Estate Planning for Under $5M Net Worth

In this video, Matt discusses estate planning considerations for those with a net worth under $5 million. He highlights the importance of protecting family assets from creditors and potential threats. Using a hypothetical case in Pennsylvania, he explores the need for an irrevocable trust, considering current and future estate tax limits. Matt suggests that for a net worth under $5 million, a basic will, power of attorneys, and a revocable trust are often sufficient. He details the benefits of a revocable trust in avoiding probate and maintaining privacy, and concludes by addressing key decisions in estate planning, promising future content on irrevocable trust planning for those with a net worth above $5 million.

Video Transcript

Today we’re going to talk about some estate planning considerations if your net worth is under $5 million. So, in general, one of the, in most states, you really want to make sure that your family is protected from creditors and also from some potential other threats, such as if your information is public when you pass it, then your kids could be at risk with not only creditors, but also predators. So today we’re going to talk around some general rules of thumb when completing an estate plan. So the first thing is what we have to understand. I’m going to talk specifically for Pennsylvania. So let’s say there’s Mr. And Mrs. And I’m going to draw two things here. So this is everything in Mr. And Mrs. Name. So let’s just say, hypothetically, we have IrA balances of $2 million.

 

We have a brokerage account of 1 million. Let’s say we have a roth that’s worth 500,000, and then our house is worth 1 million. So the total net worth here would be four and a half million dollars. So one thing right off the bat is, do we need to look at an irrevocable trust? So an irrevocable trust, once you put it in most cases, you would need a trustee sign off to get it back. So the purpose of an irrevocable trust would be, do we need to avoid federal taxes when we die? And currently, Mr. And Mrs. Combined, there’s about almost $13 million that’s available if you die. And so not a top concern here, with $26 million being on the table, that there’d be an estate tax planning issue, however, and that’s actually 13.61 million each.

 

Now, in January 1, 2026, that’s going to get cut in half because that was under the tax code, it’s going to sunset in 2026. So even so, that’s still going to be about $13.6 million combined, half and half that’s available. So with a net worth of four and a half million, and probably, if they’re retired, spending federal taxes are not necessarily from inheritance tax is not necessarily a top concern. If it were, anything above, these numbers would get taxed at 40%. So when evaluating, do I need an irrevocable trust? The answer here with this net worth is probably not. Yet. If you inherit money and your net worth goes up dramatically, then potentially some other advantages of the irrevocable trust I’ve been avoiding taxes would also be asset protection.

 

If you gift money in here, in most states, it’s three or five year look back. So if you gift money here in advance, and then you need long term health care and you blow through your assets, money and irrevocable trust, assuming those years have elapsed, cannot be touched by the government. So there’s also some asset protection considerations here. But the reason I’m breaking this down is, I see sometimes this is recommended, sometimes not necessary, for a net worth of under 5 million. So what we want to focus on, so we want to focus on having a basic will, some basic power of attorneys for decision making. If you’re incapacitated, usually there’s a durable financial healthcare power of attorney. And then the big one we’d recommend here is a revocable trust.

 

So, a revocable trust is, let’s just say, hypothetically, you had three kids here, and the goal was to get the money to three kids, and we want 10% of the money to go to a charity. So the 10% that goes to the charity, right off the bat, we would recommend, let’s make sure that only the IRA money is getting the charity is going to the charity. So 10% of the total net worth would be 900,000. So we’d want to direct 45%, hypothetically, of the IRA to the charity. And the reason for that is the charity can receive that money tax free, versus the kids would have to pay taxes on the IRA money upon receiving it. Plus they’d have to get the money out in ten years under the secure act rules.

 

So there would be not only taxes, but potentially higher taxes, being that they’d have to distribute the money so quickly over the ten year period, regardless of what their tax bracket was. So that’s just some considerations as which assets go where. Now, the rest of the money for the three kids, a revocable trust is going to accomplish a couple of things. So one is it’s going to avoid probate. Now, avoiding probate is huge because a court system is not dictating any disagreements. And the huge one I like about avoiding probate is the privacy of the documents, so the amounts do not have to get disclosed and the money goes to the kids.

 

The second thing is you can spring the revocable trust into an irrevocable trust when you pass, which means that there can be some rules, whatever your values around money, you can make sure are passed on to your kid. So, hypothetically, if it goes a third, a third into three, separate trust upon your passing. So if we have kid one, kid two and kid three, we can put a hem standard on the money. If it’s an irrevocable trust. So, meaning they can distribute the money if it’s needed for health, education, maintenance or support. You could put age restrictions like 30, 35, 40, regardless of what they want to use the money. We could say they have a third of the principal here. You could make it interest only, unless it’s a hem standard, then they can touch principal.

 

But the other nice things you can do about this is really protecting sometimes your kids against themselves. This is also something that if they leave the money in the irrevocable trust and they don’t have a prenuptial agreement and then end up getting divorced, these assets can stay in the bloodline versus getting, in most cases, potentially split 50 upon passing. So the other thing about a revocable trust as well is that you can change your mind while you’re living. So if you set this up again, remember, it doesn’t spring into an irrevocable trust until you die. So you can come in and every year you could change your mind with who gets what, how do the ages work, how do the standards work, who is the trustee, et cetera.

 

But some of the big things you’re going to want to potentially before sitting down with an attorney is, let’s say your kids are under the age of 18. Now, once they’re over the age of 18, you can make them their own trustees. But the big one is, who is the trustee going to be initially? Are you going to choose a family member like an uncle, a brother, sister? Are you going to choose an institution like fidelity? Just using that as an example. They’ll usually charge like a flat fee of 35 basis points if it’s an irrevocable trust. There’s upkeep, there’s taxes, filings, et cetera. And then obviously someone has to answer to request of when the money is needed. Oftentimes with the family members. I can see most people are most comfortable with the family members, but then sometimes it becomes very time consuming.

 

And then once the grand tours pass, then the kids, and let’s say the uncle, there sometimes can be disagreements and a breakdown of the relationship just because it does become more of a full time job than a part time job is expected. So some considerations, this is usually the biggest decision. And then other back to your general estate plan is if your kids are under 18, you’re going to want to figure out who’s going to take care of them, who’s the guardian, and then who are the successors to these very important roles, trustee, guardian, et cetera. Because if one person’s not fit at the time of death, or if you’re choosing your parents and they die before you two, we need to have successors built in to this arrangement as well.

 

So this in general is an estate planning and some of the considerations you look for. If you have a net worth, let’s say under 5 million, next we’ll do a video. If your net worth is above that, as far as how you’d want to use some irrevocable trust planning to part of your estate plan even while you are living, and potentially move some money in there over time.

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