Prince Died Without a Will. Will You?
Music fans were shocked this April when news broke that legendary performer Prince was found dead at age 57. While loved ones mourned his sudden passing, another shock came: Prince died without a will.
What is the result of the lack of an estate plan for Prince? First, the government will heavily tax Prince’s estimated $250 million estate, which will owe roughly $100 million in estate taxes due to the lack of planning. Second, the state he lived in at his death will essentially choose who receives his estate. This may mean the estate will be divided between his one full sibling and five half-siblings, some of whom he may have loved and some of whom he may have disliked, or pending the results of a DNA test, his entire estate may be distributed to a child he did not know existed. Finally, it will undoubtedly result in years of litigation before the estate is ever distributed.
At this point I’m sure many of you are thinking, “I don’t have $250 million and am not a rock star. I won’t have the same issues as Prince if I don’t have a will.” While your lack of planning may have some different results than Prince’s and you may not even have a taxable estate, it is still imperative that you have an estate plan.
Choose Your Beneficiaries
If you don’t create an estate plan, you still have one. However, it may not result in what you want. Every state has a default estate plan. In many states, if you die leaving behind a spouse and children, everything held in your name will go to your surviving spouse. However, that is not true if any of those children are not the children of your spouse. In that situation, only 50% of your estate would pass to your spouse and the remainder would be divided among your children. Most people prefer to leave everything to their spouse at their passing. A comprehensive estate plan would allow you to transfer 100% of your assets to your spouse during his/her life, but then pass automatically to your children after his/her death. In this scenario, you have ensured that your spouse is provided for during his/her life, but also ensured that your assets will remain in your blood line. Creating an estate plan allows you to customize your plan to fit your needs.
Name a Guardian
If you have minor children, one of the most important reasons for creating an estate plan is to designate a guardian for your minor children. In the unfortunate event that both parents die simultaneously, most parents would want to decide who would care for their children.
If you have been lucky enough to have limited experience with the probate court, you may be wondering why avoiding probate is such a great thing. A probate administration can be stressful, long, confusing, and expensive.
When a person passes away with no estate plan, or sometimes even worse – an outdated estate plan – their loved ones are left to pick up the pieces and are forced to spend hours every week working with attorneys, banks, creditors, and relatives trying to administer the estate. While the cost of an estate plan may seem expensive, the cost of a probate administration will often cost much more. An effective estate plan can result in avoiding probate entirely, or at the very least lead to a much quicker, easier, and less expensive process.
Protect Your Kids from Creditors… Or From Themselves
As a parent, it is natural to worry about your children’s well being, even after you’re gone. By distributing your assets to your children in trust, as opposed to outright, you have the ability to continue to help protect them. A trust allows you to dictate how much control your child has over their inheritance. If this is an older, responsible child, you may want them to have essentially total control. However, if you have an 18-year-old daughter who has not yet learned the value of a dollar, you may want to put limits on how and when she receives her inheritance. A trust also allows you to change the level of control when she is older and more responsible. Putting the assets in trust provides a great amount of flexibility, including protection from an 18-year-old spending her entire inheritance before she reaches age 25.
The trust can also protect the assets from creditors. If your child is sued, the trust assets are not available to that creditor if the trustee can only distribute pursuant to an ascertainable standard, such as for the beneficiary’s health, education, maintenance, or support. This is a pretty broad standard. Your child will have access to the money as needed, but the money will be protected in the unfortunate event that he ever has a large creditor hoping to collect. Similar to a creditor, the trust will also protect from a divorcing spouse. Assets held in trust are not considered marital assets. Therefore, assets that remain in trust will not be available in a divorce settlement. Your family’s assets will remain in your family.
Don’t Pay the IRS!
While there are many non-tax reasons to have an estate plan, avoiding paying taxes is a very important one. The estate tax exemption has been raised to $5.45 million per person, or $10.9 million per couple, which allows many families to transfer their assets free of tax. However, once your net worth is over this threshold, the excess will be taxed at 40%. There are many tax efficient planning techniques that can save you thousands, or even millions, of dollars. I’m sure you can think of better uses for your money than giving 40% of it to the government.
Provide for Your Disability
While planning for your passing is important, it is equally as important to prepare for your disability. If you ever become unable to manage your affairs, you want someone already named to be able to act as an agent on your behalf. Likewise, if you are unable to make a medical decision for yourself, an agent who knows your wishes can then make these decisions for you.
Talking about your death is not fun. It feels awkward to discuss where your assets will go after you pass away. However, it is an important discussion to have. Creating an estate plan is something that many people put off until it is too late. Don’t let that happen to you, or more importantly, to your family.