The Basics of Estate Planning

Every now and again, it’s helpful to go back to the basics.  This blog will go back to the basics of estate planning to talk about how and why everyone should have an estate plan.  Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.

No matter how BIG or small your net worth is, estate planning is a process that addresses how and to whom you leave your assets when you die and names decisionmakers who will wind-up your affairs at death and make financial, medical or personal decisions for you if you cannot yourself.

An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:

  • Your car
  • Your home
  • Financial accounts
  • Investments; and
  • Personal property.

Part of estate planning is deciding which people or organizations are to get your possessions or assets after you’ve died.  This includes determining how to give it to them, and that plan addresses concerns such as marital status of the beneficiary, how they are with money, addiction problems, taxes and so on.

It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.

This is a very important aspect of estate planning, and you can learn more here:  https://galligan-law.com/power-of-attorney-why-it-is-important/

One of the biggest reasons people don’t have an estate plan is they assume they have no “estate” to be concerned with.  It might be true they don’t have much money, but everyone should consider naming individuals to act for them if they become incapacitated, ill or otherwise need help making decisions.

It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.

You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.

All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan covering these three basic areas.

Reference: Forbes (Nov. 16, 2022) “Estate Planning Basics”

Continue ReadingThe Basics of Estate Planning

Can a 529 Plan Help with Estate Planning?

Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, they are also a good tool for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $16,000 per beneficiary for gifts made in 2022. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $80,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.  Keep in mind that you are just making a lump sum gift, so gifting in the next 4 years to that 529 beneficiary is taxable.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.  They have become fairly expensive.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

If you want to explore more ideas on how to pay for a loved one’s education, see this article:  https://galligan-law.com/how-grandparents-can-help-pay-for-college/  

As a quick aside, contributions to a 529 plan for a child or grandchild are also exempt as transfers under Medicaid.  This means that if you are in a spenddown situation trying to become eligible for Medicaid, contributions to this fund might be very attractive.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of your estate plan.

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

 

Continue ReadingCan a 529 Plan Help with Estate Planning?

Is Spouse Automatically Your Beneficiary?

People make a grave error when they don’t have an estate plan because they think their surviving spouse is their automatic beneficiary.  The laws of intestacy work differently, as explained in a recent article “Estate Planning: The spouse doesn’t always get everything” from nwi.com.

The surviving spouse doesn’t always receive everything under the intestate laws. This often comes as a surprise to people. In estate administrations without a will, I’m often told the decedent didn’t have a will because “it all goes to the wife anyway” or sometimes even “it all goes to the kids” (but that’s a different blog).

In many states, one half of the decedent’s estate assets are distributed to the spouse and the other half are distributed to the decedent’s child or children.  Similarly, many states have provisions where some property is divided between spouse and decedent’s parents if there are no kids.

To make this a bit more complicated, Texas has community and separate property.  Community property is marital property, and separate property comes from outside of the marriage, such as inheritance from that spouse’s family, a gift or something they distinctly brought to the marriage such as their home.  Separate property is treated differently in intestacy.

If a married couple lives in the separate property residence of a spouse who then dies, the surviving spouse gets a life estate in 1/3 of the property and the children take the rest.  It basically means the spouse stays in the house, but the house ultimately goes to the kids.  This essentially creates a division in which the spouse is expected to pay for some expenses, and the children for the rest.  It tends to be an unhealthy dynamic, to say the least.

Bear in mind the intestate laws only apply to assets in an estate administration.   Assets that pass by contract, such as life insurance to a named beneficiary or an account titled as joint tenants with rights of survivorship pass to those individuals.  This solves part of the property, such as bank accounts, but won’t solve the problem for everything.

I should note too that many people assume everything goes to the spouse because that’s what most people choose in their estate plans.  Practically things do go to spouse, but it required the estate plan to make it happen.  People see the common result and make an assumption on the process.

If you’d prefer to leave more to your spouse, you need a will. Intestacy literally translates to dying without a will. If you have a will and then die, you haven’t died intestate, and the provisions don’t apply.

The key in estate planning is to recognize you have a choice.  If you want everything to go to your spouse, don’t assume it’ll happen. Make it happen in your estate plan.

As one final aside, people also assume spouses can act for them if they are incapacitated.  That also isn’t automatically true and may require guardianship if estate planning doesn’t address it, although a power of attorney may avoid that need.  See here for more:  https://galligan-law.com/do-you-need-power-of-attorney-if-you-have-a-joint-account/

Each state has its own laws of intestacy, so an estate planning attorney who practices in your state needs to be contacted to determine what would happen to your spouse if you didn’t have a will. Your best recommendation is to meet with an experienced estate planning attorney and create a plan to protect your spouse, your children or your chosen beneficiaries.

Reference: nwi.com (Oct. 23, 2022) “Estate Planning: The spouse doesn’t always get everything”

Continue ReadingIs Spouse Automatically Your Beneficiary?