Why Don’t Most Americans have an Estate Plan?

Just one of every three Americans has an estate plan in place, mostly because they don’t believe they have the assets to merit it.  However, everyone should consider having an estate plan.

Investment News’ recent article entitled “Procrastinating Americans putting off estate plans, says D.A. Davidson survey” says 34% of adults in the U.S. have an estate plan, according to a survey released recently by D.A. Davidson & Co. 37% of respondents also said they didn’t have a plan at the ready because they felt they didn’t have a large enough estate to warrant one. Procrastination came in second place, with 32% of those surveyed saying they simply “haven’t gotten around to it.”

The survey also showed that 20% of respondents who actually created estate plans haven’t updated them in the last five years.

Procrastination is a human, and understandable, reason for people not to have an estate plan.  However, lack of assets isn’t.  Estate plans aren’t just for the wealthy.  Estate plans quite critically help with incapacity planning, such as when you need someone to access your money for you, or to make medical decisions on your behalf.

Estate planning helps ensure what you have, whether a lot or a little, goes to the loved ones you intended.  It also can appoint guardians for minors.

I’ve often to put it to clients that a lack of assets makes estate planning even more critical.  You can’t afford to go through a costly or inefficient estate process when you don’t own much.  The process will quickly eat up what you have.  You need to plan to preserve as much as you can.

See here for more basics to estate planning and why they are essential.  https://galligan-law.com/the-basics-of-estate-planning/

Consulting an experienced estate planning attorney has a positive effect when it comes to creating an estate plan. The survey said that the number of those having a plan jumped from 18% to 56%, if they worked with a professional at some point.

The survey showed those who have worked with a professional also feel more confident and prepared discussing their estate plan and end-of-life wishes than those who have never worked with one.

In terms of gender differences, 72% of the women surveyed don’t have an estate plan compared to 59% of men. This spread should narrow as the wage gap closes between male and females.

A married couple will typically pass their full estate to the surviving spouse. Statistics show that the surviving spouse is likely a woman, and she will then need to pass her remaining estate to the next generation. That can be complicated, with things like family dynamics playing a major part which underscores the importance of estate planning at that stage.

Regardless of gender, it is extremely important for everyone to have an estate plan.  If you are interested in starting or aren’t sure how to begin, we’ve prepared an article on preparing for an estate planning meeting which you can find here:  https://galligan-law.com/preparing-for-an-estate-planning-meeting/

Reference: Investment News (Oct. 11, 2022) “Procrastinating Americans putting off estate plans, says D.A. Davidson survey”

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6 Things Seniors Should Consider Before Marrying

Seniors in particular think about marrying with an understandable degree of concern. Maybe your last relationship ended in a divorce, or it’s been a long time since they were married. However, according to a recent article from MSN, “Planning to remarry after a divorce? 6 tips to protect your financial future,” there are some steps to take to make relationships easier to navigate and protect your financial future.

Not all of them are easy, but all are worthwhile.

1.No marrying without a prenup. Everyone thinks of prenups as pertaining to divorce.  They can address divorce, but prenups do much more.  They clarify property in the marriage, such as whether it will belong to one spouse or to the other or both.  Prenups clarify many issues: full financial clarity, financial expectations, the marital rights of the couple and clear details on what would happen in the worst case scenario. This is especially important to putting each of the couples’ respective families at ease as they marry.  Getting all this out in the open before you say “I do” makes it much easier to go forward.

2.Trust…but verify. Estate planning ensures that assets pass as you want. A revocable living trust set up during your lifetime can be used to ensure your assets pass to your offspring. Unlike a will, the provisions of a revocable trust are effective not just when you die but in the event of incapacity. A living trust can provide for the trust creator and their children during any period of incapacity prior to death. At death, the trust ensures that beneficiaries receive assets without going through probate.

3.Estate planning. While you are planning to marry is a good time to check on account titles, beneficiary designations and powers of attorney, both medical and financial. Couples should review their estate plans to be sure planning reflects current wishes. This will go a long way to avoiding fights between the respective families who just recently joined together.

4.Check beneficiaries. Especially after divorce and before a remarriage, check beneficiaries on 401(k)s, pensions, retirement accounts and life insurance policies. If you marry, state law may require you to give some portion of your estate to your spouse or otherwise affect your ownership of property.  In many cases, this can be addressed by a prenup, but you still want to consult an estate planning attorney to guide you through any changes to beneficiaries.

