Estate Planning: Beyond the Will

Key Takeaways

1. Wills alone are insufficient to ensure your assets are distributed to your preferences.
2. Setting up a revocable trust as part of an estate plan enables you to transfer assets to beneficiaries without going through the public court probate process.
3. Additional estate planning strategies, such as spousal lifetime access trusts and charitable remainder trusts, can protect beneficiaries from changing tax laws.

What do Aretha Franklin, Prince, and Howard Hughes have in common?

When they passed, their estates were not in order. Aretha Franklin left two handwritten wills found hidden in household furniture, and it took five years to determine which will would be the basis for property distribution. Prince had no will, resulting in prolonged battles in court among his heirs. Hughes left no valid will, although many handwritten wills were produced over the years, all of which were determined invalid. It took 34 years to settle his estate.

These high-profile cases serve as stark reminders of the importance of proper estate planning. Many believe that having a will—even a handwritten one—is sufficient, but the reality is often more complex. This article explores why it is essential to have more than just a will to prevent these kinds of issues and walks you through the general processes of estate planning.

The Myth of State-Provided Wills for Intestacy

A prevalent myth is that if you are not a high-net-worth individual or have designated your beneficiaries as part of property ownership, you do not need a will because “the state has one for you”. While it’s true that states have intestacy laws that dictate how assets are distributed when someone dies without a will (intestate), these generic provisions rarely align with an individual’s specific wishes. In extreme cases—where no beneficiaries can be found—the state can end up being your “heir.” Relying on state intestacy laws can lead to unintended consequences, such as property sales bogged down by the need to clean up the title and family disputes. In fact, intestate estates are more likely to end up in litigation than estates with wills as heirs fight over property or over who is in charge. This was the case with both Prince and Hughes.

The Probate Problem

One primary reason to consider estate planning beyond a simple will is to avoid probate. Probate is the court-supervised process of validating a will and distributing assets. Many people underestimate the significance of probate, but it can tie up assets for months or even years. It’s a time-consuming process which can cause financial strain for heirs.

The costs associated with probate, including court fees and legal expenses, can significantly reduce the value of the estate left to heirs. During probate, the deceased person’s financial affairs become a public record, potentially exposing private family matters to scrutiny.

You can avoid probate with an estate plan that includes one or more trusts, proper designations of beneficiaries, and the use of transfer on death registrations which enables you to transfer assets to beneficiaries without going through the public court process.

Essential Estate Planning Documents

Four documents should form the foundation of your estate planning:

• Will: This document specifies how you want your assets distributed after death. It’s your final say on who receives what, from your home and bank accounts to personal keepsakes.
• Durable power of attorney: A durable power of attorney is a legal document that allows you to designate an agent to make decisions and act on your behalf, even if you become incapacitated and are unable to make decisions for yourself. It is important to use a durable power of attorney as opposed to a basic power of attorney as a basic power of attorney ceases in the event of incapacitation.
• Healthcare directive: Also known as a living will, this document outlines your wishes for medical care if you are unable to communicate. It can also specify who should make health care decisions on your behalf.
• Trust: This legal document transfers your assets into a trust managed by a trustee (which can be you or other individuals or even institutions), so you can protect and preserve them. You can also customize how your wealth is distributed to your beneficiary or beneficiaries and minimize federal or state taxes. A trust can help you avoid probate and reduce estate taxes.

The Role of Trusts

Revocable and irrevocable trusts are the two basic types of trusts most used in estate planning. For individuals or couples beginning their first estate plan, a revocable trust is the best place to start. Here are the differences between revocable and irrevocable trusts.

Revocable Trusts

Revocable trusts allow you to manage your assets during your lifetime and specify how they should be distributed after your death. Unlike wills, assets in a revocable trust bypass probate because the trust, not you as an individual, owns the assets, and there’s no need for court involvement to transfer ownership after your death. Therefore, revocable trusts save time and money for your beneficiaries.

