What Are Your Estate Planning Goals?
When you prepare an estate plan with the guidance of a Cape Cod estate planning attorney, what are your goals? What is important for your estate plan to address? What documents will you and your estate planning attorney need to prepare?
Your estate plan should address five common goals. If you’ll keep reading this brief discussion of estate planning goals, each of these goals will be discussed:
- testamentary disposition
- incapacity care planning
- probate avoidance
- asset protection
- tax avoidance
Goal #1: Testamentary Disposition – Passing Your Wealth to Your Loved Ones
Testamentary disposition is how you pass your wealth – in other words, the disposition of your assets and property – to one or more beneficiaries after your death, as spelled out (usually) by your trust document.
Historically, a last will and testament was commonly used for this purpose, but in recent decades, the use of revocable trusts has grown due to the advantages these trusts offer. The “contract to plan” is a newer estate planning tool that many married couples are now using as a supplement to their trust.
How Does a Contract to Plan Work?
A contract to plan is a legal document – usually prepared for a married couple – in which the spouses in effect say to one another, “I promise to give everything to you, you promise to give everything to me, and we both promise to give everything to our agreed-upon beneficiaries.”
Why is this important? If your spouse remarries after your death, whatever he or she inherited from you could go, upon your spouse’s death, to your spouse’s new spouse and not to your children or other chosen beneficiaries.
What Are Your Other Tools for Testamentary Disposition?
Many people use joint property, where your half of a home or bank account, for example, passes to the co-owner automatically upon your death. For several reasons, you shouldn’t use joint property for testamentary disposition, except perhaps for passing a car or a checking account to your spouse.
Beneficiary designations pass bank accounts, retirement accounts, annuities, and life insurance benefits to your designated beneficiary. A beneficiary designation overrides an estate planning document, like a last will and testament. Unfortunately, use of many beneficiary designations result in the need for conservatorships, unanticipated taxes, or the loss of asset protection. So beneficiary designations should be only a few types of assets and with the advice of an experienced Cape Cod estate planning attorney.
What Do Revocable Trusts Provide?
Revocable trusts are a popular and practical estate planning tool because, along with providing for testamentary disposition, a properly structured revocable trust:
- allows you to manage and enjoy your property and assets
- can protect your beneficiaries’ inheritance from a divorce
- allows your spouse or other beneficiaries to avoid probate
- can reduce or eliminate several types of taxes
- may be amended or revoked at any time while you are alive
A Cape Cod estate planning lawyer will offer you sound advice regarding your testamentary disposition. Depending on your needs, that lawyer can help you prepare a last will and testament, a contract to plan, and a revocable trust.
Goal #2: How Do You Plan for Incapacity Care?
How will your assets be managed and your medical decisions made if you can’t make those choices yourself? Several legal tools are available for incapacity care planning:
- If an adult is incapacitated, a concerned party may submit a Petition for Guardianship to the court, which may name a guardian to make the incapacitated person’s medical decisions. Guardianship requires a costly, time-consuming legal proceeding.
- A better option is preparing, in advance, a health care proxy. It’s a legal document that names someone you have chosen to act as your proxy to make medical decisions on your behalf. It may include your instructions regarding medical treatment and end-of-life care.
- A MOLST (Massachusetts Order for Life-Sustaining Treatment) may be prepared with your doctor to establish your wishes regarding life-sustaining treatment and end-of-life care. When you both sign it, it becomes a legally binding order in your medical record.
Incapacity Care for Financial Affairs
Who manages your financial affairs if you’re incapacitated? If you don’t plan in advance, a conservator will need to be appointed. The person who will be your conservator will be appointed by a court, and if there’s a dispute among your family and loved ones, that court proceeding could be lengthy, arduous, and expensive. You can and should nominate who you wish to have appointed as your conservator, but it is better to prepare two documents before there is an incapacity – a durable power of attorney and a revocable trust. With these documents, most people will never need the costly process of a conservatorship.
The solution is to prepare, in advance, a durable power of attorney, a legal document that lets you name the person who will make your financial decisions for assets you own in your name alone (like retirement plans) if you cannot make those decisions yourself. Most other assets should be owned by a revocable trust and not be governed by a durable power of attorney.
If you’ve established and funded a revocable trust, your designated successor trustee will manage the assets owned by the trust if you become incapacitated, while the person who holds your durable power of attorney will manage the property and assets that are in your name alone and do not belong to your trust. For most families who use a trust, the appointment of a successor trustee (the person who will manage the trust to take care of you if you are incapacitated), is one of the most important decisions you make when designing your estate plan.
