Why You Should Start Estate Planning Now

Estate planning is something everyone needs to think about even if all they intend to do is put a will in place designating what assets go to which heirs. Without a will in place, the deceased is considered intestate and their assets will be divided up based on the laws of the state where they were resident… or the location of the assets if they are overseas.

Some people don’t care or think about a will if they have no spouse and no children—but they should if they don’t want some random unknown relative to end up with their assets. It’s the “rich old uncle” joke which can happen.

A few years ago, an old hermit type of guy in Nevada living alone died in his house. The local authorities took away the body and eventually found some gold coins in his garage in a shoebox. Turns out, the guy had many shoe boxes full of coins—gold and silver. Total value in the millions. The state eventually tracked down a distant cousin who inherited the stash.

If you don’t have a will, each state and each country have their own rules for who inherits your assets and in what proportion. Do you really want to leave things up to one or more governments to tell your state who gets your assets?

Therefore, a will is a first step in estate planning. It directs who gets what assets rather than following the rules laid out by the government. Still, the estate will still have to go through what’s known as probate or proving of the will depending on the estate’s value and the individual state’s threshold for probate. Most probate thresholds are relatively low.

Many assets can bypass probate such as property held by spouses that is titled joint tenants with rights of survivorship, IRA accounts with named beneficiaries, bank accounts with named beneficiaries, and life insurance—unless the estate is the named beneficiary. Other assets may bypass probate depending on the individual state’s laws.

Nevertheless, probate takes time and money. The bigger and more complex the estate the longer and more expensive the probate in most cases. Better to be prepared.

For Americans, a next level beyond a will is a living trust. A living trust is simply an entity in which you can title property and then when you die, the property is simply transferred to the beneficiaries of the trust since it already belongs to it. No probate process required for the assets titled in the name of the living trust.

A living trust can be revocable or irrevocable. If the idea is to just avoid probate but still control the assets yourself, a revocable living trust allows for that. The problem encountered much of the time is that people set up the revocable living trust but don’t transfer the ownership of their assets to the trust. So those assets are back to the probate issue.

Irrevocable means you give up the direct rights to the assets put in the trust. You can be both the grantor and the initial beneficiary, but a trustee will manage the assets. One benefit of doing the irrevocable trust compared to the revocable trust is that once the assets are transferred to the trust they are out of your estate.

When it comes to estate taxes, that can be a big benefit if those assets appreciate significantly during the rest of your lifetime.

The 2019 estate tax exclusion amount was US$11,400,000 per person, i.e. per spouse for a married couple. That means you could transfer up to US$11,400,000 into an irrevocable trust in 2019, which would use up your full exclusion (assuming you hadn’t used any of it in previous years for gifts or transfers to previous trusts). That US$11,400,000 of assets could then grow to a billion dollars before your death and you’d pay no estate taxes on the difference.

The reason being the assets aren’t yours anymore. They belong to the trust. You simply become the beneficiary. That doesn’t mean the trust won’t pay taxes. Trusts are taxed on income and capital gains, but since they don’t die, they don’t pay estate tax.

US$11,400,000 is a lot of money and thanks to the current rules which increase the estate tax exemption each year based on inflation, the number will go up every year unless and until Congress changes the rules which they have done over the years. It’s possible the exemption amounts could be lowered in the future. However, any transfer to a trust in 2019 would have the 2019 figures applied.

Setting up a domestic irrevocable trust in the United States eliminates probate and can resolve estate tax worries, but it doesn’t eliminate the risk of being sued as an individual and a plaintiff getting a judgement in the United States against the assets of the trust even though you’re no longer the owner of the assets.

Domestic trusts get pierced by attorneys regularly. They’ve even been able to do it with IRAs which are technically a trust and should be protected against lawsuits.

The way to obtain the third level of estate planning after the probate and tax question is to set up an offshore trust in a jurisdiction that will protect the trust assets should you—as the grantor and primary beneficiary—be sued back home.

Offshore trust jurisdictions organize their laws to specifically protect trusts in their country from frivolous lawsuits. The barriers to piercing a foreign trust by a U.S. attorney are effectively insurmountable including rules that require the plaintiff to pay the defendant’s legal costs if the plaintiff loses.

Most U.S. attorneys will take on a frivolous lawsuit on a contingency fee basis, knowing they’ll at least get some settlement out of most suits whether it’s just the defendant taking the hit to save legal fees or an insurance company paying out to make the suit go away. Those same contingency fee attorneys won’t take the risk of their time filing a suit in another country. They’ll want to be paid by the hour which generally forces the plaintiff to abandon the frivolous suit.

For an offshore trust to work most effectively, you’ll need to move the assets in the trust out of your home jurisdiction. That gets you to the topic of offshore investing which is beyond the scope of estate planning.

Simply moving assets outside of your home jurisdiction and holding them in an offshore entity that isn’t an offshore trust gives you a barrier to someone trying to attack your assets, but the assets are yours in that case so the protection is limited.

Nevertheless, holding offshore assets in an offshore entity does give you some estate planning benefits as well if your assets are in different countries. You can hold real estate, for example, in Panama, Belize, and Colombia all in the same Nevis LLC. When you die, your estate won’t need to go through probate in each of the three countries where the real estate is based, as the titles are in the name of the entity. Your estate simply deals with Nevis.

In that scenario, you wouldn’t need a will in each of the three countries to outline your wishes for who gets your properties. If you held title in your own name, without a will in each country, each property would be allocated to heirs based on the laws of each country.

Most countries look to blood relatives first including children. For people with second marriages with step-children and half-siblings, those rules may not be what you want. So take the time to structure your estate in a way that will meet your goals for who inherits what. At a minimum, prepare a will listing all your assets.

Lief Simon