While many people may think of estate planning as only for the very wealthy, that’s not really true. If you have possessions, you have an estate. However, according to a recent study, only 32% of people have a simple will or other type of estate planning document, down from 42% in 2017.* And, with the continuing spread of COVID-19, it’s more important than ever to plan your estate — even if you don’t have millions of dollars in the bank.
But it’s just about taxes, right? Yes and no
Over the years, the estate tax has gone up, gone down, disappeared and come back. In 2020, your descendants will pay federal estate tax only if your estate is worth more than $11,580,000. The amount, known as the applicable exclusion, is doubled to $23,160,000 if you are married. However, the applicable exclusion amount is at a record high and could come down significantly, depending on future legislation. So it’s wise to not count on a high exclusion rate and, instead, plan for a tax-efficient distribution of your estate’s assets. You may also want to organize your assets and property, consider who should get what, and plan ahead for a time when you might be incapacitated and want someone else to manage your finances or your health decisions.
Here are a few things to consider:
Decide if you need a will or a trust, or both
A last will and testament can be used to direct how assets held in your name will be distributed after your death, appoint an executor to manage the administration of your estate and name a guardian for minor children. It may have to go through probate, which can take anywhere from 6-12 months. On the other hand, a revocable living trust allows assets to pass to your heirs without the need for probate proceedings, eliminating expenses, delays and public records. You can set up a living trust while you’re living, use the assets for your benefit and name a successor trustee to manage the trust assets after your death.
Consider a bypass trust if you’re married
Married couples, who are afforded an unlimited marital deduction amount, often structure their estate plan to transfer some assets to a bypass trust at the first death. This utilizes some or all of their applicable exclusion amounts. Income earned from the assets in the trust, as well as the principal, can be used for the benefit of the surviving spouse. And, at the second death, the assets in the trust are not included in the second spouse’s estate for federal estate tax purposes. Up to $23,160,000 of assets can avoid estate taxation if bypass trusts are utilized.
Assign a power of attorney to manage your finances if you can’t or don’t want to
You can appoint a durable power of attorney (POA) to manage your financial affairs in the event you are incapacitated or otherwise can’t or don’t want to manage them yourself. Under a POA, your appointed person can act on your behalf to file tax returns, apply for Medicare, manage your bank and investment accounts, insurance and more. So, be sure to appoint someone you trust.
Put together an advanced healthcare directive in case you become incapacitated
A power of attorney for healthcare (advanced healthcare directive) allows the person you appoint to make important medical decisions for you if you are incapacitated. Again, this should be someone you trust.
Name beneficiaries so your assets go where you want them
You should name beneficiaries for your insurance policies, annuities and retirement plans. If you do not, those assets will go through estate probate, a lengthy legal process in which your debts are paid, and your estate is divided.
Make a list of your assets, property and passwords
In any estate, it is helpful to have a list of all your possessions and tangible personal property. You can include special gifts or instructions for distributing property to beneficiaries. Include a list of accounts, account numbers and passwords, so your loved ones can access your bank, investments and online accounts after you’re gone.
A comprehensive estate plan can help you organize your assets and ensure an orderly distribution at your death. Consult with your attorney, accountant and/or financial professional for more details and assistance.
This informational and educational article does not offer or constitute financial, legal, tax, or accounting advice. Your unique needs, goals and circumstances require individualized attention of your own professional advisors. Equitable Financial Life Insurance Company and its affiliates do not provide tax, legal, or accounting advice or services.