While only the wealthiest individuals need to invest in “Cadillac” estate planning for the purpose of minimizing estate taxes, many others can benefit from estate planning more on an economy car level.
People who need estate planning that might include complicated trusts are those with assets in excess of $5.25 million for an individual or $10.5 million for a married couple.
“If net worth is less than that, estate planning for taxes isn’t necessary,” said Ronald Morton, LL.M., CELA, Morton Law Firm, Clinton. “There are a lot of people who are concerned about estate taxes who don’t have to be anymore. That is not to say that you won’t need estate planning. The major thrust of planning is very seldom taxes; it hasn’t been for many years. The bigger issues stem around, ‘How do I protect my loved ones when I am gone?’”
That can include protecting a surviving spouse from gold diggers, safeguarding of assets if a spouse goes into a nursing home and shielding assets from creditors such as those stemming from a lawsuit.
“With good planning, you can protect against those things,” Morton said.
To plan for the time period after the death of the second spouse, trusts might be considered for children, not to keep the money from the children, but to keep it from their spouses after a divorce. The current 50 percent divorce rate means that if someone has two children, one is likely to divorce.
“So we will frequently put an inheritance into a family access trust where it is totally available to the children, but not available to their spouse and their creditors,” Morton said.
He also recommends long-term care insurance as a good way to protect assets. Statistically, half of people 65 and over will end up in a nursing home.
“The cost of that is catastrophic,” Morton said. “It is $75,000 to $80,000 per year on average. Most people are not able to pay for that. Think of insuring for long-term care just as you would insure your house or car, which has much lower odds of catastrophic loss. That being said, long-term care insurance is very expensive, and many people can’t afford it or may not qualify medically. Those individuals have to do other types of planning to protect assets for the well spouse, or pass on a legacy to the next generation.”
The government’s spousal impoverishment provision means that in order for Medicaid to pay for nursing home care, the well spouse can have a home, a car and less than $115,000 in savings.
Medicaid looks back 60 months for gifts such as uncompensated transfers to children, and will penalize individuals one month of eligibility for each $5,700 transferred.
“You can’t be a millionaire on Monday, give money to the kids on Tuesday and qualify for Medicaid on Wednesday,” Morton said. “For people who can’t afford long-term care insurance, you look at other avenues to protect assets like a Medicaid asset protection trust. Other things business people need to consider in their planning is protection of their assets from third parties like lawsuits. Certain types of asset protection trusts can be used to make those assets unavailable to third parties.”
One important issue is who to trust for doing your estate planning. Eddie Carlisle, CFP, financial advisor with Medley and Brown, LLC, Jackson, recommends first checking to see if there is good communication, especially after an initial meeting.
“If you have questions and aren’t comfortable with the answers, keep looking or get another opinion,” Carlisle said. “And, sometimes people will go to some length getting an estate plan done and wills in place, and then not follow up and make changes in a title and update information on bank accounts listing beneficiaries. I would recommend people coordinate more between their estate planner and financial advisor watching investments. People should avoid making the mistake of not telling one what the other is doing.”
Estate planning, especially for business people, isn’t something that can be done at the age of 50 and then forgotten about. Carlisle recommends reviewing the estate plan, especially if something changes like losing a business partner or family changes. Be aware of general changes in the law, and have the estate plan reviewed periodically.
While certain tax rates have gone up this year, especially capital gains taxes, Carlisle said a lot of proposed changes regarding estate taxes didn’t happen as some people feared. “There was a lot of worry towards the end of the year that estate tax provisions would not get extended, but that turned out to not be as terrible as everyone was concerned it could be,” Carlisle said. “That said, who knows what will happen throughout the year? Action in Congress is something people always need to stay aware of.”
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