In a world that has seen rising costs of housing, food, utilities, and other necessities, preserving money for the next generation has never been more important. Many people fail to understand the potential consequences of failing to plan ahead. Roughly 70% of generational wealth is lost in two generations, and roughly 90% of generational wealth is lost in three generations. This blog post will discuss how people can help save their estate money, allowing them to give the next generation a better life and preserve their legacy.

Where do Expenses Come From in Estate Planning?

Various added costs can be incurred by an estate in the course of its administration. This list will go over common costs that can diminish an estate and how to plan ahead to save on those costs.

1. Probate

Probate is the process of the court supervision of the division and payment of your assets. Through this process, the court will consider what assets you have that are considered “probate assets”. Essentially, this distinction is any property you may own that is not held in a trust or subject to a Pay on Death designation. The court will first require your executor to pay your creditors and then distribute your remaining property to your heirs. If you fail to create a will, the court will order the executor to make distributions in accordance with your state’s intestacy laws. This process can be lengthy, especially if there is a challenge by one of your beneficiaries. It is common for estates to incur thousands, if not tens of thousands, of dollars in attorney’s fees depending on the complexity and size of your estate, and whether a challenge arises. American estates lose roughly $2 billion annually in the probate process.

How to Avoid Costs Associated with Probate

POD

There are various ways to avoid the cost of probate. The first is to ensure that you have designated a Pay on Death designation on any accounts or assets that allow it. This can help keep some assets out of probate, allowing for expedited distributions to your designees. 

 Revocable Trust

The revocable trust has become the gold standard for many people seeking to avoid probate. A revocable trust is a document that allows you to serve as trustee of a trust in which you are also a beneficiary. This document gives you the power to add or remove property from the trust and use the property during your lifetime. Upon your passing, the trust will become irrevocable and a successor trustee will be appointed. Depending on your wishes, the trust can either pay out to the individual beneficiaries listed in the document, or the property can be held and managed by the trustee and distributions can be made as directed by the trust agreement. 

The assets contained in this trust will avoid probate, helping to save on attorney’s fees and reducing the risk of a challenge. Additionally, the trust can be structured to provide creditor protection to the beneficiaries, preventing their creditors from accessing their inheritance. Although these trusts are typically more expensive than a will to create, they often pay for themselves by saving people significant costs in probate and by preventing the beneficiary’s creditors from accessing the assets contained in the estate

2. Improperly Drafted Documents

In an attempt to save money on the cost of creating a will, more and more people are seeking out DIY solutions. Although some of these DIY sources may be reliable, there are certain risks involved. Often individuals will seek out documents that may not be valid in their home jurisdiction or may not be properly executed or funded. This can lead to complex probate challenges when such errors occur and may cause your intended beneficiaries to lose out on their share of your estate.

How to Avoid Using Improperly Drafted Documents

1. Use a Knowledgeable Attorney

By using a local attorney who is knowledgeable about your jurisdiction’s estate planning laws you can ensure that your documents achieve your goals and will not cost your estate thousands of extra dollars in expensive litigation. Additionally, no two estates are identical, and local attorneys can help find solutions to your unique challenges, providing you with individualized solutions to ensure your estate accomplishes your goals.

3. Gift, Estate, and Generation-Skipping Tax

These taxes are imposed on lifetime gifts and large estates. Every taxpayer gets three “coupons” to use for these taxes. First, any individual can make a gift to another individual as long as the amount does not exceed the annual “coupon”. Currently that “coupon” is $18,000 for individuals and $36,000 for married couples. In addition to the annual coupon, each individual can make gifts, including through their estate or throughout their lifetime in the amount of $13.61 million or $27.22 million for a married couple. Anytime you make a gift to an individual in a calendar year, the amount in excess of your annual exclusion will require a gift tax filing, and the amount in excess of your annual “coupon” will come out of your lifetime exemption. Additionally, each individual can gift the same amount as the lifetime estate tax exemption to a skip-generation person ($13.61 million). The current tax rate for estate and generation-skipping tax ranges from 18% to 40% of the amount in excess of the lifetime exclusion. Therefore, if you have a large estate it is imperative to plan ahead to avoid a substantial tax on your assets when they pass to the next generation.

How to Minimize Negative Estate Tax Outcomes

Lifetime Gifts

The first and most straightforward way to plan ahead for potential estate tax implications is by taking advantage of your annual gift exclusion. Lifetime gifts can be made to any individual annually as long as they do not exceed the limits listed above. This allows individuals to make gifts outright during their lifetime, reducing their taxable estate size. Additionally, some gifts are exempt from gift tax regardless of size such as gifts to charitable organizations, gifts directly for the payment of tuition, and gifts directly for the payment of medical expenses. This option does have some downsides, however. Many individuals fear that their gift may be going to an irresponsible party that is not ready to manage money. These considerations can be solved through the use of certain trusts. It is also wise to speak to an attorney before using this strategy to prevent potential Medicaid implications that can be triggered by such gifts.

