A friend of mine (in the industry) recently asked how to respond to this question. My friend’s clients are a young wealthy couple with a new child. That is all I know about these people, but I thought I would share my answer with you:
The three main reasons for having estate planning documents for this couple are (1) naming a guardian for their child, (2) establishing a credit shelter trust structure to save the first-spouse-to-die’s estate tax exemption, and (3) establishing a trust for minors to avoid a conservatorship.
Here’s a little more on each of these:(1) Naming a guardian for minor children in most states is merely a nomination, and a judge would decide who will raise minor children if they lose both their parents. This is usually determined with a “best interests of the child” approach. However, in many states there is a presumption that the individual(s) named in a person’s Will will be named unless someone establishes good cause why they should not be named. As a parent myself, I want a say in who would raise my children, and most parents I advise feel the same way. Therefore, having a Will to formally set forth your preference is important.
(2) For wealthy clients, there is a pretty simple estate planning technique that can save their children a ton of money. To explain, let me give you a few tax rules. First, in 2011 and 2012, generally the first $5 million in an estate can be transferred to beneficiaries free of estate tax, but federal estate tax kicks in after that point at a 35% rate. Second, you can leave as much as you want to your spouse with zero tax. Many couples merely want to leave all their assets to their surviving spouse, and this can be done without estate tax. However, when the second spouse dies, only the $5 million exemption is available to that spouse. In essence, we’ve wasted the first spouse’s $5 million exemption. Therefore, we could have shielded $10 million from estate tax rather than just $5 million if we had instead created a trust with the exemption amount on the first death. The surviving spouse can be primary beneficiary of this trust and even the trustee. So, if the estate planning documents are tweaked slightly to provide a trust, many tax dollars can be saved. Using very raw numbers here and 2011 exemptions and rates, $1,750,000 would be the tax savings.
(3) In most states, if a minor receives assets greater than a certain amount ($15,000 in Georgia, where I practice), state law requires that a court-appointed conservator (called guardian or guardian of the property in other states) manage the property. That conservator must be bonded and must file an initial inventory and regular reports to the court. The ability to manage the assets and use them is under strict court supervision. Even something as simple as selling real estate can require court supervision. Therefore, we try to avoid this outcome for our clients and create trusts in the estate planning documents so that a conservatorship can be avoided, and instead a trust is used with more flexible administrative provisions and distribution standards, giving most of the discretion to the trustee who is named in the document by the Will maker.
Of course, all that I’ve said here is very much a generality, and everyone’s situation is different, but even if you’re not a “wealthy” couple, most young couples with children should have a Will even if just to name guardians for their children and cause trusts to be created for even modest assets.
Click here to read Part II to this series, Why Do I Need a Will?