Estate Planning for Nontaxable Estates

In the wake of the Tax Cuts and Jobs Act, P.L. 115-97 (Dec. 22, 2018), estate planning has seen a return to its genesis. At its core, estate planning is about making sure assets pass to the right people, at the right time, and in the right manner. For most estates, the estate tax tail no longer wags the dog due to historically high estate tax exemption amounts ($11,180,000 for 2018) which have effectively eliminated the estate tax for all but a few estates. With estate tax no longer being the driving force behind estate planning, this article briefly highlights the important nontax reasons for estate planning.

Retaining Control

Individuals dying without a Will lose all control over the disposition of their estate, and in doing so voluntarily cede this control to the state in which they reside, or in the case of real property, the state in which the property is located All states have intestacy laws which control where the assets of a deceased individual will pass without a Will. In Mississippi, how your property will pass under the intestacy laws depends on several factors including your marital status and the type of property you have (real or personal). How property passes under the laws of intestacy is beyond the scope of this article, but suffice it to say it is highly unlikely that your intentions and those of the state of Mississippi will match.

Planning for Minors

  1. Use of Trusts

What if property passes to a minor? Minors are not allowed to take legal title to property in Mississippi (or any other state). Property passing outright to a minor would necessitate a court appointing a guardian for the estate of the minor. This is an expensive and inefficient process that may be avoided by utilizing trusts for minor beneficiaries.

  1. More Than Just Property, What About People?

What happens to a decedent’s minor children? If a minor child’s parent fails to name a guardian of the person for the minor, then the court will appoint a guardian. This may create issues if both sets of grandparents or multiple siblings cannot agree who should have physical custody of the minor children. By designating a guardian for your minor children in your will, you can select who will care for your children when you are gone.

Planning for Incapacity

We must plan for incapacity. Many of us live with the belief that it will never happen to us, but it happens and it needs to be planned for. We plan for incapacity through a set of documents designed to avoid the expensive and burdensome court appointment of a guardian to handle our affairs once incapacitated. Just as with minors, an incapacitated person requires a court appointed guardian to handle his or her affairs unless the proper powers of attorney are in effect. The following documents are used to plan for incapacity:

  1. Durable Power of Attorney: A durable power of attorney appoints an agent to transact your financial affairs when incapacitated; and
  2. Durable Power of Attorney for Healthcare: A durable power of attorney for healthcare appoints an agent to make medical decisions when you are unable to do so for yourself; allows you the option to declare your intent that medical treatment be either provided or withheld in the event you are terminally ill and unable to communicate your wishes; and allows medical records to be accessed by your agent in the event of incapacity (thought it still best practice to include a HIPAA release in the power of attorney to ensure your agent can access your medical records). Keep in mind that the latter two functions may be done as separate documents known as an advanced healthcare directive, sometimes referred to as a living will, and a standalone HIPAA release respectively.

Asset Protection Planning

Not only are trusts useful in the event assets pass to minors, but trusts can also protect assets passing to your beneficiaries from creditors, divorcing spouses, and in some instances the beneficiary themselves. For example, a trust created to hold assets passing to a surviving spouse can provide creditor protection for the spouse while simultaneously allowing the deceased spouse to control where the assets go at the death of the surviving spouse. Trusts can be used to protect the assets passing to a child from divorcing spouses as well as protect the assets from waste by a spendthrift child.

Probate Avoidance Planning

Probating assets in multiple jurisdictions is expensive and time consuming, often causing delays in the transfer of legal title to heirs. The use of a revocable living trust to hold out-of-state real property can eliminate the need to go through probate in a state other than where the decedent resided at death. A funded revocable living trust may also be used to avoid probate in the decedent’s state of residence at death.

Business Succession Planning

Without a succession plan, business assets may end up in the wrong hands. Maintaining ownership and voting control in the proper hands is crucial to the long term success of a business. A and B may be best friends and may have been in business together for 30 years, but A may not want to be in business with B’s wife or B’s children. Proper estate planning and the use of a buy-sell agreement with a viable valuation and funding mechanism may prevent the business from passing into the wrong hands or into incapable hands. It also can allow a deceased owner’s family to receive the monetary benefits of ownership while the active business partner retains control.

Income Tax Planning

While the focus of this article is not about tax planning, I would be remiss to not include a brief mention of estate planning for income taxes. With the estate tax exemption being so high and with portability of the estate tax exemption between spouses, there are many opportunities to take advantage of the step-up in basis for income tax purposes through proper inclusion of assets in a decedent’s estate. A full discussion of step-up planning is a lengthy article in and of itself, but proper step-up planning can significantly reduce tax burdens that the beneficiaries might otherwise face on future the disposition of assets.

Summary

I hope this article has been helpful in highlighting the importance of estate planning for nontaxable estates. This article is just a brief overview of some issues that can arise when no estate planning is done and of the benefits estate planning can provide. Individuals that do not have an estate plan in place would do well to remember that not having a plan is a plan. It may be a bad plan but it is still a plan.