Understanding Estate Planning – Begley Report
by: Begley Law Group
By Thomas D. Begley, Jr.
WHAT IS ESTATE PLANNING?
Estate planning is the process by which an individual defines his or her goals for passing assets to beneficiaries and chooses appropriate tools and strategies for achieving those goals. The process begins with a careful analysis of one’s situation, objectives, and potential tax liability. Only after all of those factors have been considered is it possible to select the tools and strategies that will allow assets to pass in the most effective manner.
It is important to coordinate estate planning decisions with broader financial plans. Absent adequate financial planning, even the best estate plan can easily fail. Just as important is getting an early start on estate planning to help mitigate undesirable outcomes in the event of a disability or incapacitation, both of which affect a majority of individuals at some point in life. For example, there is a 58% probability of suffering a disability lasting at least 90 days and requiring assistance with the management of property and affairs. There is approximately a 70% chance of eventually requiring some form of long-term care, whether home care, assisted living, or nursing home care, all of which can have a devastating impact on life savings.
HOW DO LIFE CIRCUMSTANCES IMPACT ESTATE PLANNING?
♦ Bloodline Trust.
- Would you like to keep the money that you are leaving to your children in your bloodline?
- Would you like to protect your children and grandchildren from claims by creditors against the assets that you leave them?
- Do any of your children or grandchildren have problems with the following:
- Drug Addiction?
- Criminal Behavior
- Can’t Hold a Job
- In view of the fact that 50% of all marriages end in divorce, are you concerned about your children’s spouses?
- Would you like to design a trust for your children that would protect the assets from a strong-willed spouse?
♦ Retirement Plan Trust.
- Are you concerned that your children or grandchildren may lose the IRA they inherit from you (probably your largest asset) by:
- Squandering it?
- Creditors (including bankruptcy)?
- Do you want to take your grandchildren into consideration in designing your estate plan and documents?
- If so, would you like to leave your children a token amount (i.e., $1,000, $25,000)?
- Would you prefer to set aside one share of your estate for each of your children and one share to be divided equally among your grandchildren?
- Have you considered an education trust for your grandchildren?
- Have you established 529 plans for your grandchildren?
♦ Protecting Your Home.
- Would you like to protect your home, if you need long-term care in the future?
- Do you have a family member, spouse, child, grandchild, or other potential beneficiary, who suffers from a disability?
- If so, is this person receiving government benefits?
- If so, is this person receiving SSI, Medicaid, Section 8 Housing, or DDD benefits?
- Have you (or either of you, if married), any of your children, or any of your grandchildren been diagnosed with a mental illness?
♦ Tax Considerations.
- Do you want to discuss any potential federal estate tax, state estate tax, state inheritance tax, federal gift tax and income tax issues at your appointment?
♦ Blended Families.
- Previous Marriage. Do you, or if married do either of you, have children by a previous marriage?
- Do you, or if married do either of you, have any step-grandchildren?
- If you have children by a previous family, is your goal to provide for your spouse and then for your children?
- Would you like to leave your current spouse a life estate in your home?
- Would you like to establish a trust for your current spouse?
- Do you want your step-grandchildren to receive an inheritance?
- Do you want your current spouse’s children to share in your estate?
♦ Gifts/Loans to Children.
- Have you made gifts to any of your children during your lifetime that are unequal?
- If so, should such gifts be considered an advancement against that child’s share of the estate?
- Have you made loans to any of your children?
- If so, should the loan be repaid from the child’s share of the estate?
♦ Different Treatment for Different Children. Not all of our children are the same with respect to personality or need.
- Do you want to treat all of your children equally and the same regardless of their differences?
- Do you want to disinherit any of your children?
♦ Relationships among Family Members. Some families are tightly-knit, others are dysfunctional.
- Is there friction among your children?
- If so, is there one child who gets along with everyone?
♦ Long-Term Care Insurance. Many estate plans and retirement plans have been destroyed by the unanticipated cost of long-term care.
- Do you have long-term care insurance?
- If no, are you willing to consider the possibility of purchasing such a policy?
♦ Umbrella Liability Policy.
- Do you have an umbrella policy for large liability claims?
♦ Financial Advisor.
- Do you work with a financial advisor?
- If so, has your financial advisor prepared a written IPS for you?
- Does your financial advisor manage all of your investments?
- How many banks, brokerage firms, RIAs, insurance companies, and mutual fund companies do you have accounts or investments with?
- Have you evaluated your options with respect to your IRA or qualified retirement plan to reduce or defer income, estate and inheritance taxes on your death (e.g., spousal rollover, inherited or “stretch” IRA, Roth “stretch” IRA, charitable beneficiary, etc.)?
WHAT SHOULD YOU KNOW ABOUT TAXES?
