How to Use Estate Planning for Smaller Estates

What is an Estate Plan?

The word estate is most commonly associated with great wealth, but the truth is, that everyone has an estate. Everything you own, from your car and bank accounts to real estate and retirement accounts, encompasses your possessions. An estate plan is simply creating a legal document that puts your financial affairs in good order for the specific needs of the individuals and organizations you wish to receive your possessions once you’ve passed away.

Who Needs Estate Planning?

Everyone. Some say there is no need to plan their estates because they fall below the federal estate tax exemption. Even if we can safely assume that federal tax laws will remain unchanged, there are at least three arguments why planning is a good idea:

• Estates can become substantially larger over time, as success in business, more savings, growth of investments and inheritance increase assets.
• There are substantial non-tax reasons, such as creditor protection and special needs children, for planning the distribution of physical and financial assets in your estate.
• Many states have “decoupled” their exemptions from the federal exemption to generate more revenues; in these states, there are important financial decisions about which exemption(s) to claim.

Estate Planning for Smaller Estates

With the above in mind, even if you have a small estate, you should invest the time and energy to protect your property for you and your beneficiaries.

What Qualifies as a Smaller Estate?

A small estate is an estate that will not incur federal estate tax. Small estates may need more protection than super-sized estates because mistakes are more painful when there are fewer assets. For example, an estate without a plan may be subjected to the probate process in a state where probate court proceedings are expensive. In these states, the cost of implementing good estate planning is relatively small, whereas the potential cost of probate is in the tens of thousands -- and a small estate could be hit hard by these expenses.

Review State and Federal Law

Another common issue is the decoupling of state and federal estate taxes. 17 states have now deviated from federal estate tax codes and implemented their own. New York state, for example, has set its ceiling at $5.93 million while the federal exemption is set at $11.7 million in 2021. This discrepancy means there are circumstances where you shouldn't rely upon the full federal exemption, especially with the frequently used A-B Trust arrangement.

Remove Your Life Insurance Policies from your Estate

Most insurance agents only focus on the beneficiary designations when they place policies in force without ever considering how the ownership of the policies could affect your inheritance tax. While life insurance proceeds are currently tax-free to beneficiaries, if you own a life insurance policy, the policy becomes part of your estate at death, potentially subjecting it to federal and state taxes. One easy step is to have married couples cross-own the policy on each other, instead of solely being the designated beneficiary. With large policies, establishing an irrevocable trust to own the policy might be the best way.

Take Your Growth Rate into Consideration

A quick look at the growth rate of your savings, brokerage accounts, 401k, and other financial accounts can point out potential future tax issues that may not be present currently. In these cases, changing titling now, or setting up entities such as Family Limited Partnerships or Family LLCs can move this growth out of your estate and put it in a more favorable position for the long run.

Protect Family Members from Themselves as Needed

Families, almost by definition, come with complications. Sometimes a member of the family should not ever receive money directly or have control of the estate. This can be caused by spendthrift behavior, overuse of credit, substance abuse, disability, or incapacity. In these cases, a planned estate can protect a spouse or a child “from themselves”, from any creditors, and protect any public assistance they may be receiving.

As you can see, there can be many reasons to plan an estate, other than just the “Will there be federal estate tax?” standard. Protecting a family member from themselves, and creditors - plus protecting their public benefits - could be the difference in a lifetime of financial security or a tragically wasted opportunity.

Estate Planning Helps While You Are Living

Most people think estate planning serves them and their families best at death. However, with Americans living longer lives than generations past, people are learning how much a good estate plan helps when old age, memory loss, dementia, physical incapacity, and other constraints of old age settle in. I have personal experience with this from caring for my elderly parent and I appreciate that they took my advice to have something in place beforehand. There was a medical power of attorney and advance healthcare directive so I could make medical decisions when they couldn't. There was a HIPPA Disclosure document so healthcare providers could share information about their medical records. There was a financial power of attorney to manage their checking account, pay monthly bills, make a long-term care insurance claim, and access their retirement plans when necessary. Of all these, the ability to make healthcare decisions and prepare for end-of-life care in a way that was consistent with their healthcare wishes was most crucial.

Protect Your Assets and Your Family with a Comprehensive Estate Plan

Don’t let the size of your estate stop you from planning. Let’s begin a conversation about your estate today. As a financial advisor, I am here to help you start an estate plan, review and update an outdated plan, provide a quality referral to an estate lawyer, and everything in between. 

Book your complimentary consultation to create a proactive estate plan that protects you, your beneficiaries, and your assets for years to come.