Estate Planning For Millennials
Estate planning is generally thought of as something one does midway through life after wealth has been accumulated and as retirement is approaching. However, estate planning is much more than simply writing a will. It encompasses providing for yourself and those you care about during life and after death, disposing of assets in life and in death, and estate and gift tax planning. Millennials should have a basic estate plan in place in the event of an emergency or untimely death. They also need to consider advanced estate planning techniques since they are making decisions now that will have a profound effect on their estate plan.
Life Altering Decisions Affecting Your Estate Plan
The life decisions millennials are making now that will affect their future estate plan include getting married and divorced, having or not having children, deciding where to live and work, buying homes and other real properties, and deciding whether to focus on saving or spending. The millennial group includes individuals who are currently young professionals and those just graduating from college; they might not have a lot of money now but this is the time in their lives when they will start to build wealth and make investments.
Beginning with getting married or getting divorced, these life decisions affect their estate plan because it generally means that millennials will now have a family to support and should have a plan in place if they were suddenly not there to provide that support. Supporting a family means providing for their health, education, maintenance, and support. Millennials should also be aware of the tax consequences of marriage including tax free marital transfers and the ability to make joint gifts up to $14,000 each, and the Estate Tax Unified Credit and Portability, which allows a married couple to pass twice the Federal Exemption, that is, $5,430,000, tax free.
The other side of getting married is the potential for divorce. Millennials may think that because they have no assets now they do not even need to consider a prenuptial agreement. But when one considers that forty to fifty percent of first marriages and sixty percent of second marriages end in divorce, it may seem like a better idea. The assets that they have been accumulating and working for or inherited may be suddenly cut in half due to divorce and this means that retirement will happen much later in life and the estate they will have will also be drastically reduced.
If millennials decide to have children, this will also affect their estate plan and, more importantly, is a reason to create an estate plan immediately. They must plan for how the child would be supported and taken care of if one or both parents were to pass away. Considering that, on average, raising a child to the age of 18 costs a middle income family approximately $250,000 their estate plan is likely going to require a life insurance policy to provide for their children in the event of the death of one or both parents. If they had planned on their children going to college, that life insurance policy is going to need to be even larger. Finally, it would be wise to name a guardian for the children if both parents die while the children are still minors to save family the stress and cost of a court battle to determine who will be raising the children.
The first big investment that most millennials make is buying their first home. How this property is titled is part of estate planning and depends on how the individual wants the property to pass in the event of their death. If married, most people title the property as tenants by the entirety. The benefits of titling as tenants by the entirety include each spouse owning an undivided interest in the property, each having the full right to occupy, each having the right of survivorship and their interest in the property cannot be alienated without the consent of both spouses. However, if the millennial is buying an investment property with a relative or friend, how the property is titled becomes more important. If it is not titled as tenants in common, the property will not be part of their probate estate and their family would be deprived of their interest in the real property.
Finally, the decisions millennials are making now when choosing to save or spend and their standard of living now will have a major impact on their ability to retire comfortably and leave an estate to their loved ones.
Estate Planning Tools For Millennials
The tools most millennials will use as part of their estate plan include wills, trusts, life insurance, employee benefit plans, and health care directives and powers of attorney.
Even without significant assets, a will is still important for millennials to have. First, in a will the millennials will be able to name the personal representative to handle their estate and will name the guardian for their children if both parents die. This is also the document where millennials can dispose of sentimental assets to their family or friends who would most appreciate the asset and where they can state their preference for their funeral and disposition of their remains.
Taking the time to create a will now will save the estate money after the millennial’s death because it can help avoid a court battle over who will administer the estate and who will receive what assets. For example, if one spouse dies intestate and the couple has no children in Pennsylvania, the surviving spouse will receive the first $30,000 and then must split the remainder of the probate estate with the parents of the deceased spouse. It is also a way to ensure that the right person is handling the estate. When choosing the personal representative the millennial will be able to consider factors such as trustworthiness, conflicts of interests, ability to meet the duties required, managing the affairs of the estate, financial/investment management expertise, and time and desire to serve. If no personal representative is chosen, the court would not consider these factors, but would instead name the personal representative based on the relationship to the deceased.
The reason that will spur most millennials to make a will is to provide for the care of their children. If no guardian is named, the surviving family members will have to apply to the court to obtain guardianship of the children and the people who end up with custody may not be the people the deceased would have chosen to raise their children. By naming a guardian to raise the children in a will, the millennials can ensure that the person/people they want raising their children will be the one to do so and they can also provide for the financial means to raise the children through the use of life insurance, as discussed below.
The next tool that millennials will use when creating an estate plan is a trust. Whether it is a trust contained within a will or a trust created while still alive, this is a useful mechanism for managing the assets of a millennial’s estate. Often, the biggest source of wealth at a millennial’s death is a life insurance policy, whether it is a group policy held through work or one owned by the millennial individually. The life insurance is usually significantly larger than the millennial’s net worth as a way to provide for family at a relatively low cost. The problem is that if the policy names the millennial’s children as the beneficiaries of the policy, the money will be given to them outright when they turn 21 under the Uniform Transfers to Minors Act. There are few 21 year olds who will responsibly handle a sudden rise in wealth, especially when the policy proceeds is hundreds of thousands or even millions of dollars.