When developing an estate plan, there are five taxes that need to be considered:
♦ Federal Estate Tax. Currently, there is a federal estate tax on all estates in excess of $12,920,000 for an individual and $25,840,000 for a married couple in 2023. The tax is 40% on the excess amount. However, this exemption is scheduled to be reduced on January 1, 2026 to approximately $5,700,000 or $11,400,000 for a married couple. President Biden has proposed to reduce the exemption to $3,500,000. Presumably this would be $7,000,000 for a married couple.
♦ New Jersey Estate Tax. The New Jersey estate tax has been repealed, but there is talk that it will be reinstated. This possibility should be addressed in estate planning.
♦ New Jersey Inheritance Tax. There is a New Jersey inheritance tax based on the relationship between the decedent and the person receiving the inheritance. The tax rate ranges from 0% to 16%. There is no inheritance tax on transfers to lineal ascendants (i.e., grandparents), descendants (i.e., children and grandchildren), or spouses or qualified domestic partners. There is an inheritance tax on siblings, in-laws, other relatives, and friends.
♦ Gift Tax. Currently, there is an annual federal gift-tax exclusion of $17,000 per person. Married couples can potentially split gifts to enjoy a total annual exclusion of $34,000. Additionally, there is a $12,920,000 lifetime exemption. In 2023, the combined lifetime gift tax exemption for a married couple is $25,840,000. It is important to track changes in the law, which may affect this exemption amount.
♦ Income Tax. It is important to consider the income tax consequences of various strategies for both you and your beneficiaries. Effective January 1, 2020 the provisions of the Secure Act must be considered. This is a huge tax increase on the middle class that will be paid for by our children. The general rule is that beneficiaries who inherit IRAs must now withdraw them within ten years. Formerly beneficiaries could withdraw the IRA funds over their life expectancy. There are certain exceptions and there are a number of strategies that should be considered as part of an estate plan.
WHAT ESTATE PLANNING TOOLS ARE AVAILABLE?
Depending on one’s situation and goals, it is possible to benefit from numerous estate planning tools.
♦ Wills. A will is a document that spells out how an individual wants his or her estate to be distributed at death. Distributions can be made outright or through a trust. A will also appoints an executor, whose function is to probate the will, gather all assets, pay all bills, file all necessary tax returns, prepare an accounting, and make distributions in accordance with the terms of the will.
- If you have minor or disabled children, the will should also appoint a guardian. That individual will often live with the children and look after them during minority or disability.
- When appropriate, the will should also name a trustee. The trustee’s job is to invest the trust assets and make distributions in accordance with the terms established in the trust.
♦ Living Wills/Health Care Representatives. A living will, sometimes called a health care power of attorney, has two components. The first part of a living will addresses the need to appoint someone to make medical decisions on an individual’s behalf when he or she is unable to do so due to incapacitation. These medical decisions do not include end-of-life decision making. The second component of a living will addresses end-of-life decision making. This applies only in situations when the individual is unconscious and/or otherwise unable to make medical decisions, and there is no hope of recovery or of regaining a meaningful quality of life. If there is hope of recovery or of regaining a meaningful quality of life, the living will does not apply.
There are four options with respect to the second component of a living will/health care power of attorney, but only the first three are advisable:
- Terminate life.
- Continue aggressive treatment.
- Authorize a loved one to make decisions without guidance, if and when the time comes.
- Leave the decision up to the courts. Failure to choose one of the first three options places an individual in the position of having the matter go to court, where a judge will make a decision as to whether or not life should be continued.
Begley Law Group will send a copy of your Living Will to your primary care physician.
♦ Financial Power of Attorney. Sometimes called a general durable power of attorney, a financial power of attorney gives the agent the right to make financial decisions on behalf of an individual. Standard provisions should include:
- A reference to the New Jersey Banking Power of Attorney Act.
- A listing of any real estate by street address or tax block and lot.
- Specific language agreed to by the National Association of Securities Dealers and the American Bar Association, authorizing the agent to deal with securities.
- Power to make gifts, including any conditions or restrictions on such gifts.
♦ Living Trusts.
- Revocable Living Trusts. A living trust is a document designed to avoid probate. It can be used to save estate and inheritance taxes, but it is not required for that purpose. The same tax savings can be achieved through a properly drafted will. It is almost always appropriate to use a living trust if you own real estate outside your state of residence, in order to avoid ancillary probate. The advantage is that the trust can easily be amended or changed at any time. The disadvantage is that assets in a revocable living trust are included in your estate.
- Irrevocable Living Trusts. An irrevocable trust is one that cannot be changed. Such a trust can be designed so that the assets it holds are not included in a person’s estate for estate tax purposes. Typically, irrevocable trusts own life insurance policies when the insured does not want the proceeds included in his or her taxable estate.
