Common Misconceptions Regarding Proper Estate Planning
by Michael A. Kasberg, Esq.
I often hear many people say that they do not need an estate plan or that they do not have enough wealth to necessitate an estate plan. This is very far from being true. Estate planning is not only for the wealthy, but is how you can dictate how your hard earned assets pass after your death, no matter how wealthy you are. This includes a Last Will and Testament as well as Power of Attorney and Health Care Proxy, in the event you become incapacitated. It also may include trust planning. There are many types of trusts that accomplish a wide variety of goals, one does not need to be wealthy to benefit from a trust. Proper estate planning can minimize costs, time, and emotional burden on your family at a difficult time. The goals of any estate plan often are:
- Make sure your assets pass according to your wishes and not the wishes of the Commonwealth of Massachusetts.
- Eliminate, if possible, otherwise minimize state and federal estate taxes.
- Avoid probate to assure privacy, eliminate court involvement, delay, and minimize expenses.
- In some cases, protect your assets from the cost of long term care, including nursing homes.
Carrying out your wishes:
The estate plan should carry out your wishes, not the government’s wishes. If you die without a Will, every state has rules as to how your property will be distributed. In most states, the statutory distribution is inconsistent with your wishes. You can avoid these arcane and inflexible rules by having a properly drafted Will. Be sure your assets pass to your loved ones rather than persons favored by the state. However, a will does not avoid the expense, delay and publicity of a probate proceeding, nor does it help to reduce estate tax costs or protect your assets from the costs associated with long-term care. This is why a trust is usually recommended in addition to a will.
Estate taxes can be minimized or eliminated with proper planning:
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The includible property may consist of cash and securities, real estate, insurance, retirement accounts, trusts, annuities, business interests, and other assets.
The federal government imposes up to a 40% estate tax on estates that exceed $10,000,000 (indexed for inflation) for deaths occurring in 2018. Many states, including Massachusetts imposes up to a 16% estate tax on estates that are worth $1,000,000 or more. With proper planning, federal and state estate taxes can be eliminated and/or minimized.
This requires trust planning, because, while each person is entitled to an exemption upon death, the surviving spouse in Massachusetts is not permitted to use the exemption that the first spouse had, while the federal estate tax exemption is portable between spouses. This federal portability election is made on a timely filed estate tax return for the decedent with a surviving spouse. With proper planning by use of a trust you can save your family a significant portion of your wealth, and ensure that this wealth will pass to your loved ones rather than the government.
Probate is the process whereby assets owned by an individual are transferred upon death. Court approval is often necessary and this process can be time consuming, expensive, and public. Using a revocable trust and/or an irrevocable trust can avoid probate and thereby assure fast and efficient administration of your estate.
Long Term Care Planning:
Statistics show that more than 1 out of 2 individuals will spend some time in a nursing home after age 65. We tend to be living longer but not necessarily healthier. If you do not plan in advance, all of your life savings could be used to pay for long term care, leaving nothing for your heirs, and more importantly bankrupting your healthy spouse. With trust planning, you can make yourself eligible for state benefits known as Medicaid. There are complicated look-back periods, penalty periods, and spousal allowances, all of which are available to be utilized to your advantage and to protect your assets.