When people think about estate planning, the estate tax is one of the first things that comes to mind. The Tax Cuts and Jobs Act signed into law by President Trump on December 22, 2017 brought significant changes to the transfer of wealth, including increasing the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts from $5.49 million per individual in 2017 to $11.2 million per individual starting January 1, 2018. Additionally, the portability election is still in effect – meaning that a surviving spouse may elect to take the deceased spouse’s unused exclusion amount, resulting in a combined exemption of $22.4 million for married couples. This increase means that even fewer U.S. families will be required to pay federal estate tax. With that said, tax planning, while important, is not the only reason to establish an estate plan. The purpose of this article is to address some of the overlooked benefits of having an estate plan.
An estate plan ensures that your assets are managed and distributed after your death or incapacity in accordance with your wishes. It allows you to name the beneficiaries of your estate and provides an opportunity to appoint the individual(s) tasked with managing and distributing the assets of your estate. Without an estate plan, your assets will be distributed pursuant to state law. Oftentimes the statutory distribution is contrary to the intentions of the decedent. In short, if you do not establish an estate plan, the state has one for you, whether you like it or not.
Planning for Incapacity
The 2017 Alzheimer’s Disease Facts and Figures Report, prepared by the Alzheimer’s Association, estimated that 5.5 million Americans were living with Alzheimer’s dementia. With an aging U.S. population, the number of new Alzheimer’s cases is expected to soar over the next decade.
What happens to your assets and who makes decisions on your behalf when you lose capacity to handle your legal and financial affairs? Who makes health care decisions for you if you cannot make them yourself? A power of attorney and healthcare directive are essential tools for planning for incapacity. In your power of attorney, you appoint someone (your attorney-in-fact) and authorize them to make legal and financial decisions on your behalf. This is usually a spouse, adult child, or other family member. Your health care directive appoints one or more agents, again usually a spouse or other family member, to make healthcare decisions on your behalf.
Another tool for incapacity planning is a revocable trust. When establishing a revocable trust, you have the power to name yourself as trustee and to name a successor trustee. Your assets are retitled or transferred to the trust and managed by you as the acting trustee for so long as you are able to do so. At your death or incapacity, your successor trustee takes over the management of trust assets for your benefit and ultimately for the benefit of the trust beneficiaries. Your successor trustee serves an important role in incapacity planning, because he or she is charged with managing your assets appropriately in line with your intentions while making sure that your needs, healthcare and otherwise, are met.
While no one likes to spend too much too much time thinking about sickness and dying, planning for incapacity in your estate plan gives you an opportunity to provide input in the management of your finances and medical care. It also relieves your loved ones from the burden of making difficult decisions during a time of grief.
Probate is the court-supervised process of administering a decedent’s estate. In both Minnesota and Wisconsin, depending on the complexity of the estate, the probate process can be fairly simple and require limited court involvement. However, probates can easily become complicated and costly and can present a substantial burden for the decedent’s family. Probate can be avoided through relatively simple estate planning techniques, including the use of a revocable trust. A revocable trust allows individuals and families to title their assets in a trust and nominate a successor trustee to manage those assets for the benefit of named beneficiaries. The process following the individual’s death is referred to as a trust administration and occurs completely outside of the courtroom. This is appealing to many people because it completely avoids the probate court and keeps the handling of the decedent’s estate outside of public record.
Family Business Succession
The importance of an estate plan for small business owners cannot be emphasized enough. Simply leaving the business to children equally can lead to disaster. Oftentimes, one child is more involved in the business than his or her siblings and an equal distribution can result in family disputes and an uncertain future for the continuation of the business. There are plenty of tools to remedy this type of situation, but they require some thought and must coincide with the business owner’s overall estate plan.
Establishing a revocable trust, naming your children as beneficiaries, has a built-in asset protection mechanism. While outright gifts left to children may be subject to creditor claims, gifts left in the form of a trust are sheltered so long as they remain an asset of the trust. This can be a valuable protective measure for parents of children who struggle to manage their finances or children at risk of divorce.
Minnesota Estate Tax
While the focus of this article is the non-tax related benefits of estate planning, we can’t ignore the tax benefits of estate planning for Minnesota residents. If you are a resident of Wisconsin, you can completely ignore this section, because there is no state mandated estate tax in Wisconsin.
For 2018, the Minnesota estate tax exemption is $2.4 million and set to increase to $2.7 million in 2019, and then $3.0 million in 2020. The portability election referenced above does not apply to the Minnesota estate tax, meaning that a deceased spouse’s unused exemption cannot be transferred to the surviving spouse. The key to limiting the impact of the Minnesota estate tax for married couples with estates exceeding the exemption amount is smart planning. Rather than leaving everything to the surviving spouse (which will result in a larger estate tax bill when the surviving spouse dies), there are ways to preserve the deceased spouse’s exemption through the use of a credit shelter trust (often called the Family Trust). At the first spouse’s death, his or her assets are divided between two separate trusts, the Marital Trust and the Family Trust. The Family Trust is funded with an amount equal to the applicable exclusion amount ($2.4 million in 2018) and the Marital Trust is funded with the excess. While the surviving spouse may be a beneficiary of both trusts, he or she cannot have a power of appointment over the assets of the Family Trust. If properly drafted, the assets of the Family Trust will not be included in the surviving spouse’s estate, reducing or completely avoiding the Minnesota estate tax.
While exemption amounts have increased to the point where most Americans can ignore the Federal estate tax, there are plenty of reasons to have an estate plan that have nothing to do with tax planning. Schedule your appointment today to get your estate planning ducks in a row.