Crummey Trust

A Crummey Trust is a type of trust that is funded progressively over time. The IRS has ruled that gifts of future interests do not constitute a completed gift, and therefore are not eligible for the annual exclusion. Estate planners developed a simple solution to this issue, a limited power of withdrawal for beneficiaries. Each year the grantor of the Crummey Trust will gift each beneficiary the amount of the annual exclusion for that year. The beneficiary will have the power, for a limited amount of time, to withdraw that amount outright from the trust. Once the power has lapsed and the beneficiary has failed to exercise their withdrawal power, the amount will pass into the trust. The IRS has found that this lapse in withdrawal right makes the gift a present interest and it is therefore able to be exempt from the gift and estate tax. This allows an individual to gradually fund their trust without additional tax planning required.

Dynasty Trust

A Dynasty Trust is a trust that continues in perpetuity. Only select states, such as South Dakota, allow for such trust agreements. These trusts are an excellent planning strategy for those who wish to build generational wealth. Dynasty trusts allow an individual to make a gift to future generations. As long as this gift is less than the grantor’s lifetime exemption, there will be no subsequent generation-skipping tax as the beneficiaries change from generation to generation. This allows the money in the trust to grow over time. These trusts are typically funded with assets that produce capital gains to avoid additional income tax. Additionally, when such a trust is established in South Dakota, no state income tax is applied to the gains of the trust corpus. This allows for exponential growth without the problems incurred by the generation-skipping tax. Furthermore, it ensures that future generations' inheritance will not be subject to their creditors or poor financial management. Typically a dynasty trust will also be a directed trust, allowing various advisors who take on different roles in the management of trust assets. This gives the trust additional flexibility, allowing it to be adaptable to new challenges that may arise in the course of its administration.

Conclusion

Unfortunately, a lack of future planning can cause your life's hard work to be lost to avoidable costs. The good news is that there are many options for those seeking to preserve their estate and take care of future generations. By working with an attorney you can create a customized estate plan that will help save your estate money and preserve your legacy for generations to come. If you would like to learn more about what plan is right for your circumstances, feel free to schedule your free consultation today!

A common question people who are just starting their estate planning journey may ask themselves is "why do I need a will". This is a fair question, as people should always be inquisitive when dealing with new or foreign concepts. This brief article will explain what a will is, it's purpose, why it is a beneficial tool in estate planning, and how to go about creating a will.

1. What is a Will?

A will is written document produced by an adult individual that directs what should happen to their belongings when they pass. Each state has their own definition of what a valid will is or looks like. As long as a will meets the legal requirements in the jurisdiction it was created in, it will be deemed legally effective. In South Dakota a will is a document in writing, containing testamentary language (meaning it reflects the individuals intent to distribute their property upon passing), signed by the individual and witnessed by two or more individuals. South Dakota also offers the option of a holographic will. A holographic will is a document with testamentary language, in the individuals hand writing, signed by the individual. No witnesses are necessary for a holographic will to be valid. 

2. What is the Purpose and Benefit of a Will

The main intended purpose of a will is to direct how your property will be distributed. Without a will your property is divided according to predetermined legislative rules typically referred to as "intestacy laws".  Without a will the court will automatically transfer your property according to these laws. Typically your property will go to your spouse, then your children, parents, siblings, and more distance relatives should no other relatives survive you. This gives you and your family almost no say as to how your property is to be divided. Furthermore, the division of property amongst various relatives can lead to fighting between family members, extended probate times, and additional attorney's fees. These issues are often avoided through the use of a will. 

In addition to the added benefit of being able to distribute your money the way you wish, a will can also name an executor. An executor is typically a trusted individual in your life who will have the responsibility of ensuring that your property is divided the way you wish, leading to added efficiency in getting through probate. Additionally, your will can direct how the executor is to sell property to cover debts of your estate, ensuring that specific property is maintained within the family as much as possible. 

A will can also help you prevent certain people from getting your assets when you pass should you wish for them to not have them or have direct access to them. For example, if you have children and you do not want them to receive a large lump sum of money all at once, you can create a testamentary trust within the will that directs how and when a trustee should distribute money or assets to that individual, and for what purposes. This allows you to ensure that any gift you make is spent and distributed how you wish.

These are just some of the various benefits to having a properly drafted and executed will as a part of your comprehensive estate plan.

3. How to Create a Will

Creating a will can be a confusing and difficult process. Although it appears to be relatively simple, small details in the law can drastically alter the results of a document making it ineffective. These pitfalls can lead to lengthy litigation and attorneys fees. Anyone considering creating a will should begin to gather information relating to what property they own, what debts they have, what gifts they have given, who they wish to have what property, who they trust to serve as executor, and how and when they want that property distributed. In order to avoid potential pitfalls created by improperly drafted wills it is important that individuals work with a trusted attorney to ensure that their will achieves their estate planning goals, helping to preserve their legacy and take care of their loved ones.