When you think about estate planning, the most common responses are, "That's for wealthy people" or "No reason to plan because I don't meet the tax threshold". While taxes and wealth do play a considerable role, estate planning is not just for the wealthy. In this episode of Money Script Monday, Joe shows you the four critical reasons why everyone should have an estate plan in place.

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Video transcription

Hello, and welcome back to another episode of "Money Script Monday." My name is Joe Schweiger, and today we're going to talk about the importance of estate planning and why it's not a tool just for the wealthy.

When we think about estate planning in the traditional sense, most people think it won't really apply to them.

The reason they have this misconception is because, if you don't have an estate over a specific threshold and, in 2017, that threshold is $5.49 million for a single taxpayer and just under $10.9 million for a married couple, then you won't owe any estate taxes. While estate taxes and expenses associated with death are of very great importance, they're not the only considerations to factor in when we're building an estate plan.

Estate planning is the accumulation, conservation, management, and distribution of one's assets throughout their lifetime.

The correlation of estate planning and death is obviously a real one, which most people can't get out of their heads. But the idea is that the whole time while you're estate planning, you're accumulating, you're managing, and you're conserving these assets to make sure they go to the proper designations upon your death.

Which brings us into one of the first of four reasons we're going to talk about today with why estate planning is for everyone and not just the wealthy.

Asset distribution

The first reason is for proper asset distribution. When we're looking at different types of property, there are two types: real and personal.

Real Property

Real property is land and anything that is fixed on that land, such as the trees and shrubbery.

Personal Property

There are two types of personal property: tangible and intangible property.

• Tangible - is obviously anything you can feel or touch that holds its intrinsic value in itself.
• Intangible - is just the opposite, where there's no intrinsic value in the actual piece of property in front of you. For instance, you have a stock certificate or a life insurance contract or an annuity contract, where the actual paper or the contract doesn't hold value, but the asset itself is elsewhere.

Now, when we're thinking about property and properly distributing it, there's two main factors that need to be considered when we're talking about estate planning to make sure they go to the right beneficiaries or right designations.

Two Main Factors

The first factor is how that property is titled. The second is going to be how that ownership is structured.

Now, we're not going to go too far into this, but I just wanted to make it a point that certain ways to title property can or cannot make that property pass through that probate estate. For instance, tenants in common will automatically include property to go through that probate estate.

Let’s talk about ownership and how it's structured. The greatest type, or form, is going to be a fee simple estate where you own property outright and you have complete equitable and beneficial interest in that property.

There are other types of ownership structuring that will not cause inclusion in your estate, like a life estate or an estate for a term of years, as long as you outlive that. Remainder interest and reversionary interest are also important considerations because they can, or cannot, cause inclusion into your estate.

Obviously, having the right type of property titling and ownership structuring has a huge impact on where your assets go and how they go via laws.

Family protection

The second thing I want to talk about is family protection. And what I'm talking about here is especially useful for younger families who have minor children or people who have potentially mentally or physically handicapped children who would need someone to look after them upon their premature deaths.

What people don't understand is without an estate plan, or some sort of plan in place to deal with this, they'll have to go through the court system and basically the state will decide who is the best-fit guardian for this person - which may or may not be as you wish or against your wishes.

So it's important to at least review this to make sure that if you were to pass away and the unthinkable were to happen, that you can safely know that your children will be taken care of.

Taxes & expenses reduction

The third reason that we want to make sure everyone has an estate plan in place is going to be for tax and expense reduction. And again, if you're not over those specific thresholds, the taxes won't really come into play. But there's a number of other reasons to lower expenses, such as that probate process.

With proper beneficiary designations and again, property titling and ownership structuring, we can make sure that things pass outside that probate estate and go right to the beneficiaries that we want them to, without having to add on that additional administrative expense and extra cost.

For those of you that do have an estate that's over those limitations or thresholds, it's very important to sit down with an advisor and make sure that you're planning for the right type of liquidity needs for your beneficiaries so they don't have to liquidate illiquid assets and cause a number of other problems for them.

In this scenario, life insurance is commonly used, typically inside of what's known as an irrevocable life insurance trust (ILIT). The life insurance itself will pass outside of your estate, but will be able to provide some liquidity for those taxes that'll be due.

Argument reduction

The last reason I want to talk about today is going to be family argument reduction. And I think of an example here with small business owners.

A small business owner may have a number of children. Let's say four children. And one of those children has grown up and he's decided to take over that family business.

With improper planning and a lack of an estate plan or a succession plan in place, that child may eventually not have to sell of business interests.

Again, if their estate is too large to pay its estate taxes, but also in any type of family feuds with the siblings, because they've all inherited part of that business.

And if they want no part of it, they may want to liquidate it. And with their majority ownership at the time, if you were to pass away, that could cause some serious problems.

So it's very important for small business owners and people with illiquid assets to make sure that they're planning properly to reduce or complete eliminate the amount of feuds and arguments within a family.

Start your estate plan today

At the end of the day, it's very important that people consider estate planning. Not just if you're wealthy.

We've went through a number of reasons today, including proper asset distribution, family protection, taxes and expenses reduction, and also how arguments can be reduced after you pass.

It's extremely important if you do not have an estate plan in place, to reach out today and get started. Estate planning is typically done with your financial advisor.

Please use the information on this page to get started today and work on your own estate plan. Thank you for watching ‘Why Every Person (Not Just the Wealthy) Should Have an Estate Plan’. We'll see you next time.