How to Use Estate Planning to Protect Personal Assets for Different Size Estates

What is an Estate Plan?

The word estate is most commonly associated with great wealth, but the truth is, everyone has an estate. Everything you own from your car and house to investment accounts and personal possessions make up your estate. An estate plan is simply planning for the individuals and/or organizations you wish to receive the personal assets that make up your estate once you’ve passed.

Who Needs Estate Planning?

Everyone. I sometimes find myself in conversations with people who tell me that there is no need to plan their estates, because they fall within the federal estate tax exemption. Even if we can safely assume that federal tax laws will remain unchanged, there are at least three arguments against “not planning”:

• Estates can become substantially larger over time, as success in business, more savings, growth of investments and inheritance increase assets.
• There are substantial non-tax reasons, such as creditor protection, for planning an estate before the unforeseen becomes reality.
• Many states have “decoupled” their exemptions from the federal exemption to generate more revenues; in these sates there are decisions to be made about which exemption(s) to claim.

Estate Planning for Small Estates

With the above in mind, even if you have a small estate, you should give some thought to protecting your property for you and your beneficiaries.

What Qualifies as a Small Estate?

A small estate is an estate that will not incur federal estate tax. But small estates may actually need more protection that super-sized estates, simply because mistakes are more painful when assets are few. For example, an unplanned estate may be subjected to probate in a state where probate is expensive. In these states, the cost of titling the assets differently or creating a trust is relatively small, whereas the potential cost of probate is in the tens-of-thousands, a small estate could be hit really hard.

How to Protect Small Estates

Families, almost by definition, come with complications. Sometimes a member of the family who should not ever receive money, or control of the estate, directly. This can be caused by spendthrift behavior, overuse of credit, substance abuse, disability, or an incapacity. In these cases, a planned estate can protect a spouse or a child “from themselves”, from any creditors, and to protect any public assistance they may be receiving.

As you can see, there can be many reasons to plan an estate, other than just the “Will there be federal estate tax?” standard. Eliminating the cost of probate alone could provide a sizable savings for a small estate in a high tax state. Protecting a family member from themselves, their creditors, and protecting their public benefits could be the difference in a lifetime of financial security or a tragically wasted opportunity.

Estate Planning for Mid-Size Estates

Planning for mid-sized estates can entail several tactics to minimize potential estate complications. One big issue common to mid-sized estates is that much of the actual wealth can be tied up in retirement accounts, such as 401ks and IRAs. This often leaves them exposed to the double whammy: estate AND income taxes. Various beneficiary and distribution strategies often help to minimize, and in some cases actually eliminate the tax liability.

Decoupling of State and Federal Estate Taxes

Another common issue is the decoupling of state and federal estate taxes. 17 states have now deviated from federal estate tax codes and implemented their own. New York state, for example, has set its ceiling at $5.93 million while the federal exemption is set at $11.7 million in 2021. This discrepancy means there are circumstances in which it may not make sense to rely upon the full federal exemption, especially with the frequently used A-B Trust arrangement.

Take Your Growth Rate into Consideration

Finally, a look at the growth rate of your estate can point out potential future estate tax issues that may not be present currently. In these cases, changing titling now, or setting up entities such as Family Limited Partnerships or Family LLC’s can move this growth out of the estate and put it in a more favorable position for the long run.

Protect Your Personal Assets with an Estate Plan

Don’t let the size of your estate stop you from protecting your personal assets. Let’s begin a conversation about your estate today. Our team is here to help you start an estate plan from, update an outdated plan, and everything in between. Book your complimentary consultation to create an estate plan that proactively helps protect your personal assets for you and your beneficiaries for years to come.

Related Reading:

• 3 Ways to Avoid the Biggest Estate Planning Mistake Everyone Makes
• The Need for Asset Protection
• Shield Your Personal Wealth from Business Risk

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About the Author

Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.

Connect with Jack on LinkedIn  or follow him on Twitter.