“My situation is very simple. I just want to make sure that if something happens to one of us, the other gets everything. If something happens to both of us, the kids get everything.” It’s the classic opening. Estate planners hear it every week.
After a few follow-up questions, many people find that their situation is not quite as simple as they thought and that they would, in fact, like to do more than the bare minimum to protect their legacy. Here are some of the follow-up questions a good planner will ask before concluding that your situation is simple.
1. Are you at increased risk of lawsuits?
Some occupations are riskier than others. If you are a licensed professional or business owner (or both), one mistake, one lawsuit, could wipe you out. It is critically important to combine best practices and adequate insurance coverage with appropriate legal structures to maximize protection and minimize risk of loss of your personal assets.
There is an especially nasty surprise waiting for licensed professionals who depend solely upon their business’s status as a PC or PLLC; those structures do not protect you from liability for your own malpractice.
2. Do you have significant assets in retirement accounts?
While most inherited assets are not taxed as income, non-Roth retirement accounts are. Under the default rule, these accounts must be drained within five years of death, and the beneficiary owes income tax on every dollar. So not only is there a huge tax bill, but the tax deferral terminates.
Alternatively, the beneficiary can leave the assets invested, tax deferred, for their remaining life expectancy. They take a distribution every year and leave the rest to grow. This technique can increase the lifetime value of these accounts by five to fifty times, depending on the age of the beneficiary. But it takes planning to make sure they follow this plan rather than the default.
3. Are you prepared for the prospect of long-term care costs later in life?
The average cost of nursing home care in North Carolina is $6,300 per month. These costs are decimating estates across the country. The key to protecting assets from these expenses is to plan ahead—at least five years ahead. While there are crisis planning tools available to protect some assets at the last minute before going into the nursing home, they are more expensive and often less effective than prospective planning.
4. Have you ever known anyone who was disinherited?
Scenario: Mom and Dad are married. Mom dies and leaves everything to Dad. Dad remarries. Dad dies and leaves everything to Stepmom.
Almost everyone has seen this scenario first hand. What often happens next is Stepmom changes her will to leave everything to her own kids, disinheriting Dad’s kids. If Mom and Dad had seen this coming, they easily could have used Bloodline Protection measures in their estate plan to make sure their kids were not disinherited.
5. Windfall or Legacy?
Usually, an inheritance is a check that goes into the bank. It’s a one-time windfall. The end.
With just a bit more planning, an inheritance can be a multigenerational legacy protected from the beneficiaries’ creditors, predators, divorces, lawsuits and even bankruptcies—all without restricting control and access. Consider the Golden Rule and ask yourself, “Which would I rather receive?”