of wealth planning and personal trusts for Fidelity. “They want a family member who understands the family dynamic and relationships, but they also want an institutional trustee to do all of the administration, investment management and tax returns.” Trust service fees are typically about $4,000 per year, or more for trusts over $2 million, Ruth says.

Take time to think through what you want your trust to accomplish. David TenBrink, 70, started his precision machining company in Holland, Mich., with one machine in 1983. It has since grown to a 25-person company that builds parts for trucks, military vehicles and tractors. He and his wife of more than 50 years, Mary, have spent a long time thinking about their values. “We believe that a good estate plan can be used as a learning tool for money management,” he says. They created a trust to help pass along the values of hard work, education and charitable giving to their three children and 10 grandkids. They specified that the children (who are ages 42 to 47) should use some of the money to save for their own retirement and give 10% to charity. They can use unlimited money in the trust for education (college or trade school), and other withdrawals can match what they’ve earned as income. “I’m a big believer in matching funds,” he says. “You want to try to give them a safety net, but they have to participate.”

To pick the right kind of trust, it’s important to work with an estate-planning attorney who is an expert in your state’s laws. It can also help to have your financial team work together on your plans, which the Luceros did with their CPA, financial planner and estate-planning attorney.

You can usually get a will, a basic trust and a durable power of attorney for financial matters and for health care for about $2,500 to $3,000. The trust itself can cost from $1,500 up to $10,000, depending on its complexity, says Michael Eisenberg, the Luceros’ CPA. Your financial adviser may recommend an estate-planning attorney, or you can find one through the American College of Trust and Estate Counsel or the National Academy of Elder Law Attorneys.

Having the talk

Some well-off people avoid discussing estate planning because they don’t want their children or grandchildren to know how much wealth they’ve accumulated. “You don’t want to disincentivize your kids from having their own successes or set the expectation that there’s something large coming down the pike,” says Malia Haskins, vice president and wealth strategist for RBC Wealth Management. Alternatively, “your kids may have structured their lifestyle anticipating a large inheritance,” only to find out that you have other intentions—say, donating most of your wealth to charity, says Jordon Rosen, head of the estate and trust practice at Belfint Lyons & Shuman, an accounting firm in Wilmington, Del.

Even if you don’t want to provide specifics, it’s important for your heirs to understand the framework of how they’ll receive any inheritance, along with the reasoning behind your decisions. If you’re doling out funds through a trust in which the bene­ficiaries receive income but no access to principal, they should know that in advance, says Rosen.

Matthew Wesley, director of the Merrill Lynch Center for Family Wealth, favors a series of progressive conversations over time. “Feed out a little information, see what the response is, then figure out the next steps from that,” he says. When your children are in their late teens or twenties, start having general discussions about your family’s views on wealth. Next, you can introduce them to the structure of your estate plan—telling them, for example, that you have money in a foundation and that you’d like them to help determine where to direct it, or that you have sufficient funds in a trust for, say, their children’s educations. In later conversations, you can reveal numbers, such as how much money is in a trust or foundation. Make sure your kids also know where to find key documents and who to contact for questions and assistance when you die.

A third party, such as your financial adviser, estate planner or attorney, can help steer the conversation. A professional can also explain the more complex aspects of your plan to your children. For example, you may have your attorney review the structure of your estate plan, your accountant discuss its tax implications, and your financial planner go over such technicalities as how the money will be transferred upon your death. A professional can also ease tensions and encourage both sides to talk. “The parents don’t feel as though they’re being parents, and the kids don’t feel as though they’re being kids. It becomes an adult-to-adult relationship,” says Wesley.

Equal or not?

In some cases, leaving different inheritances to your children makes sense. For instance, a child with a severe disability or mental incapacity may need more financial support in life than your other children. Or parents who regularly give financial gifts to one child—sort of an inheritance advance—might leave more to others to even things up.

But many estate-planning experts say unequal inheritances can tear the family apart after your death. “Any differences among siblings tend to create animosity,” says Matthew Boersen, a certified financial planner in Jenison, Mich. “And at someone’s death, when emotions are running high, it’s very, very easy for people to get hurt feelings.” Even children who are financially better off than their siblings can feel unloved or punished for their success if they receive a smaller inheritance. That’s why most parents end up leaving kids equal amounts, estate-planning lawyers say.

But there are ways for parents to give more to one child without stirring up hard feelings. For instance, parents who want to reward a child for beinga caregiver can pay that child like an employee while they’re alive, and then treat the caregiver the same as the other children in the will, says Drew Kellerman, an investment adviser in Gig Harbor, Wash., who works on legacy planning. And if other children have any questions about how the caregiver is paid, the parents are still around to explain their thinking.

Communication is even more important when you plan to treat heirs differently, either by bequeathing unequal amounts or by giving one heir a lump sum while creating a trust with restrictions for another. “The worst time for people to find out that they are being treated differently than their siblings is during the reading of the will,” says Kellerman.

When choosing an executor (to carry out your will’s instructions), a trustee (if you’ve set up a trust), and agents who will make medical and financial decisions on your behalf, many parents divide the roles among the children, without regard to whether a child is suited for the job, says Vincent Averaimo, an estate attorney in Milford, Conn. Some name two children to the same role to avoid hurt feelings. This can lead to chaos if two children are named as a health care agent but disagree on a parent’s care, Averaimo says. (Some states, such as Illinois and New Jersey, don’t allow more than one health care agent at a time.) To avoid problems, name one person to fill a role, but include a backup in case he or she is unavailable.

Give it away before you die?

