Why Do I Need an Estate Plan if My Estate isn't Taxable?

Historically, one of the reasons for creating an estate plan was to avoid one's heirs being saddled with burdensome estate tax. For those whose estates are subject to estate tax, this is still an important motivator for estate planning. However, the reality is that very few people have had large enough estates to be subject to federal estate tax. With the enactment of the Tax Cuts and Jobs Act (TCJA), that number has gotten even smaller: each individual can now exempt $11,180,000 from federal estate tax. For a married couple, that number doubles. What's more, the exemption is portable; if the first spouse to die only uses $1,000,000 of the exemption, his or her spouse can use the remainder of the exemption in addition to their own. Even if you are financially very comfortable, you may not have assets approaching twelve million dollars. You may ask yourself, "Why do I need an estate plan if my estate isn't taxable?"

The answer, of course, is that your estate plan does much more for you than just avoid federal estate taxes. Here are some reasons everyone needs an estate plan, regardless of federal tax (Ohio does not impose an estate or inheritance tax).

You Want to Provide for Loved Ones.

If you have minor children, loved ones with special needs who may require government benefits, or want to leave assets to non-relatives, you need an estate plan.

An estate plan allows you to name a guardian for your minor children in the event you or their other parent are unable to care for them. An estate plan also allows you to designate someone to manage the assets you leave for them. If you create a trust, you have much more control over what happens to your children's assets until they are of age to manage them themselves.

Without an estate plan, the probate court decides who takes care of your children and their money. Usually, a close relative is chosen, but it may not be the person you would prefer. Why take that chance when it's easily within your power to protect your children and their interests?

Likewise, if you have a loved one with special needs, you want to avoid having them inherit money directly from you. Depending on the amount, it could jeopardize their eligibility for needed government benefits. They might also be taken advantage of by unscrupulous persons, so why make them a target? A special needs trust can protect their benefits and their assets.

If you don't have an estate plan, the state will distribute your assets as the law imagines you would have wanted. This may more or less approximate your goals, but your assets will be distributed only to relatives according to Ohio's intestacy statute. If you want to leave something to a friend or longtime companion, you will need to make an estate plan.

You Want to Avoid Probate.

Even if you don't have minor children or loved ones with special needs, and you're perfectly fine with the state deciding who should have your assets, you probably still want an estate plan. Depending on what planning tools you use, an estate plan can help you to avoid probate. This means less delay in your assets getting into the hands of your loved ones, as well as avoiding the expense of probate.

You Want to Preserve Family Harmony.

You may know what you want to have happen to your assets when you are gone, but you can't assume that your loved ones share your understanding. An estate plan clarifies your intentions so that your loved ones don't have to wonder what you wanted, and perhaps fight over it. Even if you've told them you want them to share equally in your estate, it can be helpful to specify who should have certain items. It is unfortunately common for disputes over even sentimental items with little financial value to cause permanent rifts in a family.

You Want to Protect Your Own Future.

Estate planning is not only about disposing of your assets at the end of your life. It's also about protecting your own interests while you are alive. No one likes to think about the possibility that they could become incapacitated, but unfortunately, it's important to plan for. Many people develop Alzheimer's or some form of dementia as they age, rendering them unable to make or communicate important decisions about their medical care or the management of their finances. Loved ones may have to go to court to obtain guardianship, a time-consuming and stressful process.

Even if the possibility of mental decline seems decades away, remember that even young people can suffer a sudden accident or illness, making it necessary for someone else to manage their affairs. By creating medical and financial powers of attorney, you get to choose who will make important decisions on your behalf and define the scope of their power. Then, if needed, they can seamlessly step into your shoes and ensure that your affairs are managed properly and efficiently.

Beyond creating powers of attorney, it's also worthwhile to consider how to protect your assets in the event you someday need long-term care (as a significant percentage of adults will). Medicare does not cover long term care; Medicaid will, but only after you have "spent down" countable assets. An experienced estate planning attorney can help you preserve assets for your loved ones while removing them from the category of assets counted by Medicaid.

In short, there are numerous reasons to have an estate plan, even if you never expect estate tax to be an issue for you. The cost of an estate plan will depend on your circumstances, but should be viewed as an investment in your future and that of your loved ones, rather than as an expense.

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