To see what happens without proper estate planning, let us consider a common family situation. Assume that you own most or all of the significant family assets in your individual name and you die leaving a spouse and minor children. If you die in Georgia without a valid will, your probate estate assets will be distributed in accordance with the Georgia rules of intestacy (your probate estate will include any assets you own except those which pass to a surviving joint owner under a right of survivorship – this does not include all jointly owned assets, however – and any assets which pass to a beneficiary other than your estate under a beneficiary designation). The Georgia intestacy rules provide generally that your spouse and each of your children will receive an equal share of your estate, with your spouse entitled to at least a 1/3 share. Since your children are minors, your spouse can petition the probate court to serve as the natural guardian/conservator for the children, to take care of their shares of your property. Of course, your spouse will have to obtain an insurance bond to ensure that the children’s shares are not used improperly, and your spouse will need to file an inventory and (at least) annual returns with the probate court showing the activities with regard to the children’s shares. While your spouse may use the income (i.e., interest and dividends) from the children’s shares for the children’s benefit, the spouse may not use any of the principal without prior Probate Court approval. Your spouse may not use any of the children’s shares for his or her own benefit, except for his or her annual statutory conservatorship fees. Your minor children will own more of your probate estate assets than your spouse, and this includes your residence and any other asset you owned outright at your death. THIS RESULT IS A BONA FIDE DISASTER.
To avoid this result, many couples will try to keep assets from becoming part of a spouse’s probate estate by owning most of their assets jointly with rights of survivorship, and having the rest of their assets pass by beneficiary designation to the surviving spouse at the first spouse’s death. This method, if done perfectly, can help ensure that the most significant assets pass to the surviving spouse upon the death of the first spouse to die, rather than to the spouse and the children. However, with this method you fail to address numerous other issues, such as:
Selecting an Executor
Selecting an Executor who will ensure that your wishes are properly followed, especially upon your surviving spouse’s death;
Selecting a Guardian
Selecting a guardian to take care of your minor children after the surviving spouse’s death;
Protecting Children’s Inheritances and Selecting Trustees
Providing for your children to receive their inheritances in trust, with a Trustee you select, who will take care of the children’s inheritance. A trust should be used for minor children, at a minimum, so that no conservator and court supervision is needed and the children will not receive control of their inheritances immediately upon turning 18. A trust can also be used to stretch out the asset distributions to the children over a period of years, to help reduce the risk that an immature or foolish act will cost a child his or her entire inheritance. For example, a child can be given his or her inherited property in installments, such as 1/2 at age 30 and the remainder at age 35. This allows a child to have a second chance if they foolishly spend the first installment. Of course, your trustee can use the trust assets for your children’s benefit prior to the trust assets being distributed outright to them. In addition, a trust which uses our long-term trust or dynasty trust structure will remain in place during a child’s entire lifetime and can provide other benefits to the child, such as protection from a child’s future divorce or creditor problems and some protection from estate and other wealth transfer taxes when the remaining trust assets eventually pass down to grandchildren or lower generation beneficiaries. The child can even be given the ability to control his or her own trust at some point, if desired, by serving as trustee of their own trust share.
Providing for Beneficiaries with Special Needs Using Supplemental Needs Trusts
If you have loved ones who qualify or may need to qualify for means-tested government benefits, such as Medicaid, either because they are in a nursing home, have a mental or physical disability, or otherwise, you can use supplemental needs trust planning to provide significant extra benefits for those loved ones. If you simply leave assets outright to a person who needs to qualify for means-tested government benefits, then that person may need to spend most or all of those assets, before he or she can again qualify for the needed benefits. By having assets put into a supplemental needs trust for the benefit of that person, however, the assets should be available to provide for “extras” which are not covered by the means-tested benefits, but the assets should not be counted as belonging to the person for purposes of determining whether or not he or she is eligible to receive the benefits. This type of planning can let you maximize the benefits your loved one receives from your assets.
Helping Ensure Your Assets Benefit Your Desired Beneficiaries
You can help ensure that assets not needed by your surviving spouse during his or her lifetime actually pass to your children (or your other desired beneficiaries), instead of to your surviving spouse’s children from a prior relationship, possible new spouse or additional children if your spouse remarries and/or starts another family after your death. You can also help ensure that your intended beneficiaries receive the benefits you want them to receive, at the time you want them to receive them. This can be especially important in the blended family situation, which is extremely common nowadays. For example, if you have children from a prior marriage, you may not want all of your assets to benefit your spouse at your death, and you may prefer that some of your assets pass directly to your children at your death. As another example, if you or your spouse has children from a prior marriage and you also have children from your marriage to each other, you may want to have different proportions of your property pass to your prior marriage children and to your children from your current marriage, to account for the fact that the prior marriage children may also inherit from their other parent’s family as well as from you, while your current marriage children will likely only inherit from you and your spouse.
Providing for the Future of Your Business
You can use a wide array of techniques to help ensure that your business will make a smooth transition in the event of your death or disability, or the death or disability of a co-owner. You can also help ensure that your business will eventually be controlled by persons you select, whether those persons are family members, co-owners, employees or others.
Well-done estate planning can be very helpful in reducing or eliminating the possibility that a dispute will arise after your death, and in helping to minimize the damage caused by any disputes which do arise.
Reducing or Eliminating Gift, Estate, and Generation-Skipping Transfer (“GST”) Taxes
Proper estate planning should include a thorough consideration of the estate, gift, and generation-skipping transfer (“GST”) taxes which may apply to assets you transfer to others during your lifetime or at your death. It should also include appropriate measures designed to reduce or avoid your exposure to these taxes, to the extent you want to do so. The goal of tax planning in this regard is to maximize the amount of your wealth passing to your loved ones rather than the government. Estate tax reduction planning is designed to help maximize the benefits of your Basic Exclusion Amount (also known as your estate and gift tax annual exclusion amounts), as well as your ability to transfer assets on a gift tax free basis during your life. If you are still projected to owe estate taxes after fully using your available applicable exclusion amounts, various other estate tax reduction strategies can help further minimize or eliminate this remaining projected tax liability.
Reducing Income Taxes
You can take steps to reduce the extent to which your beneficiaries pay income taxes on the assets they receive from you after your death. For example, proper beneficiary designations on your IRA and qualified plan accounts can allow your beneficiaries to realize the maximum available deferral of income taxes while your overall estate distribution intent is still carried out.
1 The surviving spouse could file for a “year’s support” to possibly obtain a larger share of the estate.