Financial Advice for Retirement, Social Security, IRAs and Estate Planning

The Foundations Of A Great Estate Plan

Published on: Jun 23 2020
estate planning

Everyone needs an estate plan, no matter how much or how little money is involved.

For example, you need an estate plan even if you don’t expect to owe taxes on the estate.

It is more important to decide who should receive the wealth, how much each should receive and when and how the wealth should be transferred.

Here is a look at some of the more important (but often overlooked) issues in estate planning and how to resolve them.

Who’s In Charge Of The Estate Planning?

Every estate needs at least one executor or administrator (the term used depends on your state). Every trust needs one or more trustees.

Most people appoint the oldest adult child to these positions, even if the spouse still is alive.

Keep in mind that this puts that child in charge of everything.

Depending on family dynamics, that move could trigger or aggravate family jealousy and rivalries.

Appointing all the children as coexecutors on the other hand could slow down the process and invite disputes and disagreements over even the most minor items.

Appointing the family lawyer or other professional always is an option. Unfortunately, that might increase costs and drag out the process of settling the estate.

The right choice for executor depends on your family.

For some, the best compromise is to name both a family member and a lawyer or other professional as co-executors.

A good suggestion is to make your choice known to family members.

Early notice gives them an opportunity to get used to the decision and gives you an idea of whether or not it will work.

The same considerations go into naming a trustee, but bear in mind that a trustee likely will be managing the property longer than the executor.

In most cases, the best move for surviving spouses is to roll over the inherited IRA to a new IRA.

That’s why when drafting a trust you should include a clause that allows the family to change trustees.

How Much Should You Give Now?

If you are confident that your lifetime needs are taken care of, consider giving some wealth to the loved ones now.

The tax law certainly encourages this by allowing tax-free gifts. Also, the lifetime estate and gift tax exemption is more valuable if used now rather than later.

When charity is part of your wealth distribution plan, the tax law also encourages lifetime gifts with income tax deductions.

Some people make lifetime gifts to enjoy seeing how the gifts benefit others, while some use lifetime giving as a trial run to how the wealth is used and affects people.

Sometimes the observations cause changes in the estate plan, such as putting money in a trust for an heir instead of giving it directly.

Lifetime gifts don’t have to be straight transfers of money or property.

You can pay tuition or medical expenses, or you might provide the down payment for a house or the start-up capital for a business.

Be conservative when setting up a lifetime giving strategy. More and more people live into their 80s and 90s. Unless you have health problems, include that possibility when deciding how much to give.

Should There Be Controls and Incentives?

In the 90s, people became concerned that leaving simple gifts would make heirs lazy, spoiled, or worse.

One longstanding solution is to leave money in a trust that has controls, so heirs won’t receive the bulk of the money until reaching a certain age or other milestone.

The trustee can have discretion over how much to distribute each year until then, and could withheld all money in circumstances such as substance abuse.

Many people went a step further and used “incentive trusts.”

Heirs would receive money only after achieving something, such as attaining a certain academic degree, holding a job for a minimum time, reaching a certain income level, attending church, getting married, or whatever other goal the parents wanted to establish.

Some people believe incentive inheritances resolve the dilemma of how to leave wealth to heirs but in a healthy way.

Others are against trusts, and some lawyers won’t draft them, as they can be viewed as an attempt to control loved ones from beyond the grave.

The incentives in the trusts can be too detailed and restrictive, so if you leave an incentive trust, try to keep it flexible.

The trust might be in effect decades from now, and you might end up penalizing a loved one whose interests change or who discovers a talent later in life.

A better approach might be to give the trustee discretion on distributions and leave a letter of instructions outlining your goals and intentions.

Should Someone Be Excluded From The Will?

Many families have at least one child who is estranged or has troubles.

The temptation can be to write the child out of the will, especially if the child is well into adulthood and shows no signs of changing.

Completely excluding a likely heir from a will is legal but rarely is a good idea.

The child could challenge the will or demand money from the others in return for not challenging the will.

Instead, leave the child an amount that is meaningful to him or her, then state that the inheritance is forfeited if the will is unsuccessfully contested.

The key is to find an amount that the child won’t want to risk losing.

In next week’s issue of Retirement Watch Weekly, we’ll address more of the most frequently overlooked issues with regards to estate planning.

PS: Estate plans are for everyone… not just the wealthy. In fact, that’s one of the reasons I wrote my new book, the NEW AMERICAN RETIREMENT PLAN. It’s one of the most comprehensive, do-it-yourself retirement guides you’ll ever find… and my publisher has allowed me to give away free copies to a limited number of people. Find out how to claim yours here in my latest investigative report.

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