Revocable trusts offer privacy, as their contents don’t become public record like a will does in probate. They also allow for easier management of your affairs if you become incapacitated, as a successor trustee can step in to handle your assets without court intervention.

You might be wondering whether a will is necessary if you set up a revocable trust. Yes, you will still need a will, but it will be less involved because the trust takes care of your estate complexities. Also, you can name your trust as a beneficiary in your will. This is also known as a pour-over-will.

Irrevocable Trusts

Irrevocable trusts are permanent arrangements where you transfer assets out of your ownership and control. Unlike revocable trusts, you cannot change or cancel an irrevocable trust once it’s set up. People use irrevocable trusts to reduce estate taxes, protect assets from creditors, or qualify for certain government benefits among other uses. They are typically used by wealthy individuals or those with specific financial situations that benefit from the trust’s tax advantages and asset protection features.

Implementing Your Estate Plan

There is no one-size-fits-all method for creating an estate plan. The specifics will depend on your individual circumstances. But the steps below can help you get organized and begin the process with ease.

1. Assemble a team

   Bringing in an experienced team to help you create your estate plan should be your first step. Consider including a financial advisor, a tax professional, and an estate planning attorney to map out a complete, customized estate plan. Each person on the team plays a critical role in creating a plan that helps ensure your assets are distributed efficiently to the people and organizations you choose with as little confusion as possible.

   This team can also help you take care of these estate plan tasks:

   1. 1. Retitling assets: Retitling is the process of legally transferring ownership of assets from your name to the trust’s name. This is necessary for the trust to manage and hold the assets effectively.
      2. Updating beneficiary designations: Retirement accounts, life insurance policies, and other assets with beneficiary designations should be reviewed and updated.
      3. Transfer on Death (TOD) designations: Some assets can avoid probate through TOD designations without needing to be retitled to a trust. TOD is a legal process that allows you to designate beneficiaries to receive your assets upon your death without going through probate.

2. Compile a List of Your Assets and Beneficiaries

   Before you begin the formal estate planning process, compile a thorough list of your assets and liabilities. You might think that this is a quick and easy task, but it can be more difficult than expected. Your team can help you compile your list and use it to tailor your estate plan to your unique needs. This document will also be a helpful organizational tool for your surviving spouse or loved ones as they will be able to identify all your assets in a timely manner.

   After your list is ready, you should determine who you would like to be a beneficiary of your estate. This can be one of the most challenging aspects of estate planning. Take time to carefully assess the relationships and financial needs of your loved ones. You may want to provide for your spouse, children, or other family members. Additionally, you may have charitable organizations or causes that you wish to include as beneficiaries.

3. Outline your wishes in your estate planning documents

   It is important that your estate plan makes your wishes clear. Work with your estate planning team to make sure you draft a solid plan with the four documents mentioned previously and complete the process for retitling, updating beneficiaries, and adding TODs as appropriate. Below are some additional considerations.

   • • Personal Property

       Do not overlook personal property in your estate plan. While personal property may not have significant monetary value, personal items often hold sentimental importance and can be a source of conflict among heirs. A clear plan for distributing personal property can prevent family disputes and ensure your wishes are honored.

     • Titling New Assets

       As you acquire new assets, remember that they need to be titled for your trust. Your financial advisor and estate planning team can provide guidance on how to integrate new assets into your existing estate plan.

     • Business Ownership

       For business owners, estate planning takes on additional complexity. If you own a limited liability corporation (LLC) or other business entity, it might make sense for the trust to be the owner of the LLC. However, there are times when individual ownership might be more appropriate. Consult with your estate planning team to decide what is best for your beneficiaries and the business.

     • Retirement Accounts

       Should your trust be named as a beneficiary on retirement accounts? There can be advantages to this approach, but it’s a complex decision that depends on your specific circumstances. In most situations, naming individuals as beneficiaries might be more advantageous, but there are limited instances where using a trust may provide better control and tax planning opportunities.

