The Top 7 Estate Planning Objectives
We are excited to have a guest blogger for this week. Jeff Miller is a wonderful member of our private Facebook group and is lending us his expertise on estate planning. His information is included at the bottom of this post.
When doing estate planning, often there is no one “right way” vs. “wrong way” of doing something. Rather, there can be trade-offs with the decisions that are made both in drafting documents and when reviewing or making changes to asset titling and beneficiary designations. There is no “one size fits all” blanket approach since each person or couple may feel certain planning objectives are more important to them than other objectives in their particular situation.
Estate planning is a 3-step process: (1) Draft documents to reflect your intent, (2) Review & potentially update asset titling and beneficiary designations, and (3) Periodically review your estate planning (steps 1 & 2).
To help frame any discussion or review of estate planning it is helpful to remember some of the more common, general estate planning objectives that we all have. In no particular order, other than perhaps how often we generally hear them, these common estate planning objectives typically include the following:
- Avoid probate. To achieve this objective substantially all assets should be either owned by trusts, owned with automatic survivorship rights with another person, or payable at death to family or intended beneficiaries through a beneficiary designation. Each state has its own probate laws. It is important to be aware of probate limits in each state in the country in which your client may own assets (including real estate, timeshares, personal property, business property, etc.). If an asset is owned in just the client’s name and no beneficiary designation is made on that asset, the client risks having their executor to go through a court proceeding if a state’s probate limit is exceeded. Illinois’ probate limit is $100,000 of probate assets.
- Maximize/don’t waste the client’s gift & estate tax exemptions, especially if estate taxes might be an issue at the federal OR state level for the client or someone else in their family. Currently the estate and gift tax exemption amounts are as follows: $11.58 million federal exemption for 2020; and $4 million Illinois exemption for 2020. The federal estate tax rate is currently 40% and the Illinois estate tax rate currently goes up to 16%. Other states have different rules and/or exemption amounts (some as low as $1,000,000). Knowing if the client might possibly be subject to federal or state estate taxes – now or as assets / wealth grows and changes – is critical.Generally speaking, if estate taxes at some level might be an issue for the client or someone else who would receive assets (e.g. a spouse, child, or other beneficiary), then to avoid or minimize estate taxes, the client usually wants most or all of t heir assets to be owned by one or more trusts prior to death, or to pass into the client’s trust(s) automatically at death.
NOTE: If assets pass to a surviving spouse or beneficiary “outright” (not in trust): (A) by using a joint tenancy / JTWROS ownership on any account or asset, (B) by using a tenancy-by-the-entirety designation for a home, or (C) by NOT utilizing a trust on a beneficiary designation to a life insurance policy or retirement account, then part of the client’s estate tax exemption will be “wasted”.
Depending on the values of the client’s assets, their spouse’s assets, and/or their children’s / beneficiaries’ assets, if the client does not have assets owned by a trust it could cause some assets to be eventually subject to federal or state level estate taxes at some later time.
- Protecting the home from creditors. Most people look forward to the day when the mortgage on their home is paid off. Regardless of whether a mortgage is paid off, a home can have a substantial amount of equity plus it is the one safe place we live day after day. Protecting the home is a common objective. For this purpose, think of a creditor in simple non-legal terms as anyone whom you would not want to receive your money or assets. Married clients living in Illinois (and some other states) should know that it is possible to protect the primary home from lawsuits or legal claims that might arise against one spouse (i.e. due to any kind of lawsuit that may arise in the future in a personal or business capacity, any kind of insurance exclusion or limit, etc.).
- Leave assets to a surviving spouse, children, or others in an asset protected way. When a client leaves assets, retirement plans and life insurance to a surviving spouse, children, grandchildren or others for an inheritance, they can leave it to them in a way that is flexible for them to access, yet asset protected. If a surviving spouse, child, grandchild, or other family member/beneficiary ever has a lawsuit or legal claim against him or her, and if the client leaves them an inheritance that is asset protected, then those substantial assets can survive legal attacks and continue to be available for the family in the way that was intended, even after the bad dust settles.