5.Medicaid Planning.    On the negative side, you should consider the likelihood that either party will need help paying for long term care BEFORE marrying.  Medicaid, which is a government benefit that helps pay for long term care, has different eligibility based upon the marital status of the applicant.  Medicaid also expects both spouse’s assets to be used for care which has nothing to do with the prenup.  So, for some individuals, it doesn’t make sense financial to marry where one party will need long term care.

6.Choose fiduciaries wisely. The fiduciaries named in your estate plan are the people who have tasks to fulfill.  This could be a trustee, an executor, an agent and so on.  Consider carefully who should fill these roles as they may have to be between the two families.  Consider the advantages of a corporate trustee, who will be neutral and may prevent tensions with a newly blended family. If an outsider is named as an executor, or to act as a trustee, they may be able to minimize conflict. They’ll also have the professional knowledge and expertise with legal, tax and administrative complexities of administering estates and trusts.

Reference: MSN (Feb. 11, 2023) “Planning to remarry after a divorce? 6 tips to protect your financial future”

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Taxes on Life Insurance?

When people purchase life insurance policies, they designate a beneficiary who will benefit from the policy’s proceeds. When the insured person dies, the policy’s beneficiary then receives a payout known as the death benefit.

Yahoo Finance’s recent article entitled “Will My Beneficiaries Pay Taxes on Life Insurance?” says the big advantage of buying a life insurance policy is that, upon death, your beneficiaries can get a substantial lump sum payment without taxation, unless the amount of the life insurance pushes your estate above the applicable federal estate tax exemption. In that case, your estate will need to pay the tax.

While death benefits are usually tax-free, there are a few situations where the beneficiary of a life insurance policy may have to pay taxes on the lump sum payout. When you earn income from interest, it’s typically taxable. Therefore, if the beneficiary decides to delay the payout instead of receiving it right away, the death benefit may continue to accumulate interest. The death benefit won’t be taxed. However, the beneficiary will typically pay taxes on the additional interest.

So, for example, if the decedent had an insurance policy with a $200,000 death benefit which pays to their daughter at death. The daughter submits a claim after the parent dies and receives $200,736. The $736 is interest generated on the amount of money held by the company post­ death until pay out. The death benefit of $200,000 is not taxable, but the $736 is income taxable as interest, just as though the beneficiary has held the $200,000 in a bank somewhere and generated $736 in interest.

Additionally, the value of the insurance policy is subject to estate tax in most cases. This is true for typical insurance policies where an individual owns a policy on their own life and the proceeds pay out at death (e.g. the $200,000 policy described above). The value of the insurance increases the size of your estate so that if your estate excludes your applicable gift and estate tax exclusion amount (currently about $13,000,000) then your estate will have estate tax to pay.

This obviously doesn’t affect too many people, but many term policies can dramatically increase estate sizes due to their high death benefits.  Some states also have their own inheritance or estate taxes to consider.

Estate planning attorneys, especially when the estate tax exemptions were lower, frequently used life insurance trusts, often called “ILITs” or “Irrevocable Life Insurance Trusts,” to combat this. As the estate tax exemption is currently expected to be cut in half in 2026, these kinds of trusts make sense to use now so that the value of the insurance is removed from your estate in anticipation of a lower exemption.  They work because the client doesn’t have ownership of the insurance policy. It is owned and maintained by the trust without any “incidences of ownership” so that the policy is not considered controlled by the decedent. They will often pay money to the trust which will in turn pay the insurance premiums during life.

I often recommend this to younger clients who are considering life insurance. They may never expect to be estate taxable, but as we don’t know what the future holds, or where politics will take us, we can remove the insurance from their estates now and so not worry about it.

If you want to know more about how life insurance impacts your estate plan, see this article:  https://galligan-law.com/role-of-insurance-in-estate-planning/

As a warning, I’m referring to taxation of life insurance at death. Transferring the policy, withdrawing money or taking a loan from the cash value and surrendering the policy can all have taxable components, so you would want to consult a CPA or attorney on the tax implications before proceeding.

To summarize, beneficiaries usually won’t have to pay taxes on life insurance proceeds. However, some situations can result in a taxable event and in some cases can be planned for in advance.

Reference: Yahoo Finance (Jan. 17, 2023) “Will My Beneficiaries Pay Taxes on Life Insurance?”

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