Believe it or not, that’s how much you can die with before having to worry about federal estate taxes. And, if you’re married, you and your spouse can double that to $22,360,000. So, why would anyone worry about doing any estate planning or creating a trust if there is no tax benefit? Two main answers: ease of asset transfer and privacy.
First, ease of asset transfer. If you have a simple will that states, ‘my assets go to these people in these amounts/percentages,’ your estate will be probated by the court system in your county. This means that your executor (or executrix for females!) will have to go through the painstaking process of working through the court system to settle your estate. Among other things, he or she will have to gather appointment paperwork, death certificates, land records, and perform accounting filings. All of these steps have to occur because the ownership of assets is moving from the deceased to the survivors. And (rightfully, in my opinion), the courts make sure this happens as stated in the will. If there were no oversight, the executor could to whatever he wanted with the deceased’s assets.
Second, privacy. Sticking with the example of a simple will, the will immediately becomes public record once someone passes. If you die with just a will, and someone is interested in seeing exactly what your heirs are inheriting, he or she can easily get that information by going to the courthouse.
Believe it or not, there are some in our industry that get business by doing just that! Not the most compassionate way of drumming up business in my opinion, but to each their own…”Hey there, I know you don’t know me…sorry about your mom by the way…but, what how are you going to invest all of her money??” Eek! Or, possibly even scarier, some hangers-on or other con artist types may attempt to take advantage of beneficiaries that they know received a large sum of money.
Proper estate planning can solve both of these issues. In most cases, this means creating a living trust and titling everything in the name of that trust BEFORE you die. In this way, there is no actual change of ownership at death, and the trust is not public record. Once you die, the trust becomes irrevocable (unable to be changed) and the trustee (the person or entity named to make sure your wishes are carried out) follows the rules stated in the trust. The trust still owns all of the assets, but the only thing that’s changed is who has access to the assets in the trust.
Of course, there are other valid reasons for creating trusts. Trusts can also help protect assets from things like divorce and bankruptcy. Another common reason is to prevent children from receiving a large sum of money before they are ready. Some wealthier clients will even put clauses in trust documents that say the children will get a matching distribution from the trust based on how much annual income they earn on their own. This is an attempt to avoid the often-negative connotation of a “trust fund baby.”
So, no matter your net worth, it likely still makes sense for you to do some form of estate planning, even if you don’t save on taxes. You can maintain privacy and make things easier for your heirs once you pass. For most, a simple will may not be enough.
One final note: the current law is set to sunset in 2025, so keep an eye on that for planning purposes. If no further action is taken by Congress, the amount will go back to $5 million, indexed for inflation. Still a very large number, and not much of an issue for most taxpayers!