- Ensure that gifted/inherited assets stay within the family, particularly in the following situations: (1) the surviving spouse remarries and then passes away or divorces, and (2) a child or grandchild marries and then passes away or divorces. Will the estate planning documents be sophisticated and thorough enough to expect the unexpected, for those situations and perhaps others? If assets are owned by a trust it helps ensure that assets will stay within the family as intended — no matter how life otherwise plays out in the future — because a trust agreement should continue to control and manage things as intended and typically has comprehensive provisions for future use and distribution of assets. In contrast, when simple gifts of assets are made via co-ownership with rights of survivorship (JTWROS) or via beneficiary designation in a person’s name, there is potential at any later time for those assets to “drift”, get co-mingled, or get transferred to someone else that might not have been intended. The moment an outright / simple gift is made to a person, whether during life or at death, control over that gift is given up.
- Create flexibility with income tax planning. During the client’s lifetime if they have a revocable trust, it does not need a separate tax ID number. The client simply uses their social security number. However, after the client passes away the revocable trust will need a separate tax ID number. At such time, the revocable trust (and all other trusts that flow from that document) will have a separate set of effective federal and state tax brackets, ranging from 0% on up to the highest marginal tax rate then in effect. Sometimes a trust can retain taxable income in a lower combined federal and state bracket than a spouse, child, or other beneficiary would be subject to if they received it.
- Administer assets at a reasonable cost. While trusts offer many significant benefits for estate planning purposes, in some situations the client (or a successor trustee) may find that some assets should not be held in trust due to increased cost or complexities with current tax laws or for other reasons. For example, tax laws regarding retirement plans and IRA accounts may add complexities when a trust is a beneficiary of such retirement plans or accounts. Similarly, trusts generally have provisions that allow a trustee to terminate a trust if the asset values are below a certain dollar threshold (e.g. $100,000) or provisions that give the beneficiaries the option to withdraw some or all of the assets after certain ages.
In addition to these common objectives listed above, your client may have other additional estate planning objectives. Through thoughtful reflection and discussion, all of their estate planning objectives should be discussed in “plain English”. Once they can articulate their estate planning objectives in plain English, it’s time to work with a qualified estate planning attorney and other advisors to: (1) draft and customize an estate plan, and (2) retitle/line up assets appropriately to work with the estate plan.
Even if an estate plan achieves only one primary objective, the time, effort and cost of such an estate plan will almost always produce a better result than the default “do nothing”/status quo approach. Is an estate plan worth it if it “only” avoids a $10,000/18-month probate delay? Absolutely. Is an estate plan worth it if it “only” provides a $500,000+ inheritance to a surviving spouse or child in a flexible, asset protected way? Or keeps substantial assets within the family in the event of a future unexpected death or divorce? Without a doubt.
Finally, your client should have the peace of mind of knowing that almost all estate planning is flexible and can be updated at a later point in time if their objectives, their situation, or the laws change in the future. “Objectively” speaking, that’s a great deal.
by Jeff Miller, LLM
About the Author
Jeff Miller, JD, LLM (Tax), CPA, CFP
Founding member, Miller Wealth Law Group LLC
Jeff’s full bio is included at the bottom of this blog post.
Jeffrey A. Miller is the founding member of Miller Wealth Law Group LLC, a boutique firm helping clients protect and preserve their wealth by combining the practice areas of asset protection, estate planning, tax planning and business planning in a way that is unique.
Jeff received his undergraduate degree in accounting from the University of Illinois and began his career with a Big Four accounting firm. Jeff later earned his law degree and his masters of laws (LLM) in taxation, with honors, from IIT Chicago-Kent College of Law. Jeff has given back to the profession and community in many ways. Jeff was an adjunct professor at DePaul University College of Law teaching an advanced estate and tax planning class. Jeff has also been active for many years with the well-renowned Chicago Estate Planning Council since 2003, educating the public via its Public Outreach committee. Last but not least, Jeff has been active on a Business Advice committee with the Illinois State Bar Association since 2010, lecturing to fellow attorneys and giving feedback to the bar association on proposed new business laws.