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Two of the most common misconceptions surrounding estate planning are: (1) putting an estate plan in place is only important for individuals who have substantial assets they wish to pass on to a complicated network of beneficiaries, and (2) estate planning benefits apply primarily to the interests of retirees. However, the greatest importance of estate planning essentials such as advance directives, a legally valid Last Will and Testament, and a clear and carefully-accounted strategy for minimizing final tax obligations may lie in the relief these preparations offer to the family members who would otherwise be tasked with the management of an individual’s medical decisions and final affairs, often without the benefit of any guidance.
In this blog post, we’ll discuss how those estate planning benefits can apply no matter the stage of life or financial resources of the individual putting the plan in place.
Although there can be considerable variation in estate planning priorities between one individual and the next, there are a few common goals that lead people to seek the assistance of an estate planning attorney again and again. Three primary goals of estate planning are:
The balance among these priorities will depend not only on the age and resources of the individual preparing the estate plan, but also on their personality and interests, the connections they have with family members vs. friendships and other social relationships outside the bonds of familial kinship, and even the tax and probate laws of the state they live in.
Incapacity planning, which sometimes also encompasses long-term care planning, is the preparation of financial and support resources to ensure that these are ready in the event of one’s own incapacitation. Typically “incapacity” in this sense is understood to mean “mental incapacity” – the inability to listen carefully to complex information regarding one’s personal medical or financial situation, weigh all of the factors, and make a conscious, informed choice. For obvious reasons, however, certain forms of physical incapacity – such as any condition resulting in prolonged loss of consciousness – can effectively result in this form of legal incapacity, as well.
While individual estate planners do choose to address the possibility of this scenario in their own circumstances via a variety of different methods, depending on their own concerns and the types of resources most readily available to them, in general the estate planning essentials most likely to be involved in incapacity planning are advance directives such as a durable power of attorney for healthcare and a living will. An Ohio estate planning attorney with Rhodium Law may be able to help you understand how these documents can provide important estate planning benefits in your situation.
A Living Will in Ohio is a relatively rigid document, whose main purpose, as the Cleveland Clinic points out, is to allow the person creating the Living Will (known as the “declarant”) to indicate their desire to refuse certain forms of life-sustaining treatment. While limited in scope, this document can provide crucial peace of mind to both the declarant and, in the eventuality that the document is needed, their medical care providers and next of kin.
A durable power of attorney for healthcare provides a vehicle by which one individual, who in legal terms is typically called the “principal,” authorizes another person, who depending on jurisdiction and context may be called either the “agent “or the “attorney-in-fact” (both terms have essentially the same meaning), to act on the principal’s behalf. This type of authorization is of course the “power” to which power of attorney refers, but in most cases “power of attorney” refers to the document itself, rather than the authority with which the agent is invested when the document is executed.
The power referenced is “durable” in the sense that it does not expire in the event of the principal’s incapacity (obviously important for a power of attorney designed to be executed in the event that the principal is unable to make their own medical decisions). A principal has the right to specify a predefined date for the expiration of their power of attorney; however, O.R.C. § 1337.12(3) provides that a durable power of attorney for health care executed under § 1337.11 will continue in spite of reaching its expiration date if the principal is found to be incapacitated at the time the expiry is reached.
For many individuals, one of the primary motives for developing a comprehensive estate plan is the desire to direct the orderly administration of their final affairs, often with a view toward ensuring that their loved ones will be provided for once they are gone. The essential document used to provide those left behind (and the probate court) with instructions for how the decedent (the person who has died) wished for their affairs to be handled and their estate disposed is in most cases a Last Will and Testament, and the person who creates and signs the will is its testator. Wills are also commonly used in conjunction with a variety of complementary estate planning tools, such as life insurance policies or testamentary trusts, in order to achieve the testator’s desired goals.