♦ Special Needs Trusts. A Special Needs Trust can be established for a disabled beneficiary. The trust is designed so that the disabled person will not lose his or her public benefits, such as SSI, Medicaid, or low-income housing, upon the receipt of an inheritance.
HOW SHOULD YOU TITLE ASSETS AND MAKE BENEFICIARY DESIGNATIONS?
Many assets pass outside the will. When developing an estate plan, it is important to ensure that such assets are properly titled and that beneficiary designations are accurate and up to date. Many banks and financial advisors encourage customers to attach payable on death (POD) or transfer on death (TOD) designations to their accounts. This is generally not a good idea in New Jersey or Pennsylvania. The reason is that on death the assets in the account pass by the beneficiary designation on the account and do not pass under the Will. Frequently there are inconsistencies that result in problems. It is best in New Jersey and Pennsylvania to avoid POD or TOD beneficiary designations and, if you have them, to eliminate them.
Among the assets that pass outside the will are jointly owned property, which automatically goes to the survivor, and property in trust, which goes to the beneficiary(ies) in accordance with the terms of the trust. Life insurance, retirement plan assets, and annuities are also paid directly to the named beneficiaries. Married couples who wish to achieve tax savings should avoid joint ownership of assets and retitle assets as necessary. Typically, the assets are divided about equally between husband and wife, with consideration given as to which asset gets transferred to whom. If you have life insurance policies, IRAs, and other retirement accounts and/or annuities, you must consider beneficiary designations based on your estate planning goals. For each asset, it is necessary to name both primary and contingent beneficiaries. Begley Law Group will assist you in changing the beneficiaries of your life insurance policies, retirement plans and annuities.
WHAT ABOUT LONG TERM CARE PLANNING?
Many people carefully plan for the transfer of their estate, taking steps to minimize taxes, only to see their assets eroded by long term care expenses. The cost of long term care, whether home care, assisted living, or nursing home care, can easily exceed $150,000 a year. Since approximately 70% of all individuals over age 65 require some form of long term care, it is important to consider this potential risk when developing estate and financial plans. A good long term care insurance policy will pay for virtually all forms of long term care, including adult day care, home care, assisted living, and nursing home care. The best time to purchase long term care insurance is before age 60, when premiums are far more affordable. Studies show that 25% of applicants aged 65 are rejected because they are deemed uninsurable.
Long term care policies can be customized to control costs. You should consider factors including:
- The type of care covered;
- The amount of daily benefits;
- Elimination periods;
- The length of coverage;
- Inflation riders; and
- The financial strength of the insurance company.
WHAT SHOULD YOU KNOW ABOUT INVESTMENT PLANNING?
During the estate planning process, attorneys often find that clients have made significant investment mistakes. Such mistakes could jeopardize your ability to achieve maximum investment returns, as well as your ability to realize estate planning goals. To help address this situation, Begley Law Group encourages you to follow this 12-step process:
- Set Goals. Identify and put into writing your investment goals.
- Consolidate all of your assets into one investment account. That account should then be invested in a diversified manner.
- Utilize professional management. Retain a professional investment manager. Usually the increased cost is more than offset by increased investment performance and reduced risk. You can minimize costs by using a fee-based, rather than commission-based, advisor.
- Be Objective. Make investment decisions in an objective, rather than emotional, manner. This can help you avoid the common pitfall of buying at market highs and selling at market lows.
- Start Early. Start saving as early as possible to benefit from the enormous power of compounded investment earnings.
- Buy and Hold. Use a buy-and-hold strategy, avoiding speculation and day trading, and focusing on good stocks in solid companies.
- Avoid tax-driven investment decisions. Tax shelters frequently make poor investments.
- View your home as “personal.” Consider your home a place to live, rather than an investment, despite the fact that the value of homes does tend to increase significantly over time.
- Diversify across different asset classes to help reduce investment risk and increase returns. Asset allocation is the chief factor influencing investment returns.
- Understand inflation risk. Historically, the annual rate of inflation has been about 3%. Individuals who attempt to avoid investment risk by purchasing certificates of deposit usually receive little or no investment return after paying taxes on the interest income and factoring in inflation.
- Monitor investment performance and rebalance investment allocations at least once a year.
- Review your estate and financial plans periodically. If you are over age 65 and have assets in excess of $1 million, excluding your home, review your plans annually. Also review your plans whenever relevant laws change or when you experience life changes such as:
- The birth of a child.
- The death of a spouse or beneficiary.
- A second marriage.
- The onset of disability.
- A significant change in income or assets.
- A change of residence from one state to another.
- The marriage of children.
- The divorce of children.