The number one estate planning mistake young people make is thinking that they don’t need an estate plan. In my experience this is due to the term “estate”planning. It often leaves young people believing that their assets are too small to protect and that such planning is best reserved for older and wealthier individuals. Although this sentiment is pervasive in the 20 and 30-something community, it is entirely incorrect. Just because you don’t drive a Ferrari doesn’t mean you don’t need car insurance, and just because you’re not a millionaire doesn’t mean you don’t need an estate plan.
Here are 4 reasons why young people need an estate plan:
- Fear of Commitment
At 27 years old I am in that special, yet stressful, time when many people my age are making two of the biggest commitments of their entire lives: buying a home and getting married. As both are usually joyous and celebratory moments in a person’s life, proper planning can sometimes be an afterthought. However, given both the financial and emotional issues at stake, the importance a careful review of the situation cannot be overemphasized.
In this regard, a prenuptial agreement can be your friend. Among other things, “prenups” can protect the assets you currently have, any expected inheritances, retirement account contributions, and your residence (marital or non-marital). They can also protect you from debts that your soon-to-be-spouse may have acquired before marriage.
The rest of your life you will work to grow and take care of these assets, so why not protect them at the outset?
2. Fear of the Unknown
Even young people never know when an illness, injury or other major life event may come out of nowhere and result in increased bills, decreased household income, or the loss of a loved one. While none of these are fun things to think about, they are unfortunate realities of life that require proper planning.
There are a number of ways to ensure you and your loved ones are taken care of in the event of the unforeseen. A typical way is in the execution of a Power of Attorney, in which a person is appointed to make business and/or financial decisions on your behalf should you become unable to do so. A similar document is a Health Care Proxy, which allows you to appoint a person to make medical care decisions for you in the event that you become incapacitated.
3. Fear of the Reaper
In what felt like the blink of an eye, I went from a kid without a care in the world, to a late-20’s engaged man who just found his first grey hair. While like me, you may not need to break out the Just for Men (or Women) just yet, it is never too early to make sure your affairs are in order.
Wills and trusts offer a wealth of ways to meet your goals. Among other thing, wills and trusts ensure your property passes how you want it. Each state’s intestacy laws are different, and odds are they don’t perfectly match your wishes. They will also help to reduce surviving family members’ anxiety about what you may have wanted or possible disagreement about who deserves what. Additionally, probate is a costly process which may require selling of estate assets. A proper estate plan can mitigate those costs and protect assets you want distributed.
Wills and trusts can also protect your minor children by designating a guardian to take care of them in the event that you cannot. Additionally you can determine how any assets are distributed to your children. Under intestacy laws, transfers to minors are held in trust and then distributed when the child reaches a certain age. As a favorite law professor of mine used to say, this raises the “Foxwoods” problem. It’s almost never a good idea to give an 18 or 21 year old a lump sum of cash and hope they use it wisely.
4. Fear of Uncle Sam
The primary forms of taxation that young people are exposed to on a regular basis are sales and income taxes. While their general principles and the sting of their bite may be known, it should be noted that they are just the tip of a vast and complex iceberg. Uncle Sam’s three heads (local, state, and federal) are always looking to get their cut at every step of the way, and even simple planning can result in significant savings.
Aside from income taxes, estate planning also focuses on gift, estate and generation-skipping taxes which can impose huge burdens if not taken into account. However, there are numerous legal ways to avoid or delay such tax payments thanks to government deductions, exemptions and deferments.
I know exactly what many of you young people reading this are thinking right now…”I barely have enough money to make my student loans payments, pay rent, and go out for the occasional beer. Why in the world should I invest my time and money in an estate plan?” To you I have a twofold response. First, you can’t build a house without laying the first brick. If you want to retire comfortably and have the peace of mind that you and your loved ones are taken care of then the sooner to start planning the better. Second, although it may be true that you have little assets to protect at this point in time, it’s a safe bet that your parents or grandparents probably do. And wouldn’t it be nice, after getting your estate plan done, to be able to go back to them and explain why they should take advantage of the annual gift tax exclusion and give you an advance on your inheritance now?
Got an estate planning question? Send me an email at AThayer@srt-law.com
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