If you think estate planning is only for individuals with significant wealth or is just a strategy for tax savings, think again. “For the most part, everyone needs to have their estate planning in order,” says Deviani M. Kuhar, member of the estate planning and probate department of McDonald Hopkins LLC. “An estate plan doesn’t need to be highly sophisticated, and it may or may not involve trusts. At a minimum, almost everyone needs to make sure their beneficiaries are listed properly, that they’ve properly titled their assets, and that they’ve specified who the guardians will be for their children if they die and how their spouse’s and children’s needs will be provided for.”
Smart Business spoke to Kuhar about estate plans and how to put one in place.
Why is there a need for estate planning?
Estate planning encompasses many different circumstances, such as:
- Couples who have minor children.
Whether or not these couples have accumulated a lot of wealth, they still need to document who the guardian would be if they both
die and how the children’s needs and education would be provided for. In most cases,
parents will want to specify at what age the
children can receive assets without any
restrictions on how those assets can be used.
- Children with special needs. Different
types of trusts can be set up to meet the
child’s needs if a parent(s) were to die. An
important consideration is to ensure that
access to any available government assistance would remain intact.
- The desire to avoid probate. For those
who want their families to avoid having personal information become public record, revocable trusts can be a good option. You can
also avoid probate by making sure your beneficiary designations are up-to-date. How you
title your assets determines who they will
pass to. Most people still have the misconception that their wills determine what happens to their assets. Only if an asset is titled in
your name alone, with no surviving owner or
beneficiary designation, would it pass under
the terms of your will and go through probate
to reach your children or other beneficiaries.
- Divorced individuals with children. If the
children are minors, it should be determined who will be the guardian if the noncustodial
parent cannot. Further, if either parent dies,
are there enough funds available to make
sure the children have basic needs and education paid for? Often, this involves more life
insurance than is currently in place.
- Second marriages involving children.
Often, those in second marriages make sure
their spouses are taken care of should they
die, but also want assurance that their children will benefit, as opposed to the spouse’s
children or other potential beneficiaries.
- Business owners often don’t plan for
what will happen to their business should
they die. Consideration needs to be given as
to whether their spouse or children should be
involved in the business. Steps need to be
taken to make sure the owner’s family will
receive fair value for the business.
How can people plan for common situations?
Decisions involving minor children and naming guardians are often the most difficult ones for parents to make, but once they get beyond that, subsequent decisions tend to become easier. One of the best ways to make sure the children are taken care of financially is to establish a revocable trust. The trust can specify when children can receive assets so they do not receive them at too early of an age and you are assured your assets will be used to pay for their education and other needs. Another way to assure your children’s needs are met is to have plenty of life insurance. All too often, people don’t realistically assess how expensive it is to provide for children. There are also instances where there is no life insurance for a stay-at-home parent. If that parent were to die, the working spouse would need to factor in child care and other costs involved with running a household.
If a case involves a second marriage and children are involved, planning often begins before the marriage, starting with a prenuptial agreement, which ensures that if a person dies, his or her children will be entitled to the assets. A trust can be established to provide for a person’s spouse, but also to make sure that when the spouse dies, children from his or her previous marriage receive assets. Business owners often address their issues through the use of buy/sell arrangements and by making provisions in their estate planning documents addressing the distribution of their business assets.
At what point should you have an estate plan that considers federal estate taxes?
Individuals and married couples will want to consider federal estate tax planning when their assets or combined assets exceed $2 million. This is because individuals have $2 million that is exempt from federal estate taxes (this amount is scheduled to rise to $3.5 million next year and many believe that Congress will keep the exemption at this amount rather than allow the estate tax to be repealed just for the year 2010 and return to a $1 million per person exemption, as it is scheduled to do in 2011). With proper planning, married couples should be able to pass $4 million ($7 million next year) to their children or other intended recipients without incurring federal estate taxes. Without proper planning, that amount is often limited to $2 million ($3.5 million next year). Unmarried individuals also have options available to reduce their potential estate tax liability.
DEVIANI M. KUHAR is a member of the estate planning and probate department of McDonald Hopkins LLC. Reach her at (216) 430-2038 or firstname.lastname@example.org.