By using a trust, the money can be responsibly managed and invested while the children are still minors and it can be distributed to them outright on a gradual basis. Sometimes the best person for raising the children and the best person for managing their money are not the same person. If the funds going into trust are in the hundreds of thousands or even millions of dollars, a corporate trustee should be considered because of their impartibility and greater expertise in handling and investing large sums of money. Placing the funds in trust ensures that the money will be properly managed and investing during the minority of the children while still providing for their health, education, maintenance, and support at the discretion of the Trustee. The trust can be written such that the children will start to receive income outright from the trust at a certain age, such as 21 or 23, and after that they can be given the right to withdraw money from the trust at certain ages, such as 25, 30, 35, etc. This ensures that they become accustomed to managing a large sum of money and not spend it all immediately.
Similarly, if one spouse is financially irresponsible, a similar trust can be created wherein he or she will receive distributions for their health, education, maintenance, and support but prevents them from making poor spending choices. Finally, if the millennial is a young professional, such as a physician or investment banker, and expects to accumulate significant wealth in the coming years, now is the time to start moving assets out of his or her estate through the use of the annual exclusion from gift tax ($14,000 per donee in 2015) to an Irrevocable Life Insurance Trusts (“ILIT”), discussed in greater detail below.
Life insurance is used to provide for a family in the event of death by replacing the lost income and cover additional expenses resulting from the death. Expenses that were once shared are now borne alone. Life insurance should not just be bought for the primary breadwinner; even if one spouse does not work and stays home with the children, they are providing valuable services that will have to be performed by a third party for a fee in the event of an untimely death. The amount of coverage necessary for life insurance should provide enough to allow a family to transition post-tragedy and provide for the family’s support and expenses in the years going forward, as they no longer have the income and/or support previously provided by the deceased.
There are essentially two different types of life insurance which are appropriate for this stage in life. The first is term insurance, which provides coverage for a limited term of years at a lower rate because of the low risk associated with millennials. This is the type of insurance commonly used to provide for a family in the event of the death of one parent while the family is still young and does not have much in liquid savings. These plans are cheaper but they also do not build up any cash value and become progressively more expensive as each term ends because of the greater health risks associated with increased age. If a term life insurance is the option that can be afforded presently, millennials should inquire about a policy that can be converted to whole life coverage later in the term. The second type of life insurance commonly used is whole life insurance, which provides coverage for the rest of your life. Although this type of policy has higher up front costs, these policies build cash value which can be liquidated later if necessary.
If the millennial expect to accumulate significant wealth, he or she should consider using an Irrevocable Life Insurance Trusts (“ILIT”) as a vehicle to transfer a lot of wealth/support with a small gift/estate tax footprint. By using the annual exclusion from gift tax, the premiums for a life insurance policy can be gifted to the ILIT and then the ILIT owns the insurance policy. At the death of the insured, the proceeds will be paid to the ILIT with no income or estate tax incurred if the ILIT is set up correctly.
Employee Benefit Plans
Another tool that millennials might not immediately think of as an estate planning tool is the benefit plan they participate in at work. Many employees are given the opportunity to participate in both a retirement plan and group life insurance benefits. If either one or both are being utilized, millennials should be certain that the beneficiary designations name the correct person or entity, especially if they plan to have the benefits fund a trust.
Furthermore, millennials should know and understand the benefits they are entitled to under their workplace retirement plans and insurance benefits. For instance, benefits under group life insurance generally terminate as soon as you leave that job and cannot be brought with you. Along that same vein, vesting under a employer sponsored retirement plan often occurs on a gradual basis, wherein the longer you work for the employer, the more you receive under the retirement plan. This is important to know if a millennial plans is considering switching jobs; unless they would be making a lot more at the new job it may be wise to stay at the current job a few extra months in order to vest another twenty percent in the retirement plan.
Healthcare Directives and Powers of Attorney
Although most people will not need a healthcare directive or a power of attorney while they are young, if an accident or sudden illness should strike, these documents will ensure that someone has the authority to act on your behalf while you are incapacitated.
A general power of attorney can be used by your agent to make financial decisions on your behalf and ensure that your bills are paid. In most instances, the general power of attorney may be written in such a way they only come into effect upon two doctors certifying that you are incapacitated and unable to handle your own affairs. Moreover, the powers given to the agent under the power of attorney can be as broad or as limited as you choose. An advanced healthcare directive usually combines a living will and the designation of a health care surrogate. In this document the millennial can designate who will make medical decisions for them in the event they become incapacitated and what medical treatments they desire if unable to make the decisions for themselves.
Similar to the criteria for choosing a personal representative under a will, the healthcare surrogate or attorney in fact should be trustworthy, understands your personal preferences, be strong enough to follow through with your decisions, and most importantly, be willing and able to serve. Do not just name the person and hope they accept the position.
If you have questions about creating an estate plan that meets your current goals, an experienced estate planning attorney should be contacted to assist with your planning.