Cost-Benefit Analysis of Estate Planning
How and when you depart, this world is often beyond your control. What you leave behind, how it gets distributed, and to whom, however, isn’t. Read on for what to consider in your estate planning process.
What is an estate?
An estate is more than just a fancy house. It encompasses tangible and intangible assets or everything an individual owns.
Tangible assets in an estate include:
- Homes, land, and real estate
- Vehicles, such as motorcycles, cars, and boats
- Personal possessions, such as jewelry, clothing, and furniture
Intangible assets in an estate include:
- Portfolios, such as stocks, bonds, and mutual funds
- Retirement plans, such as IRA, pension, and 401(k) plans
- Bank accounts (checking and savings), health savings accounts, and life insurance policies
- Business ownership shares
- Minor and special needs children
What is estate planning?
Nobody wants their possessions to fall into the wrong hands; an estate plan ensures your belongings are distributed to the right people or organizations in the event of your death or incapacitation. Estate plans also include medical directives and directives for surviving children.
What happens if you die or are incapacitated without an estate plan?
Laws vary by state, but if you die or are incapacitated without an estate plan in Colorado, the state will create one for you. In Colorado, your assets will be distributed to your closest relatives under intestate succession laws, irrespective of your wishes.
What to consider in your estate plan?
An estate plan is probably the last thing for early-career parents with young children’s minds. Young families and immature financial assets, however, don’t invalidate the need for an estate plan.
Below are three angles to consider:
- First, who will care for minor children if both parents die or are incapacitated?
As someone with the legal authority to make decisions for another person, guardians are essential for ensuring your surviving minor children’s wellbeing. To prevent costly and traumatic family court battles, name a guardian for your children in your estate plan. Consider their proximity to your current home and lifestyle compatibility when deciding, and don’t forget to outline any child-rearing goals and needs.
- How will the estate be distributed to the child?
Without an estate plan, the state will distribute your assets without regard to your child’s ability to manage them. A minor’s trust, complete with a trustee, ensures your property and assets are managed, invested, and distributed according to your wishes. Parents with special needs children should consider a Special Needs Trust, which provides income or resources to disabled beneficiaries under age 65 while allowing them to continue to qualify for public assistance programs.
- Who will administer the estate if both parents die or are incapacitated?
While the surviving spouse is typically named the executor of the will, a successor executor, or alternative executor, should be named in your estate plan if the surviving spouse cannot execute the will.
Blended families mean blended estate planning needs, such as proportional inheritances, spousal division of rights and responsibilities, and the need for lack of bias.
Estate planning options for blended families are numerous, but below are three joint estate planning paths for blended families:
- Martial Trust, where assets are distributed to the surviving spouse, and in the event of their death or incapacitation, assets are distributed to their surviving children.
- Family Trust, all assets are pooled into a combined trust following the first spouse’s death. Family trusts allow the surviving parent to decide how to distribute the assets according to each child’s needs.
- Outright Ownership Trusts, where all assets are transferred to the surviving spouse only.
Directives are more than dictating who gets what after you die. They also state who heads your estate and who can make financial or health care decisions for you if you’re unable to do so:
- Medical care directives outline your medical care wishes if you become incapacitated. Medical care directives also authorize someone to carry out your medical care wishes on your behalf.
- Power of attorney grants one or more persons the ability to act or make decisions on your behalf. Standard power of attorney scenarios includes making medical decisions and managing financial affairs, such as taxes, portfolios, and assets.
- Revocable and irrevocable trusts involve managing and distributing assets and can be amended without the consent of the beneficiary. In contrast, an irrevocable trust cannot be amended without the consent of the beneficiary. Both trust types are subject to different tax, privacy, and flexibility stipulations; consult with an estate planning attorney for more information.
Estate Size and Taxes
Size is another crucial estate planning factor, but how do you determine the size of your estate?
In the estate planning world, estate size is determined by gross and net values. Gross value is the sum of all asset values in your estate, while your estate’s net value is the gross value minus the total sum of your debts.
Though Colorado has no estate tax, the federal government does; knowing your estate’s exact value is integral for avoiding surprise tax liabilities regardless of size. Additional variables to consider when calculating estate size include life insurance policies, your state of residence, and your beneficiaries’ state of residence.
No matter how big or small, determine how your business(es) will be passed on with a business succession plan. Options for a business succession plan vary for everyone, but below are five common ways to transfer business ownership:
- Co-owner: selling your shares or ownership interests to someone who co-owns the business.
- Heir: a person who is legally entitled to inherit business ownership interests. Heirs are usually – but not always – surviving spouses, children, or other close family members.
- Key employee: selling your shares or ownership interests to an employee with major ownership or decision-making role.
- Outside party: selling your shares or ownership interests to a beneficiary outside your family or professional organization.
- Company: ideal for businesses with multiple owners, the company transfer method involves selling your shares or ownership interests back to the business before distributing them amongst the remaining owners.
Philanthropic testators with large estates might want to consider establishing a charitable trust.
As a gift of cash or other property, charitable trusts allow you to give back to causes you care about while reducing estate taxes and capital gains.
There are two types of charitable trust:
- Charitable Remainder Trust (CRT), which provides incremental cash or property gift for your beneficiaries over a year-long term, while your preferred named charity receives the remaining trust assets at the end of the trust term. CRTs are irrevocable.
- Charitable Lead Trust (CLT) provides an incremental cash or property gift to a named charity over a years-long term. CLTs are also irrevocable.
To live is to change. Change also includes your estate plan.
From blended families to job loss to relocation, your estate plan should always reflect where you are in life. So reevaluate, revisit, and revise your estate plan as you move through life’s stages. If, after reevaluation, you decide to keep your estate plan the same, you’ll be glad you reevaluated it anyway.
At The Germany Law Firm, our estate planning attorneys are compassionate about helping you prepare for the future. We draft customized estate planning to meet your unique needs.