Deadly Serious

Adam M. Grossman

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.

Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes. Still, you don’t have to be a wealthy rock star to need an estate plan. I believe every adult—regardless of net worth—should have at least a basic plan. Here are 10 reasons:

1. State estate taxes. Even if your estate won’t top the $11.2 million federal threshold, your state might impose its own estate tax. Eighteen states, in fact, have some type of estate or inheritance tax. In some states, the limit is harmonized with the federal limit, meaning you would only face a state-level tax if your estate met the federal threshold. But in many states, the limit is far lower. In Massachusetts, for example, it’s just $1 million.

2. An ever-changing tax regime. While today’s $11.2 million federal estate tax exemption is extremely generous, there’s no guarantee this generosity will last. While estate tax revenue is virtually meaningless to the federal budget, it’s politically symbolic and has seen frequent changes. As recently as 2000, the limit was less than $1 million and the top rate was a hefty 55%, compared with today’s 40%. In 2010, on the other hand, there was no estate tax at all. The lesson: Don’t conclude that today’s estate tax regime is the one that will apply to you.

3. Naming a guardian. Should something happen to both you and your spouse, perhaps the single most important function of an estate plan is the appointing of a guardian for your children. This is even more critical if you’re a single parent. While your loved ones may have the best of intentions, it isn’t unusual for custody disagreements to arise when parents pass away.

Should children live with their grandparents or perhaps with an aunt or uncle? Should priority be given to those who live locally? To those who share your values? To those in a more comfortable position financially? It’s unlikely that everyone will see it the same way. That’s why it’s so important to document your preference.

4. Choosing a health care proxy. Another critical function of an estate plan is to name a health care proxy. If you were to become incapacitated, a written health care proxy would ensure that a designated loved one would have authority to make medical decisions on your behalf. This need not be complicated—in fact, free proxy forms are available on the internet—but it is important. If you became incapacitated, that would be bad enough. You certainly wouldn’t want your family sparring with each other, or with hospital staff, as a result.

5. Picking an executor. The executor’s role is largely administrative and often falls to the spouse or an adult child. If you have children from more than one marriage, however, you should consider appointing an impartial executor—one who does not have a stake in the outcome. While this impartial individual will need to be paid, it’ll be well worth the cost if that impartiality helps your heirs avoid a costly dispute.

6. Ensuring equity among children. If you died without a will, a court would probably divide your assets equally among your children. But that may not make the most sense. Suppose your children are in different situations financially. Should everyone receive equal shares? The answer, of course, is that it depends. But since you’re in the best position to make that determination, take the time now to think it through.

7. Charitable intentions. If you have substantial assets, perhaps you wouldn’t want everything to go to your children. Maybe there are charities, religious organizations or educational institutions that are important to your legacy. If you don’t put it on paper, no one will ever know.

8. Personal possessions. If you’re like most people, you have items of sentimental value—jewelry, for example. Wouldn’t you want some say over how these items are allocated?

Vacation homes are similarly tricky, often holding great sentimental value for children. But how would they share a home among themselves? How would they share the maintenance costs, especially if they are in different positions financially? What if one of your children wanted to sell the house and one wanted to hold it? A thoughtful estate plan would include mechanisms to handle these questions amicably.

9. Cost savings. In Prince’s case, it’s been more than two years and none of his heirs has received a penny. In the meantime, because it’s such a tangled mess, attorneys and other advisors have collected nearly $6 million in fees. No question, this is an unusual case. But the point remains: It’s hard enough to suffer a loss. Don’t compound that pain by leaving your family guessing about—and possibly fighting over—what you would have wanted.

10. Creditor protection. In the event one of your children has a legal dispute, a well-written estate plan could help protect your assets from that child’s creditors. If he or she gets divorced, for example, a trust structure could ensure that more of your assets stay with your child.

Adam M. Grossman’s previous articles include Five Messy StepsHole Story and Seeking Zero. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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