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The Estate Plan that Outlives the Person

While everyone knows best-laid plans can collide with unexpected realities, that shouldn't serve as an excuse to neglect taking the time to create an estate plan that's adjustable based on unforeseen life changes.
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The well-known adage "failure to plan is planning to fail" is often right on the mark. People procrastinate on developing a plan for their personal goals for many reasons. While everyone knows even the best-laid plans can collide with unexpected realities, that shouldn't serve as an excuse to neglect taking the time to create a plan that’s adjustable based on unforeseen life changes—especially considering the legions of examples where a lack of planning resulted in unintended consequences.

Almost everyone is familiar with the issues that arise when someone dies "intestate," meaning without a will. Dying without a will means the respective state or states will get involved in adjudicating the decedent's estate, which can result in extending the timeframe and cost involved in settling the estate. It can also create significant problems for divorced people with children from a prior marriage or people who own real estate outside their state, and often creates ill will among family members as the process of probate commences. The probate process is a public event, with court documents available to anyone who wishes to view them.

Even if the decedent's estate doesn't involve significant assets relative to federal income taxes, the state estate tax threshold in a number of states is lower than the federal level and an inefficient or nonexistent plan may needlessly incur state estate taxes that could have been avoided. People with unique situations can establish a revocable or irrevocable trust in order to avoid probate and ensure their objectives are carried out. A revocable trust doesn't reduce the amount of estate taxes since the grantor retains the right to change the trust document until their death. But upon death, the trust becomes irrevocable and the provisions become operative. An irrevocable trust can result in lower estate taxes because the trust's assets are no longer included in the decedent's estate—if no "strings" are allowed to the grantor, the gift is of a "present interest" and three years have passed.

Many people also often overlook the importance of providing guidance on how their chosen beneficiaries should utilize the inheritance. For example, a married couple in their late 50s should discuss whether or not to pay off the mortgage if one spouse dies. And if the deceased spouse had life insurance, how should the surviving spouse spend the proceeds? Another consideration is whether the decedent had any 401(k) plan and IRA assets and whether to roll them into the surviving spouse's 401(k) plan and IRA. The tentative plan should also take into account the Minimum Required Distribution rules, which typically require the spouse to commence distributions on the April 15 of year following the year they turn age 70½—unless they are still working and don't have ownership within their employer.

Last but not least, the decedent must have trusted advisors they can rely on to do their best to carry out their wishes—even if the beneficiaries have different plans for their increase in assets. Failure to plan can indeed result in planning to fail when carrying out the wishes of someone who has worked hard to provide for his or her family in a way that they believe will benefit them in the long run.

Dave Evans is a certified financial planner and an IA contributor.