4. Discuss additional estate planning strategies with your team

   For high-net-worth individuals, more advanced estate planning strategies may be necessary, especially in light of potential changes to estate tax laws. The current estate tax exemption, which stands at $13.61 million per individual for 2024, is set to sunset at the end of 2025. While it is quite possible that the current exemption amount will be extended, it is still possible that it reverts to approximately $7.1 million, potentially exposing more estates to significant tax liability.

   Regardless of any changes in the tax law, there are additional trusts (and a partnership) you can also set up to help manage your estate tax exposure. Below is a list of such instruments to consider:

   • • Spousal Lifetime Access Trusts (SLATs)

       A spousal lifetime access trust lets you give money or property to your spouse and children without paying gift taxes. Your spouse can use the trust’s assets while alive, but you cannot access them. However, this type of trust provides significant flexibility while spouses remain married as they often effectively share economic resources regardless of technical restrictions. When your spouse dies, the remaining assets go to your children or grandchildren without incurring estate taxes.

     • Irrevocable Life Insurance Trusts (ILITs)

       An irrevocable life insurance trust (ILIT) owns and controls a life insurance policy on the person who created it. Unlike a regular irrevocable trust, an ILIT is specifically designed to hold life insurance policies and manage their payouts. The main benefit of an ILIT is that it keeps the insurance payout from being taxed as part of your estate. Like other irrevocable trusts, once you set up an ILIT, you cannot change or cancel it, and you give up control of the insurance policy to the trust.

     • Charitable Remainder Trusts (CRTs)

       A charitable remainder trust lets you donate assets to charity while still receiving income from those assets during your lifetime. You get a tax deduction when you set up the trust, and the charity receives what is left in the trust after you die. This type of trust can help you support causes you care about while also managing your taxes and retirement income.

     • Grantor Retained Annuity Trusts (GRATs)

       With a grantor retained annuity trust (GRAT), you can give assets to your heirs while paying less in gift taxes. You put assets into the trust and get regular payments from it for a set time. When that time is up, whatever’s left in the trust goes to your heirs.

     • Family Limited Partnerships (FLPs)

       A family limited partnership (FLP) is a way for family members to manage assets like a business or investments together. In an FLP, some family members (general partners) control the partnership, while others (limited partners) just invest money. FLPs can help reduce taxes, protect assets from creditors, and keep family businesses in the family.

       FLPs and these other estate planning strategies can help mitigate estate taxes and provide more control over asset distribution, but they require careful consideration and expert guidance. You should work closely with your estate planning team to determine which of these strategies is right for you.

5. Share your estate plan with your family

   Once your plan is in place, it can be very beneficial to call a meeting with your family to walk them through your estate plan. Explain your wishes, answer any questions they may have, and provide copies of your estate plan to those designated as trustees or powers of attorney. This helps to ensure that everyone involved understands your plan, and there are no surprises or unknowns when you pass.

   Additionally, some families will include a hand-written note explaining why specific plans were put in place, or why certain people were charged with key decision making and oversight. This makes it more personable to your loved ones after you pass.

6. Review your estate plan regularly

   Estate planning is not a one-time event. Tax laws change, family situations evolve, and assets fluctuate in value. Regular reviews of your estate plan with your team are essential to ensure it continues to meet your objectives and takes advantage of current laws. This is particularly important given the potential for the upcoming sunset of the increased estate tax exemption in 2025.

Conclusion

While having a will is important, it’s often not sufficient on its own. A comprehensive estate plan with a will, one or more trusts, a durable power of attorney, and a healthcare directive can provide greater control over asset distribution, minimize taxes, and ease the burden on your loved ones. Experienced professionals can guide you through the process and help you create a plan tailored to your unique circumstances.

The advisors at Alpine Private Wealth are equipped to help you navigate these complex decisions and work with your estate planning attorney to ensure your wealth transfer goals are met efficiently and effectively. Do not leave your legacy to chance – take control of your estate plan today.

Alpine Private Wealth does not offer legal counsel or tax advice. This information is not intended to be and should not be treated as legal advice or tax advice and is for informational purposes only. It is important to consult an attorney or tax professional who is familiar with your specific situation.