THAT'S NOT TRUE. YOU DEFINITELY NEED AN ESTATE PLAN.
For many professional financial consultants, estate planning is strictly about mitigating the impact of estate taxes. If the value of your estate is below the federal estate tax threshold, they will often tell you that estate planning is not an issue for you. The problem there is that viewing estate planning solely as a tool to minimize taxes fails to address the other obstacles to the transfer and preservation of wealth. For one, the gift tax and capital gains tax will still apply and can deny your heirs and legacy the fruits of your life’s labors. There are also State taxes to consider. Many states have estate tax thresholds well below the federal level. In fact, there are 20 states in the Union that feel completely justified in taking 50% of your stuff when you die. Non-tax-related threats loom potentially as well, like divorce or litigation. Aside from financial concerns, familial dynamics could be adversely impacted (The kids might fight) if distributions are not managed with care and intent. (They may still fight, but…) A strong estate plan can mitigate threats to wealth that arguably are more insidious and potentially more damaging than the federal estate tax. That is why you need an estate plan, even if your estate is not subject to federal estate taxes.
What can and will go wrong:
Creditors - Divorce settlements and other legal judgments can be more detrimental to the preservation of wealth than estate taxes. Your bequest is not intended to pay Junior’s parking tickets or his second wife’s Nordstrom charges. For this reason, many estate plans incorporate trusts to protect bequests from potential creditors of the beneficiaries. Assets placed in irrevocable trusts are owned by the trust. By severing beneficial ownership from legal ownership, these trusts can put assets out of reach of creditors.
The complexities of blended families – Leaving all of it to your spouse might look like the easiest, cheapest, and most reasonable thing to do, however, your spouse might create a new family through a subsequent marriage. That new family will possibly come with step children and maybe even grandchildren. In such an instance, who knows where your assets end up if/when your spouse dies? Again, trusts offer a solution. By creating a trust for your spouse and naming your children as beneficiaries upon your spouse’s death, you can help ensure that as yet undiscovered strangers will be excluded from your largesse.
Naughty and/or foolish children - If a child lacks the knowledge or maturity to manage assets, an inheritance can be eroded in short order by poor investment decisions or excessive spending. These threats can be addressed by holding and managing a child’s inheritance in trust until the trustee determines the child has the knowledge and maturity to manage the assets on his or her own. A parent might instruct the trustee to distribute the assets in increments, giving the child full access to them only when he or she reaches a certain age.
Taxes - Having heirs sell off their inheritance to pay the taxes on their inheritance in an undesirable scenario, especially since hurried, forced liquidations will likely result in significant loss of value. Life insurance is a possible solution to this dilemma. Assess the value of your estate as accurately as possible. Figure, as best you can, the tax liability and add that much to your insurance policy. You can stipulate in your will that the proceeds are for the purpose of paying estate transfer related taxes.
Inaccurate valuations – You may think you’re distributing your assets equitably, but it may turn out that Susan’s favorite painting is worth far more than Bobby’s favorite painting, enough so that Bobby doesn’t like his favorite painting as much as he thought – or Susan for that matter. Proper appraisals, and life insurance, will detect and correct for valuation discrepancies.
Worst of all would be the “Split it all evenly” strategy. Doing that will pretty much guarantee that your heirs and beloved causes will have all of the problems listed above. If any of this looks like anything that might possibly realize in your life or post-life, you need an estate plan. If your advisors tell you that you don’t need an estate plan, you want different advisors.
William S Jiggetts