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Estate & Legacy Planning

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Q: Do many of your clients have prenuptial agreements?

A: Most don’t, but prenuptial agreements are common in second or third marriages. A prenuptial agreement specifies who gets what in terms of assets and spousal support in the event of divorce. Prenups can protect your separate property, support your estate plan, reduce conflicts and save money in the event of a divorce. For a prenuptial agreement to hold up in court, it must be in writing, entered voluntarily, offer full disclosure at the time of execution, cannot be extremely unjust, and must be signed by both parties in front of a notary public. For more, read: Prenuptial Agreement: Five Required Elements.

Q: How are marital assets divided in divorce?

A: There are 9 Community Property states that divide marital assets equally. However, the other 41 states divide maritable property according to the principle of equitable distribution, which is based on the duration of the marriage, prior marriages of either party, age, health, occupation, amount and sources of income, vocational skills, employability, liabilities, and each of the parties’ needs. The court may also consider such factors as who played the biggest role in accumulating the assets, emotional value of specific items, alimony payments, child support obligations, tax consequences, and any other factor relevant to an equitable outcome. For more, read: Divorce: It’s Impact On Your Financial Plan.

Q: How can I protect my assets from lawsuits?

A: One of the best ways to protect your assets (especially for those in high-risk professions such as doctors, lawyers, and engineers) is through an Asset Protection Trust. There is a look-back period, which is the time between when you transfer assets into the trust and the time the assets become protected. The look-back period can vary per state, but most states’ look-back period is four years. To learn more about Asset Protection Trusts and other potential options to protect your assets, see: Asset Protection Trusts: How Do They Work?.

Q: How does the estate tax work & what is the federal estate tax exemption limit?

A: The value of everything you own will need to be totaled up for your estate tax return, which is due nine months after your date of death. Many people are surprised to find out that the death benefits on their life insurance policies will be considered part of their estates by the IRS. Nevertheless, you can leave your entire estate to your beneficiaries without any estate tax if the value of your estate is below the exemption limit ($11.7 million per person as of 2021). Every dollar above the exemption will be taxed at a rate of 40%. One spouse can leave his or her exemption to the other spouse, so a married couple could transfer approximately $23.4 million without estate taxes.

In addition to the federal estate tax, some states impose their own estate or inheritance taxes, which may have different exemption limits. Fourteen states have an estate tax while six have an inheritance tax. Maryland and New Jersey have both.

Q: Should I get a will or a revocable living trust?

A: Most people with significant assets use a revocable living trust, in addition to a will. The main advantage of the trust (over a will) is your heirs get to avoid the ugly probate process (a potentially expensive and time-consuming legal process), your affairs remain private (financial affairs can become public record during the probate process), and it is much more difficult to contest a trust than a will. The other advantage of the trust is it can remain intact and continue to hold and distribute assets for many years after your passing. Read: Lack Of Estate Plan Puts Prince’s Estate In Jeopardy.

Q: Should I tell my beneficiaries about their inheritance?

A: Studies on wealth transfer show that many beneficiaries are not prepared. Wealthy families in particular can save a lot of heartache by teaching their kids about money in advance of their inheritance. Your kids are more likely to take their inheritance for granted unless they understand where the wealth came from and how it is managed, spent, and given back. A way to prevent this can be through creating a family wealth philosophy, which is a simple framework against which future spending decisions can be judged. I also recommend talking to your beneficiaries in advance and in your “What If” letter about their financial values and how you hope their inheritance will be used. Read: How To Prepare Kids to Inherit Wealth.

Q: Whom should I name as successor trustee of my trust?

A: The two main criteria are: 1) someone whom you trust, and 2) someone who is reasonably competent in financial matters. Trustees are obligated to put your interests before their own. Trustees can inadvertently breach this “fiduciary duty” if they act in a way that is careless, negligent, or could be construed as a conflict of interest. The most common trust breeches are: 1) The trustee co-mingles his or her personal finances with the finances of the estate, or 2) The trustee engages in a conflict of interest by borrowing from the trust, profiting from it, or doing something with the trust assets that benefit him or her personally. Read: Living Trusts: How To Choose A Trustee?

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