Becoming a parent can certainly serve as a strong motivator for those who had previously procrastinated in the estate planning department. The fact is, absent a “triggering event”, such as the birth of a child, marriage, a death in the family or divorce, many people postpone creating an estate plan. Others erroneously assume that they do not have an “estate” worth planning or that their families will handle everything when the need inevitably arises. However, everyone, regardless of their age and net worth, whether or not they have a partner or children, requires comprehensive estate planning in order to ensure that their loved ones, as well as charitable organizations or business interests, are adequately and appropriately provided for, consistent with their wishes.
As difficult as it may be to contemplate, death is inevitable, and many become incompetent or incapacitated. We can either choose to ignore this reality, or accept it and be proactive in protecting our loved ones and ourselves. Without an estate plan, the state government and the courts hold the decision-making power with respect to your estate, including who will inherit your assets, who will become the guardian of any minor children upon your death and who will make health care and financial decisions on your behalf in the event of your incapacity, all without regard to your personal wishes.
Specifically, if an individual dies without a will (or intestate"), the courts will take control of the individual's estate and distribute his or her assets according to the intestacy laws of the state in which the individual resides at the time of his or her death. All too often, particularly for single individuals, those who ultimately share in a decedent's inheritance under the intestacy laws are not the same people who would have otherwise inherited the property had the individual died with a will. Individuals also need to appoint a health care agent under a document called a health care proxy to make medical decisions on their behalf, in the event the individual becomes incompetent or incapacitated. It is also important that individuals indicate their wishes regarding whether or not to remain on life support using a living will. Through the use of a durable power of attorney, a revocable trust or a combination thereof, individuals may designate an agent or trustee to manage their personal assets in the event of their incapacity or incompetence. Thus, at a minimum, an estate plan for an individual, whether single, married or divorced, will include the four aforementioned documents: a will, health care proxy, living will and power of attorney.
Estate planning for single individuals who are not married, but have partners, is particularly necessary, as the state does not typically impart partners with any legal inheritance rights, and assets can instead pass to their next living heir. Similarly, if a single individual has children without a second parent, he or she should name a guardian and trustee under his or her Will to make sure that the child, and any assets for the benefit of that child, are taken care of by trusted persons.
In contrast to individuals without spouses, married couples typically rely on each other for financial support. Accordingly, it becomes important after marriage for individuals to plan their estates in order to ensure that their spouse (and any children) are adequately provided for in the event of disability or death.
Along with marriage comes legal and financial status changes, such that spouses can file joint taxes and are bound by laws regarding the disposition of property upon their death. A spouse’s right to inherit the assets of a deceased spouse depends on whether the married couple lived in a state governed by community property or equitable distribution laws. For those residing in community property states, which include California, Texas, Arizona, Wisconsin, Louisiana, Washington, Idaho, Nevada, New Mexico and Alaska, the surviving spouse is entitled to receive his or her deceased partner’s portion of marital assets (generally, property shared and jointly owned between spouses), and the remainder of the deceased spouse’s separate property (generally, property owned as an individual, to which the spouse has no ownership rights under law) is divided according to his or her will. In equitable distribution states, which include the remaining states, the surviving spouse often has a legal right to share in a percentage of the deceased spouse’s entire estate upon death.
It is important that married couples understand the specifics of how property may be required to be divided upon death, as well as the gift and estate tax benefits available only to married couples, when creating their estate plans. Specifically, there is no federal or state estate or gift tax on transfers between United States citizen spouses, whether during lifetime or at death (this is called the marital deduction). Those gifts and bequests can be outright transfers or can be made via trusts (although not all types of trusts will qualify for the marital deduction). There is no limit on the amount that may be transferred. The vast majority of married couples needing estate tax planning combine the estate tax exemption granted to each person with the unlimited marital deduction to assure that no estate taxes are payable until the death of the surviving spouse.
Married couples typically plan their estates in consult with not only a trusts and estates attorney, but with each other. Couples with minor children should execute wills that designate a guardian for their children and, in some circumstances, a trustee to manage the children’s inheritance. Spouses often name each other as Executor under their wills; that is, the person who is responsible, upon the individual’s death, for taking inventory of property; preserving the estate; paying creditors, administrative expenses and any death taxes; and disposing of the remainder of the individual’s property among his or her beneficiaries. Spouses may be advised to own property jointly with a right of survivorship or in revocable trusts in order to avoid the often onerous and expensive process and ease the transfer of assets after death.
Divorced and Widowed Women
The death of a partner and divorce are both painful and overwhelming processes, riddled with emotion, decisions and paperwork. It is easy to overlook or ignore other important aspects of one’s life following such a difficult time. Nevertheless, it is critically important to rebuild, particularly for women who had once shared (or completely renounced) financial responsibilities. In doing so, it is imperative, during or after the death or divorce, that women update (or create) their estate plans in order to ensure that they, their assets and their families are all appropriately and adequately protected.
Specifically, beneficiary designations for bank accounts, brokerage accounts, IRAs, retirement accounts, annuities and life insurance policies should all be updated to remove a deceased or ex-spouse and appropriately name a new beneficiary. In order to prevent an ex-spouse from inheriting assets and, thereby, potentially disinheriting other loved ones, women must update their wills and/or revocable trusts. In addition, ensure that you destroy any previously executed documents naming your ex-spouse as an agent under your health care proxy or power of attorney, and execute a new instrument designating the appropriate individual to serve instead.
High Net Worth Women
The United States lifetime estate, gift and generation-skipping transfer tax exemption amounts available to U.S. citizens, as of January 1, 2020, is $11.58 million per person ($23.16 million per married couple). Notably, this increased exemption amount is a "use it or lose it" opportunity, given that it is scheduled to sunset after 2025, when the exemption will revert back to $5 million and will be indexed for inflation. If a new U.S. president takes office in 2021, this federal exemption could be changed much earlier than current law mandates. A Democratic administration in Washington could push for a significantly lower exemption.
Women of means deciding whether to gift assets to loved ones to take advantage of the temporary increase in the exemption amount should consider the level of their wealth (including future earnings, income and appreciation), asset protection planning, the need for future access to gifted assets, and the income tax consequences of transfer. Moreover, individuals need to be aware of the relatively low interest rates still in effect and the concomitant effect on powerful gifting techniques. These benefits become less rewarding as interest rates increase. For residents of states with a state estate tax (such as New York, Maryland, Massachusetts, New Jersey and Washington), gifting during life using the exemption amount may enable those funds to escape a state estate tax that could otherwise have been imposed at death.
In addition, each U.S. person may give annually, to as many recipients as he or she desires, without the imposition of gift tax or the use of the individual's lifetime federal exemption, an amount equal to $15,000 per recipient. Wealthy individuals should consider making gifts to children and grandchildren (either outright or in trust) using their annual exclusion amounts in order to deplete the value of their estates over time, without using any of the federal exemption amount.