Word to the Wise : Why Estate Planning Is Important – Regardless of Your Net Worth
Many individuals, including business owners, tune out when the discussion turns to estate planning because they don’t think they have enough assets to worry about it. After all, with a lifetime gift and estate tax exclusion of $5.45 million, a married couple can leave their heirs an estate worth $10.9 million before gift and estate taxes kick in.
But this kind of thinking ignores the fact that estate planning is about much more than just minimizing estate taxes. The main purpose of a comprehensive estate plan is to ensure that your assets and personal possessions are distributed according to your wishes after you die.
Dangers of Failing to Plan
In a worst-case scenario, failure to create an estate plan can result in your assets being distributed per your state’s probate laws, instead of as you desire. For example, state law might require that your spouse and minor children all receive a share of your estate. This could potentially put your surviving spouse in a cash flow squeeze when it comes to having enough liquid cash to meet daily living expenses.
Other critical aspects of estate planning include:
- Naming a guardian for your minor children.
- Laying out plans for your personal care if you ever become disabled.
- Arranging for the smooth transfer of your business ownership interests and responsibilities upon your death or disability.
- Detailing the role of life insurance in providing income for your family and helping transfer your business to partners or successor owners.
- Minimizing estate taxes, legal fees and court costs.
The first step in creating a comprehensive estate plan is a relatively simple one that a surprising number of people neglect: creating a last will and testament. This document will detail plans for how your assets and possessions will be given to your heirs and charitable causes you’d like to support after your death.
Other important estate planning documents you should also have prepared along with your last will and testament include a living will, durable power of attorney and healthcare power of attorney.
The living will explains how medical treatment decisions to sustain your life should be made if you’re incapacitated. The durable power of attorney and healthcare power of attorney, meanwhile, assign responsibility to someone to handle your financial affairs if you are incapacitated, terminal or in a vegetative state. These three documents together are referred to as an advanced healthcare directive.
Finally, consider including a revocable living trust in your comprehensive estate plan. Doing so will ensure that your assets avoid going through probate after you die — a time-consuming and expensive process that opens up the details of your estate to the public, destroying privacy for your heirs.
Minimizing Estate Taxes
With these core estate planning documents in place, you can now turn your attention to minimizing the gift and estate taxes your heirs might have to pay. Here are a few points to keep in mind:
- The lifetime gift and estate tax exclusion is up slightly in 2016. The exclusion rose from $5.43 million last year to $5.45 million this year. This is the combined amount of money you can give away during your lifetime and transfer to heirs upon your death before gift and estate taxes apply.
- The annual gift exclusion remains the same in 2016.This exclusion, which is the amount of money you can give away each year before gift taxes kick in, remains $14,000 this year.
- The effective gift and estate tax rate is 40 percent.This also remains unchanged in 2016.
- Lifetime exclusion portability for spouses remains a viable strategy. Exclusion portability enables surviving spouses to use any lifetime exclusion that was unused by their deceased spouse’s estate. Therefore, married couples can transfer a total of $10.9 million to their heirs in 2016 free from gift and estate taxes.
Now is a good time to get serious about creating a comprehensive estate plan, or updating your existing plan if you have one.