We examined the results of a 2021 estate planning preparedness survey in a recent blog entry, and the responses were very enlightening in a number of ways. Participants that did not have plans in place were asked if they thought estate planning was important.
Most of them said that they thought it was an important responsibility, yet many of these folks stated that they simply did not know where to begin.
With this in mind, we will ask some questions in this post. When you form your responses mentally, you will come away with an understanding of your personal estate planning objectives.
Do you have minors or poor money managers on your inheritance list?
You may assume that you will use a simple will when you get around to planning your estate. If you adopt this approach, your heirs will receive lump sum inheritances after you pass away.
However, they will play a waiting game before they receive anything. The will would be admitted to probate and the court will control and supervise the administration process.
A typical timeframe to complete the probate will be approximately six to eighteen months, and no inheritances are distributed while the estate is being probated by the court.
If you are leaving assets to a dependent child, you have to go in a different direction, because a child cannot handle a direct inheritance. Under these circumstances, you could use a testamentary trust (again, subject to control and supervision of the probate court), or you could make the child the beneficiary of a revocable living trust.
There are also custodial accounts that can be utilized to set aside resources for a child. When you have a trust, the trustee would manage the funds on behalf of the minor, and a custodian would serve a similar role if you have a custodial account.
A revocable living trust can also be a good choice if you want to provide spendthrift protection for an adult beneficiary who is a poor money manager. Following your death, your trust becomes irrevocable. Terms of the trust can include spendthrift provisions that protect the money and ensure it is not wasted.
The assets would also be protected from the beneficiary’s creditors, and you can dictate when those assets are distributed to beneficiaries. You could instruct the trustee to distribute a certain amount each month, or you could establish some other type of incremental distribution arrangement.
Another option that can be the right choice for some people is an incentive trust. As the name would indicate, you include incentives that must be met before the beneficiary can receive distributions.
For example, you could instruct the trustee to cover all college expenses and encourage a work ethic by allowing the trustee to match the beneficiary’s earnings after graduation. One of our clients stipulated that distributions could not be made to a beneficiary in excess of the beneficiary’s adjusted gross income reported on his 1040.
Have you considered potential nursing home costs?
About 35 percent of senior citizens will require nursing home care eventually. Last year, the median annual cost for a private room in a nursing home in Oklahoma City was $69,350 according to Genworth Financial.
An extended stay in a nursing home could consume a significant portion of your legacy, and a married couple could face two different sets of nursing home bills. Medicare does not pay for long-term care, so this is not the solution.
Medicaid is a need-based government health insurance program that will cover a stay in a nursing home. You can divest yourself of direct ownership of assets with future Medicaid eligibility in mind by conveying them into an irrevocable Medicaid trust.
Because there is a five-year look-back period, timing is the key to the successful execution of this strategy. All transfers to the irrevocable trust must be completed at least five years before you submit your application for Medicaid coverage.
Will your estate be exposed to the estate tax?
There are some very successful people in the Oklahoma City area, and the federal estate tax looms large for high net worth individuals. The tax carries a 40 percent top rate, and it is applicable on asset transfers that exceed $11.7 million in value.
If your estate is in the taxable territory, there are steps that you can take to ease the burden.
Have you prepared for possible incapacity?
A significant percentage of elders become unable to make sound decisions at some point in time. As a response, your estate plan should include an incapacity component. It starts with an advance directive for health care, sometimes referred to as a living will.
You should execute a living will to state your life support preferences if you are terminal, persistently unconscious, or have what is called an end-state condition. To handle all other medical situations, you can name a medical decision-maker in a durable power of attorney for health care. If you have a living trust, you can name a disability trustee to assume the role in the event of your incapacity.
Your plan can also include a durable power of attorney for property to name someone to manage property that is not held by a trust.
Attend a Free Webinar!
Attorney Larry Parman is conducting a series of webinars over the coming weeks, and you can learn a lot if you attend one of these sessions. There is no charge, and you can see the dates and obtain registration information if you visit our Oklahoma City estate planning webinar page.