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Estate Planning for Middle Class Families

Estate Planning is not just for the wealthy. Most "middle class" families should have some estate planning in place to protect their assets and avoid unwanted results.

As an estate planning attorney, I often meet people who assume that they don't need to do any estate planning because they have no “estate” or because they are "just middle class". They are usually surprised when I tell them that nothing could be further from the truth. These people are possibly making a huge mistake, that could wind up being very costly someday. Many people think that "estate planning" is only valuable for the wealthy. However, the truth is that nearly everyone has an “estate” for purposes of estate planning. This includes personal residences, insurance, retirement accounts, personal possessions and household goods. It also includes often uncomfortable but still very critical issues such as who will care for children in the event both parents die, who will make financial decisions in the event an individual does not have the capacity to do so, and how should doctors handle feeding tubes and life-sustaining treatment in the event they become an issue.

Here are some examples of people who may not have millions of dollars in the bank, but still should seriously consider putting an estate plan in place:

1. Middle-Class Couples and Estate Taxes

Although the situation in Washington is very much uncertain right now and no one knows what will happen after January 1, 2013, currently the Federal estate tax exclusion amount in 2012 is $5.12 million per individual (married or unmarried).  This means that any amount under that limit can be passed on to friends, family, charity, or whomever upon death. Obviously, the vast majority of couples don’t have anywhere near that amount. However, chances are very good that the exclusion amount will revert to a much smaller sum at the start of 2013.  Most signs are pointing towards the exclusion amount being set at $3.5 million.  However, it’s possible that it could drop as low as $1 million. Such a dramatic change would affect a much larger segment of the population. Without the proper planning, many more couples would face potential liability for estate tax in the event of their deaths. One or two million dollars may seem like a high number initially, but when you factor in life insurance amounts and home equity into the value of an estate, it becomes much more likely that a normal middle -class family could approach the exemption threshold. Remember, for estate tax purposes, ALL assets are considered.

Of course, married couples can pass an unlimited amount of assets to one another without incurring any tax liability, but unmarried couples don’t enjoy the same right. Additionally, any wealth passed to a surviving spouse upon the death of the first spouse may be estate tax free, but without additional planning, the exemption of the dying spouse will be lost and chances are much greater that the surviving spouse will be subject to estate tax upon his or her death.

If estate taxes do need to be paid, they can be quite costly. Currently, Federal estate taxes are based on 35% of any assets over the exclusion amount. In addition, Massachusetts may impose state estate taxes as well. On January 1, 2013, if Congress does not take any action, the exemption amount per person will drop from $5.12 million to $1 million, and the top estate tax rate will rise to 55%.

So, what can be done to avoid this potentially costly error?

One approach for married or unmarried couples alike is to put assets into a trust that would not be considered part of the surviving individual’s estate.  The terms of the trust can direct for the disposition of those assets to other beneficiaries while permitting the surviving member of the couple to receive income from the assets (and potentially principal) for health, safety and general welfare. This approach permits each member of the couple to take full advantage of the estate tax exemption and no taxes would be owed when the surviving member of the couple died.

Another option is an irrevocable life-insurance trust which can shelter insurance proceeds from estate tax; however, the price of administration may not be worth it for most ordinary middle-class couples. Instead of a straight irrevocable life insurance trust, couples may be interested in exploring the possibility of naming each other as the primary beneficiary under the policy with the previously
mentioned trust named as the secondary beneficiary. Depending on the current situation when the first member of the couple dies, the surviving member may be able to elect to decline the funds having them flow directly into the trust as the secondary beneficiary of the policy. It may be possible to use this approach for retirement accounts as well.

2. Second Marriages and Step-children

Families with second marriages and step-children present some additional considerations due to the various relationships involved. Often, couples come into a new marriage with some estate planning already in place; however, changes are usually necessary given the new priorities in their lives. Previous spouses typically need to be written out of documents, and new ones need to be written in.  Another potential hurdle is figuring out how to divide up an estate when each spouse has brought children from a previous marriage into their new marriage. A natural inclination may be to favor children by blood, but doing so may provide fuel for a family dispute down the line.

Because of the inherent conflict in blended families discussing plans with all of the children is usually a good idea. The more clarity that can be given on exactly what the children should expect, the better the chances that disputes won’t arise after it’s too late to change anything.

3. Couples Without Children

Many couples make the decision not to have children or to postpone having children until later in life.  Sometimes a question of these couples is who will take care of them in the event they are no longer able to do so. For these couples, it is important to think about that possibility and plan accordingly. A power of attorney in the name of a friend, relative or trusted advisor that becomes effective upon a finding of incapacity may help ease the concerns over financial and medical decision making down the line, but these couples should also consider setting forth their wishes regarding nursing home care, hospice, etc.

By planning early on, there becomes less of a chance that unforeseen circumstances will force lived ones to guess as to what care someone may desire or how it should be provided. Worse yet, without planning, there is always a very real possibility that the courts will be involved with appointing a guardian to act in the disabled individual’s best interests. Sometimes this may not necessarily be the person that the disabled person would have chosen to fill that role.

I hope that these examples have helped to show that estate planning does not need to be something that involves moving around millions of dollars. Of course, there may be many other reasons, based on your particular circumstances, to engage in some kind of planning. Estate planning is important to practically anyone in one form or another. 

Although many people are hesitant to plan because they are uncomfortable with the topic, or because they don't like thinking about their own mortality, failure to do so can have some very serious financial or other consequences. I strongly encourage you, even if you have relatively modest assets, to talk to an estate planning professional to explore how estate planning can help protect you and your loved ones and prevent potentially damaging unforseen consequences. 

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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