Goal #3: Why is Probate Avoidance an Important Goal?
Probate is a legal process that delays the transfer of your wealth to your beneficiaries and takes a considerable percentage of that wealth. In Massachusetts, probate takes a minimum of one year, and probate typically “costs” about five percent of the probated assets.
Your estate will have to pay attorneys’ fees, accountants’ costs, appraisal fees, filing fees, and other expenses. Moreover, because it’s a legal proceeding, probate is public, and anyone can learn the details of your financial affairs.
Can you avoid the delays, the costs, and the public nature of probate? The key is having as few assets as possible in your name alone. As mentioned previously, joint property should usually be avoided, but assets owned by a trust and assets with beneficiary designations are not probated.
Goal #4: How Can Estate Planning Protect Your Assets?
Speaking frankly, persons with wealth are the “deep pockets” who are the likeliest targets for lawsuits, and even if an attorney successfully defends you against a lawsuit, it’s going to cost you substantial time and resources.
Proper estate planning protects your assets from lawsuits for as long as you are alive, and upon your death, it protects your assets for your beneficiaries. Once again, the key is having as few assets as possible in your name alone.
If your assets are owned, for example, by an irrevocable trust or a limited liability company (LLC), you can still have access to them for your use and enjoyment, but when irrevocable trusts and LLCs are set up correctly, they can provide protection from the claims of creditors, and in some cases, those who would sue may be discouraged from acting against you. Before a lawsuit happens, ask a Cape Cod estate planning attorney to help you determine which asset protection tools you need.
Can You Protect Your Assets for Your Beneficiaries?
Most trusts handle testamentary disposition in a similar way as wills do – by giving an inheritance to the heir. All of your assets—your “deep pockets”—are transferred directly to your beneficiaries. How can you protect your assets for your beneficiaries?
The key concept is to remember to leave things “for” your loved ones and not give an inheritance “to” your loved ones. Trusts can be established to continue after your death. With the right kind of asset protection language added to your trust, you can specify that each heir may act as the trustee of his or her inheritance. Then, once your loved one inherits, they may use your trust to own whatever they wish to invest in. Additionally, if they need money from your trust, it may be distributed out of trust for medical needs, educational needs, or the standard of living needs of your loved ones or their descendants. A Cape Cod estate planning lawyer will know what clauses and provisions you will need to include in the trust document.
Goal #5: Can Planning Reduce Your Estate’s Taxes?
Upon your death, your probate estate becomes a legal taxpayer. Any income, like interest, dividends or capital gains, that your estate generates while the probate process is pending is considered taxable income. Currently, probate estates hit the highest income tax bracket at a very low level of income – several hundreds of thousands of dollars under the personal tax brackets. This results in an inheritance being significantly reduced by high income taxes.
A trust may be written in a way that reduces taxes on the income (interest, dividends and capital gains) earned after your passing. The trick is to make the trust income taxed at the personal income brackets of the beneficiaries. The trust document must be carefully drafted, or the assets owned by the trust will be subject to income taxes for whatever income the trust generates.
The trust document must specify that income created by the trust belongs to the beneficiary and not by the trust. With the correct provisions in the trust document, a beneficiary will pay significantly less income tax than the estate would pay without the right language.
Can Estate Planning Reduce or Avoid Estate Taxes?
The federal estate tax exemption (for 2023) is $12,920,000, but Massachusetts levies a tax on estates worth more than $1 million. If your estate’s value is at or above the $1 million exemption figure, an inadequate estate plan could leave your beneficiaries with an estate tax burden that may be avoidable.
For married couples, a revocable trust can protect your assets from the Massachusetts estate tax. A revocable trust may be created in a way that passes up to $2 million without a Massachusetts estate tax liability.
If you are single with an estate of more than $1 million, or married with an estate of more than $2 million, an estate plan may be designed to reduce or even eliminate the estate tax. A Massachusetts estate planning lawyer will know how to best avoid an estate tax on your estate.
Should You Have Your Estate Plan Reviewed?
A Massachusetts estate planning attorney can help you prepare a comprehensive estate plan that meets all five common goals of estate planning. If you already have an estate plan in place, ask an estate planning attorney to review it to ensure that it still meets your goals and your needs.