ESTATE PLANNING IS MORE THAN JUST A WILL

When people talk about “Estate Planning” what do they mean?  Typically, a Will is on the agenda, and talk about planning for death… not the sexiest or easiest of topics!  But actually real “Estate Planning” involves much more than death-time planning using just a Will – as this planning encompasses planning for lifetime emergencies as well as planning how assets will be distributed at death.  In effect, a large swath of lifetime situations should be covered.

PLANNING FOR DISABILITY – NOT DEATH

Disabilities can strike at any age and are almost always unexpected.  The most important protections to have in place at such times are documents that nominate a person or persons who can assume legal responsibilities and make decisions on your behalf in the event of a medical, physical or financial emergency, while knowing your wishes. To provide this back-up planning, the key documents  are:

A.       Power of Attorney for Health Care – names an agent (as well as a successor) to make medical and health care decisions for you, according to your guidelines.  You may describe end of life planning, administration of drugs, specific treatments you prefer or do not wish to utilize, and your wishes for burial and funeral arrangements.

B.       Power of Attorney for Asset Management – names an agent (as well as successor) to manage financial decisions and obligations, including right to sign checks, buy/sell assets, deal with taxes, etc. You may make the authority conditional on a finding of your “incapacity”, or make it effective immediately, so it will be available without delays in the event of an emergency.

C.       Advance Health Care Directive -  provides specific authority to your Agent, typically the Agent under your Power of Attorney for Health Care, to carry out your directions for treatment, or withdrawal of treatment, including withdrawal of artificial life support at the time of death.

D.       Revocable "Living" Trust -- gives your named successor trustee immediate power to manage and deal with assets held by the trust, in the event of incapacity without the necessity of creating a conservatorship through the Court, or at death, without having to initiate a probate proceeding.

PLANNING FOR DEATH – WITHOUT PROBATE - ASSETS THAT DO NOT PASS UNDER A WILL

A.               Joint Tenancy Accounts.  Joint tenancy titled assets pass by affidavit to a named “surviving joint tenant” after death of an owner.  Frequently used for assets owned by spouses, these assets can pass to more than a single person, to be divided after death. All named joint owners’ control and “co-own” asset during life.

B.              Retirement Assets.  Retirement assets, including IRA’s, ROTH IRA’s, 401(k) assets, 503(b) plans etc. pass by “Beneficiary Designation,” that is they pass to the persons named on the attached Beneficiary Designation form, without any formal probate.  These assets are not typically subject to a Will and cannot be added to a Revocable Trust.  A “Beneficiary Designation” form is attached to the account record, held by the custodian of the plan, and names a primary beneficiary, as well as typically a secondary or “contingent” beneficiary.  The named beneficiary claims the asset in full after filing proof of death (death certificate) with the asset custodian.  A substantial amount of property can be transferred by this means, typically securities and cash.

C.       Beneficiary Designated Accounts.  Some bank accounts and securities accounts, that are not specifically retirement assets, may pass by Beneficiary Designation, as described above.

D.       Annuities.  Annuities are life insurance types of assets sold typically to be effective during the life of a beneficiary, to provide income and then either pass to a remainder beneficiary at the first death or expire.  Some annuities are held for the life of a designated beneficiary, during which period principal grows, and then pass outright to a remainder beneficiary after the designated life.  Annuities are frequently used with retirement assets and to make charitable gifts.

E.       Life Insurance.  Many planning options are available with life insurance plans.  This asset class passes exclusively according to its terms at the death of the insured, outside of probate. Trusts can be the beneficiary of a life insurance policy, typically to ensure long term planning for the ultimate beneficiary but cannot own life insurance.

F.        Other special purpose gifting vehicles - qualified college expense - IRC. Sec. 529 plans.  College funding plans, organized by an educational institution or by government entity, these plans serve as a savings vehicle for the specific goal of paying for education. These plans are not subject to probate.

G.       Payable on Death Accounts (PODs or Totten Trusts).  This asset class includes accounts specially designated by a bank or brokerage as “POD” accounts.  They pass to the named beneficiary, only upon the death of the owner, upon presentation of the owner’s death certificate.

H.       Transfer on Death Deeds, or “TOD” Deed.  A deed transferring real property may state specifically that it is “transferable on the death of the Owner,” in accordance with RCW 64.80.010. In this case, the deed, signed by the living owner, and describing the successor owner, must be recorded in the County in which the property is located, prior to death. The named beneficiary, at the death of the original owner,  need only present a certified copy of the owner’s death certificate, complete specific transfer county documents, and pay the County transfer tax, to transfer title.

I.         Business Assets.  Business Assets deserve special planning.  The specific planning depends on the type of entity involved – is the business a solo business, or “Schedule C” busines? A Partnership? A Corporation? An LLC? Or a professional organization?  Each type requires tax as well as legacy planning, and likely requires a tailored business entity agreement to ensure continuity, or disposition according to owner(s)’ specific plans.

PLANNING FOR LIFETIME GIFTS

Whether nor not estate taxes are of concern, making gifts prior to death may be a satisfying and efficient means of carrying out legacy planning.  Certainly, if estate taxes – Washington or federal estate taxes, are of concern, making lifetime gifts is a very effective tax reduction planning tool.  By gifting, tax rates are reduced over the long term, as appreciation of gifted assets takes place outside of the grantor’s estate and therefore avoids tax, and the overall tax rate is reduced due to a smaller estate at death.  Additionally, the grantor can use the gifts to incentivize the next generation, give the next generation a beginning for a business, or make real estate affordable. 

Annually, each individual (the “donor”) may give up to $16,000 per person (to the “donee”) per year (plus may directly pay tuition/medical expenses for another) for 2022, with no tax consequences, and without the necessity of filing a gift tax return.    

“Estate Tax,” is the tax paid on the transfer of wealth at death.  A simple explanation is:  (a) an accounting is made of the market value of all assets owned at death, (b) plus taxable gifts made prior to death, (c) less certain allowable deductions and credits, and (d) the final amount in excess of the ”applicable exclusion”  – for an individual dying in 2022, this amount is $12.06 million, or $24.12 million for a married couple, is subject to tax. The 2022 estate tax rate on the amount in excess of the exemption is 40%.

Due to this high rate, and the fact that all tax is payable within 9 months after the date of death, this is a tax to avoid – if you are in these brackets!  We can assist with analysis and planning. To eliminate, reduce or defer estate tax.