Giving away some of your assets while you’re alive will give you the satisfaction of watching your beneficiaries enjoy the gifts—especially if they need the money to, say, pay college bills or make a down payment on a home. (And as a bonus, they’ll have a chance to thank you for it.) You can also be sure that your gifts go to the people you intend to receive them. And the more property you keep out of probate, the less your heirs will have to deal with the costs and delays that can come with the process, Haskins says.

Lifetime gifts can also serve as a barometer of how your heirs will manage inherited wealth. You could, for example, give $10,000 to your child, tell him that you expect him to invest it, then check in a year later to see how he has managed the money, says Haskins. If he blew it on a shopping spree or a luxury vacation, that may guide how you set up his inheritance.

Tax considerations are still part of the equation. While the vast majority of people don’t have to worry about estate taxes now, the federal estate tax exemption is scheduled to drop to about $5.5 million in 2026. In addition, several states still have lower limits—such as $1 million in Massachusetts and Oregon, $2.4 million in Minnesota, and $2.2 million in Washington state. Giving away some of your assets while you’re alive will shrink the size of your estate, reducing the chance that it will be subject to federal and state estate taxes.

In 2018, an individual can make gifts of up to $15,000 in cash or other property to each recipient without reporting them on a federal gift tax return—so as long as your gifts to each person stay below that yearly limit, they won’t eat into your total exemption. Together, you and your spouse could give up to $30,000 for the year to each child (and for children who are married, you could give up to $60,000 to include the spouse). You won’t pay gift tax as long as all your gifts over the years do not surpass the lifetime limit of $11.18 million per person, which is the combined exemption for gift and estate tax.

If you’d like to cover an adult child’s medical bills or help a grandchild pay for college, payments you make on behalf of someone else directly to an educational institution for tuition or to a medical facility for care are not subject to gift tax. You can also give five years’ worth of gifts to a 529 college-savings plan in one year—which is $75,000, or $150,000 for a couple—to each child, grandchild or others (but you can’t make any other gifts to them during that time).

Certain types of assets may be less desirable to transfer during your lifetime. If you pass on appreciated assets such as stock or real estate while you’re alive, the recipient will be subject to capital gains tax on the appreciated amount. For example, if you purchased a stock for $10 and its value has soared, the recipient takes on your cost basis of $10. If he or she sells the stock at $100, he or she will owe tax on $90 of appreciation. If the stock is transferred after your death, though, your heir gets a “step up” in basis to the asset’s fair market value on the day you die and will pay tax only on appreciation from that date. (One exception: Assets transferred through a credit-shelter trust don’t get the step-up.)

However, if your assets will likely be subject to estate tax, it may be wise to give away stocks that you expect to appreciate significantly in the years ahead. Any appreciation that occurs during the time until your death will escape estate tax when you die.

To avoid the risk of giving away money you’ll need later, work with a financial adviser to project expenses you’re likely to have in the future, based on your life expectancy, spending habits, and projected rates of return on your investments. Health care expenses are especially important to consider.

Account for how your personal spending may fluctuate, too. “Sometimes people spend a little more when they’re newly retired, but after they get the travel bug out of their system, they’ll settle down and spend a little less,” says Michael Duffy, director of the Strategic Wealth Advisory Group for Merrill Lynch Private Banking & Investment Group. Once you’ve set a projection for how much you’ll spend, build in a cushion of an extra 10% to 20% for unexpected needs.

How to avoid probate

Probate is the court-supervised process of passing assets through a will (or through state law if there is no will) after you die. Money in a trust generally does not have to go through probate. Life insurance death benefits and money in IRAs, 401(k)s and other retirement plans with beneficiary designations pass directly to the beneficiary without having to go through probate (and the beneficiary designations supersede your will). Bank accounts and brokerage accounts held as joint tenants with rights of survivorship pass directly to the joint owner after you die. Many states now permit people to own bank accounts and other financial accounts with a transfer-on-death designation. The accounts can pass on assets outside of probate when you die, and you don’t have to give up any control over your accounts while you’re alive.

Pass on an IRA the right way

An inherited IRA could create a lifetime legacy for your heirs. But unless you’re careful, you could end up leaving a large part of your savings to Uncle Sam. The tax code treats IRAs inherited by children and other heirs differently from IRAs inherited by spouses. Spouses can simply roll inherited IRAs into their own accounts, postponing required minimum distributions—and taxes—until they turn 70½. Non-spousal heirs don’t have that option. To continue to benefit from tax-deferred growth, each heir must roll his or her portion of the IRA into a separate account known as an inherited IRA.

Once heirs transfer the money to an inherited IRA, they can take annual distributions based on their own life expectancies. But to give your heirs this option, you must name them as beneficiaries of the IRA. If you name the estate as the beneficiary, your children will still inherit the money, but they’ll be required to clean out the IRA by the end of the fifth year after your death if you die before you turn 70½. If you die after age 70½, your heirs can take payouts based on your life expectancy, as set by IRS tables.

A Roth inheritance is usually tax-free, but your heirs can’t leave the money in the account forever. The rules for withdrawals are the same as they are for traditional IRAs. If your heirs transfer the money to accounts for inherited Roth IRAs, they can usually stretch withdrawals over their life expectancies.

Estate plan starter kit

You can create your own will for $70 or less at a do-it-yourself website, such as legalzoom.com. But if your circumstances are at all complex, you’ll need a lawyer. You also need to prepare for the possibility that you could become incapacitated and unable to make your own financial and health decisions. A durable power of attorney lets your agent manage your finances and legal affairs. A release-of-information form gives doctors permission to share your medical records with designated representatives. A durable medical power of attorney (also called a health care proxy) names a representative to make medical decisions on your behalf. And a living will specifies the medical treatment you do or do not want during a terminal illness.