The sad truth is that anyone can meet with an unexpected accident or sudden illness, leaving their friends and families behind to try and organize the administration of their final affairs, and the estate administration process that ensues when an individual dies intestate (without a valid will) can often be prolonged, expensive, and confusing. Consequently while individuals who have complex assets and many potential beneficiaries may wish to provide detailed instructions in their wills, and may be especially motivated to combine these documents with advanced estate planning tools such as revocable trusts (designed to become irrevocable upon the grantor’s death) or testamentary trusts in order to develop a truly custom estate planning design.
Even people whose assets are limited and who have no complex instructions to provide should consider creating a valid Last Will and Testament that, at minimum:
Ohio residents who are especially keen to ensure that the will does its job in saving loved ones time and confusion can petition a probate court for a declaration of validity during the testator’s own lifetime, pursuant to O.R.C. § 5817.10.
A carefully-selected life insurance policy can provide numerous estate planning benefits. Life insurance can be a particularly useful tool for ensuring that financial resources are available to family members in the immediate aftermath of a loved one’s death. This type of provision can be crucial for covering funeral expenses, and life insurance policies are frequently used by seasoned estate planners for precisely this purpose.
Another common use of a whole or universal life insurance policy – although term life may be appropriate in some instances – is to serve as a form of near-term replacement for the deceased person’s income. This particular use can have life-changing implications in alleviating or even preventing a devastating loss from developing into an even greater tragedy when a family is unexpectedly confronted with the sudden loss of the household’s primary financial support.
Any property left to friends or family via the will must go through probate before the executor of the estate will even be able to determine what assets remain to be distributed. An essential part of the probate process is settling any and all of the decedent’s outstanding debts and ensuring that all creditors of the estate have been satisfied – including state and federal governments, if applicable.
The Internal Revenue Service (IRS) explains that the person appointed to handle the final administration of a deceased person’s estate (in Ohio, this will be the executor named in the will, presuming an Ohio court declares the will to be legally valid) will be responsible for filing the decedent’s final individual income tax tax return, any income tax return needed for the estate, and – if applicable – for paying the federal estate tax and filing the associated return using IRS Form 706. Only once all applicable tax obligations have been discharged and any non-governmental creditors of the estate (such as mortgage lenders, credit card companies, or auto loan services) have been satisfied will the executor be able to make an assessment of the property remaining.
Although many estates fall beneath the threshold for federal estate tax each year, and Ohio does not impose separate estate or inheritance taxes, the tax burden for those estates that do not qualify for federal exemption can be considerable – potentially reducing the amount available to transfer to beneficiaries by as much as 40% of the estate’s value. Liability for estate income tax may be more common, and can still result in both inconvenience to the executor and a reduction in inheritance for beneficiaries, so part of the importance of estate planning lies in developing tax-efficient strategies, often in conversation with an experienced estate planning attorney, for the transfer of assets to loved ones.
While it is true that tax burdens increase relative to the size of the estate, becoming aware of the various taxes that may apply and taking steps during life to reduce their impact can be a gift of time, attention, and consideration to the loved ones you leave behind.
Two estate planning essentials commonly used to transfer assets to intended beneficiaries while reducing or avoiding estate taxes include irrevocable trusts and strategic gifting:
An estate planning attorney well-versed in wealth transfer strategies may be able to help you determine which tools offer the greatest estate planning benefits for your situation.
Individual priorities in estate planning can differ depending on personality, resources, and family or social circumstances. For most people, however, preparing for the possibility of their own incapacity, ensuring the orderly disposition of personal property after their own deaths, and reducing the tax burdens associated with the final administration of their estates can constitute a compelling set of estate planning benefits. The importance of estate planning lies in its effectiveness at providing peace of mind for both the individual who puts their estate planning essentials in place and the loved ones who may need to oversee difficult medical decisions long before they inherit from the individual’s estate.
To discuss your estate planning needs and core concerns with an experienced professional, reach out to an Ohio estate planning attorney by calling Rhodium Law at (216) 699-8145 to schedule your estate planning consultation.
