Planning to pass on—it’s a touchy subject with many clients, but one that has to be addressed. A proper estate plan can maximize the assets a client’s heirs receive, and it can drastically reduce the hassles, heartaches and expenses inherent in the wealth transfer process. Despite the importance of estate planning, however, only about half of American parents have a living trust document or will, according to a Caring.com survey, and only 40 percent of those who do have wills have updated them within the last five years.
But is estate planning really all that important for middle- and upper middle-class clients, who don’t have massive households or millions in assets? “It’s definitely important for everyone, including the middle class,” said Mike Piershale, president of Piershale Financial Group.
Agreeing, Ric Runestad, president of Runestad Financial, said, “It’s important because of how remarkably complex our modern financial system is, even for modest accumulated assets.” Between minimizing taxes, avoiding court fees and preventing family feuds, there’s a long list of reasons why the average retiree should be sitting down with a well-qualified estate planner, he said.
The possibility of probate is at the top of that list. Probate costs vary by state and among law firms, but the combination of fees for courts, attorneys, accounting and appraisals can run the gamut from three to ten percent, according to Piershale. “The national average is about six percent of accumulated assets,” he said. Piershale’s home state of Illinois requires probate for estates greater than $100,000, but plenty of states have far lower thresholds.
How can clients avoid the costly and time-consuming probate process altogether? The most important step is to not rely on a regular will—which still exposes them to probate—or a rights of survivorship deed, which simply delays probate until the surviving spouse dies. “A will is putting the fox in charge of the chicken coop,” said Piershale. “A lawyer who recommends a will without a trust to go along with it is usually the same lawyer who will take the family through probate and collect a large portion of the probate fee.”
Instead of, or in addition to, a will, Piershale and many other advisors recommend revocable living trusts. Both documents allow signers to name beneficiaries, leave property to minors and make revisions as their circumstances and priorities change. Unlike wills, however, trusts avoid probate, keep plans out of the public record and allow clients to plan for incapacitation and mental disability. Still, wills can address matters trusts cannot—naming children’s guardians, assigning property managers to minors and leaving instructions for paying taxes and debts, just to name a few.
Aside from the issue of probate, divorce protection is unfortunately a critical consideration for American couples, and just about any estate plan can be tailored accordingly. “You can have the attorney put language in a trust that requires children to receive their inheritance inside of that trust,” said Piershale. Such a provision keeps that money off-limits from a spouse in the event of a divorce, while an unprotected joint account could allow them to walk off with half an inheritance.
Also important for high-income couples is the possible change from separate trusts to a joint trust. It was once common practice for high earners to set up separate trusts, so that the combination of the two wouldn’t trigger the estate tax. In 2010, the estate tax threshold was risen considerably from $3.5 million to $5 million, however, and separation now causes unnecessary hassles for clients with assets less than that. (The limit, adjusted annually for inflatio, is $5.43 million for tax year 2015). According to Piershale, separate trusts require that a certain amount of money stay in the deceased’s trust, triggering higher tax brackets. Survivors will also have to deal with the trust tax for the rest of their lives, and they won’t be able to spend more than a specified amount from that trust per year. Fortunately, currently separated trusts can be joined to avoid these costs and hassles – as long as both spouses are still living.
On that note, it’s always better to have more time than less in crafting an estate plan. “In my view, clients should have it done a long time before they’re in retirement, especially if they have children,” said Piershale.
Likewise, Runestad said early estate planning is particularly important for people accumulating large amounts of assets in their 40s and 50s. “Oftentimes how they arrange those assets can lead to preferable outcomes for leaving them behind later on,” he said. A lack of a sense of urgency may keep some clients from addressing the issue, but it’s critical for advisors to communicate the benefits of planning early on, as well as the risks of waiting too long.
Ultimately, the importance of estate planning makes it a critical issue for any retirement-minded advisor to learn and address. Lawyers craft the actual documents that spell out a client’s wishes, but those clients need solid advice on how to carry out those wishes with as few costs and headaches as possible. “I’m far better at showing my clients what they need than an attorney,” said Piershale. “It’s almost doing them a disservice if all you do is direct them to a lawyer.”