Written by: Corey Janoff
This post was originally published on our previous blog website on February 28, 2017 and has since not been revised and/or updated.
With our son being born in October, my wife and I recently created an estate plan, with the help of an attorney. Everyone should have a basic estate plan in place, but it is especially important when you have a family. Like most people we probably should have taken care of this sooner, but we got it done, which is all that matters. In this post, I’ll walk through some of the considerations we looked at and what we ended up doing.
Will versus Trust
The biggest question asked of anyone making an estate plan is: should you create a will or a trust? Estate planning attorneys love creating trusts and probably over-recommend them, in my opinion. While trusts have their benefits, they are expensive to set up and can often result in unnecessary complications if not followed correctly.
The big advantage of a trust is it avoids probate – a public process in which your estate plan is sorted through in court so assets can appropriately be divvied up, per your wishes. The key to the success of the trust is, you have to make sure all of your assets are titled correctly to comply with the trust. This often means changing the ownership of your assets to be owned by the trust; a process that can be somewhat tedious and time consuming. If you know exactly what you want to have happen when you pass away and are willing to pony up the extra dough to create a trust, then a trust is for you.
A will, on the other hand, is less expensive and much simpler to create and update. If not worded well, it may not hold the same strength of a trust and depending on what state you live in, wills can be contested in court during the probate process. So when you pass away, you may have family members (or even non-relatives) fighting over your assets in front of a judge.
Tax Consequences
One objective of estate planning is to minimize taxes due upon death. As crazy as it sounds, the government taxes you when you die. Under current estate planning laws, if you are married, there probably won’t be much federal tax owed unless your net worth is greater than $10.9 million. However, depending on what state you live in, there could be additional state taxes owed. In Oregon, where I reside, if your estate is greater than $1 million when you pass away, there will be taxes owed to the state upon death.
A big component of the value of your estate that is often overlooked is the value of your life insurance. If you own your life insurance policy, the death benefit is considered part of your estate. So if you have several million dollars of life insurance, on top of a couple million dollars of assets and investments, you could owe hundreds of thousands of dollars (or more) in taxes to your state.
This potential tax was an area our attorney kept stressing. He didn’t want to see several hundred thousand dollars going to taxes when that could be avoided with some basic estate planning measures.
One simple solution to get the life insurance out of your estate and not count towards the total value is to create an irrevocable life insurance trust (ILIT) to own the policies. This way, the beneficiaries still receive the death benefit if/when you die, but since you don’t own the policy yourself, the value isn’t considered part of your estate, which helps avoid potential taxes.
For some people it is hard to comprehend a trust owning their assets. You own the trust. The trust owns the assets. Think Ben Stiller and Owen Wilson in Zoolander: “The files are in the computer???”
The one problem is with an irrevocable trust is you can’t change it; it’s irrevocable. We didn’t like that idea, since there is a good chance we would want to change our plans in the future.
Guardian and Conservator
The whole reason we wanted to create an estate plan in the first place was to outline who would get the privilege of inheriting our child(ren) if my wife and I go down in the same airplane. We’re fortunate to have our siblings and both sets of parents within driving distance. I imagine it will be a team effort, but it is still good to write it down on paper, so nobody is fighting over anything.
Since our parents already had to deal with us as kids, we assumed they aren’t going to want to go through that again. We also didn’t want to offend one side by naming the other as the preferred caretaker of our child. So we opted for one of my brothers, who is in the most stable financial state of all of our siblings.
Executor of Estate
This is the lucky individual that gets to sort through your mess when you pass away and figure out what you wanted to do with all your stuff. If you have a well-documented and organized estate plan, this person will simply have to read through the instruction manual that you laid out for them. However, they will still have to write checks, liquidate/transfer accounts, etc. If both my wife and I kick the bucket at the same time, my dad will be in charge. If he is unable/unwilling, my wife’s dad is on deck. If he is unable/unwilling, my brother is next in line.
We asked about listing both our dads and moms together, but the attorney advised against that. If two people are co-listed, they both would need to sign checks, etc., which complicates things.
Powers of Attorney
This is who you want to be in charge of making decisions for you if you are unable to make decisions for yourself. If I’m in a coma, or incapacitated in some other way, my wife will be in charge of making decisions on my behalf. Financial decisions, healthcare decisions, legal decisions, etc. Hopefully I never get to this point, because if deciding what color to paint the bedroom is any indication, my wife will have a difficult time with this. If she’s not around, my parents are in charge, followed by siblings.
Advanced Directives
When in an end of life situation and I’m incapacitated, what do I want to have happen? This was a little uncomfortable because the attorney handed us a sheet of paper with these horrible hypothetical situations and for each scenario, we had to check one of three things:
- Yes I want life support and/or feeding tubes
- No I don’t want life support and/or feeding tubes
- Whatever my physician recommends
For most of them, we deferred to the physician. Again, hopefully we’re never in this state, but if we are, I apologize in advance to the doctor that gets to make those decisions.
What Did We Do?
Given we are relatively young (in our 30’s) and just started a family, a lot will likely change in the future. Our main objective going into this was to keep things simple and make sure our son and potential future children are taken care of. So we opted to create a will, knowing that if we both die tomorrow, a decent chunk of change will go to the state for taxes owed. If our son is a minor when we pass away, the money will be managed by my brother, for the benefit of our son.
We didn’t want our families to have to deal with sorting through trust documents and figure out what is supposed to happen. I remember my dad having to deal with that when his father passed away and it was a big pain.
Despite state taxes being owed, between the value of our house, investments, and life insurance, there should be more than enough after taxes for our families to support our child until he reaches adulthood.
However, as our situation evolves, we will be sure to revisit the estate plan and update it as needed.
Disclosures:
This should not be considered legal advice. Please consult an attorney for estate planning and legal advice.
