Estate Planning- it's not just For Millionaires

A common misconception among the public is that only the wealthiest members of our society need estate planning. To the contrary, regardless of your financial condition, you should have an estate plan.

Simply stated, estate planning is the process of making sure that you and your loved ones are cared for as you want if you become disabled or die. In most cases, a proper estate plan results in four documents: a will, a general power of attorney, a living will and a healthcare power of attorney. This article discusses the importance of a properly drafted will. In a future newsletter, we will discuss the purpose and importance of a general power of attorney, a living will and a health care power of attorney.

A properly drafted will names guardians for your minor children, disposes of your property and minimizes death taxes.

If you have children under age 18, the most important reason to have a will is to name guardians for your children if your spouse does not survive you. Your will is your only way to make the Orphans' Court (or other court charged with protecting children) respect your wishes relating to guardianship. In all but the most extreme circumstances, a court will honor your directive and appoint as guardian of your children the person named in your will. By failing to execute a will that names a guardian for your children, you leave with a judge the decision of who will be your children's substitute parents.

Related to the determination of who will have physical custody of your children is the determination of who will serve as guardian of the estates of your children; this guardian manages the property you leave behind for your children. Again, your will is your opportunity to name this person. In addition, your will gives you the chance to determine when your children receive their inheritances. Absent a specific directive in your will, a child receives his or her inheritance at age eighteen. Many people consider eighteen to be too young an age to give their children access to thousands of dollars. To ensure that your children do not have unfettered access to their inheritances until they are sufficiently mature to handle this money, you can create simple trusts within your will. A common plan is to permit a child to access one-third of his or her inheritance upon reaching age twenty-five, one-third upon reaching age thirty and the remainder upon reaching age thirty-five. This simple trust mechanism ensures that your child's inheritance is always available for his or her benefit, but keeps the money out of the child's hands until he or she reaches an age determined by you in advance.

Another important function of your will, and the one most people associate with a will, is to dispose of your property when you die. If you die without a will, your property will be distributed according to the intestacy law of the state where you resided when you died. Do not rely upon intestacy laws to distribute your property the way you want; for most people, they never do. For example, a married man with children who has been married only once probably wants all of his property to go to his spouse when he dies. However, if he dies in Pennsylvania without a will, his property will be split between his spouse and children, and one-half of his property may not be sufficient to sustain his spouse for his or her lifetime. Your will is your chance to make sure that the assets that pass through your will end up in the right hands. In addition, the estate planning process also allows you to confirm that those assets that pass outside of your will, such as life insurance proceeds and retirement plan assets, pass according to your intent.

The last major goal of estate planning is also the most publicized -- reducing death taxes. Generally two types of death taxes exist: state inheritance taxes and the federal estate tax. Giving away your property outright before death (and not in contemplation of death) is the only way you can avoid paying most state inheritance taxes; however, when it comes to the federal estate tax, proper estate planning can save you thousands of dollars.

Under current law, you can transfer an unlimited amount of property to your spouse, whether during life or at death, tax free. In addition, you can transfer a total of $650,000 of property to persons other than your spouse without incurring any federal estate tax liability. Although you might be tempted to stop reading right now because you do not think you have $650,000 of assets, remember that life insurance is included in this amount. For many people, life insurance immediately turns a "simple" estate plan into one with potentially significant tax consequences. Considering that the lowest federal estate tax rate is 37%, you cannot ignore the tax aspects of estate planning.

Consider the case of a husband and wife with $1,000,000 in term life insurance coverage between them and other assets (including 401(k) assets) worth $300,000, who have "simple" wills in which they each leave their assets to each other and, upon the death of the second, to their children. If the husband died today and the wife died one month from today, their death tax bill would be $258,500 and only $1,041,500 would pass to their children. However, if their wills were drafted to minimize the effects of the federal estate tax, they would owe no federal estate tax and would pay only $9,000 in Pennsylvania state inheritance tax. As a result, $1,291,000 would pass to the children. In this case, careful estate planning provides an additional $249,500 to their children.

The process of drafting a will that meets your specific needs and wants is straight forward and does not require a significant amount of your time. The first step is to complete a questionnaire, stating, in general terms, what you want done with your property and who should serve as guardians for your children and their property. The questionnaire also requires that you list all of your assets, their values and the manner in which you hold title (either alone or jointly with someone else). After we review your questionnaire, an initial one hour meeting is held during which we discuss your goals, suggest a plan for achieving those goals and quote you a fee for preparing your estate plan. Based upon our initial meeting, we prepare your will and, within a couple of weeks, have you return to our offices to explain the will, make any required changes and have you sign the will. Usually, the entire process can be completed within three weeks.

Regardless of how much money you have, you should have an estate plan that includes a properly drafted will. If you have minor children, your will is the only chance you have to pick substitute parents for your children if you die and your spouse does not survive you. In addition, your will controls who gets your property (and when) and makes sure that your loved ones (not the IRS) get what you leave behind.

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