To properly plan your estate, it’s important to understand how your estate size will influence your estate plan. As explained in the article The First Step to Estate Planning: Estimate Your Net Worth, your net worth will determine your estate size. By calculating your net worth, some important questions will come into focus regarding your estate plan:

• Are there enough assets to cover your debts and other estate obligations?

• If there are enough assets to cover the estate obligations, are the remaining assets enough to cover bequests? 

• Do I need to plan for estate taxes or estate income taxes?

• Do I need to plan for abatement?

Obviously, these are just a few basic questions as life circumstances can make estate planning much more complicated. However, the answers to these questions will influence how you begin to properly plan for your estate.

How a Small Estate Size Will Influence Your Estate Plan

In states that have a probate process, small estates may qualify for a simplified probate procedure. However, even if you qualify for a simplified probate procedure, filing a will with the probate court is still necessary. So, the following factors will influence your estate plan:

• With a small estate comes a restricted beneficiary pool. Since small estates have limited assets, the beneficiary pool should be small. Furthermore, if you are married, list your spouse and children, if any. In small estates going through the abatement process, the probate court in some states will permit a family allowance.  

• Provide abatement instructions if the estate is too small to cover expected estate obligations. Usually, the probate court will defer to the will when deciding on abatement. However, use common sense when deciding what expenses to pay with your limited assets. In fact, it may be a good idea to mirror the state’s order of payment in the abatement process as illustrated in the article Paying Debts and Honoring Bequests through the Abatement Process.

• If there are assets that will earn income after death, designate the executor as beneficiary to the assets. In the will, provide instructions that the beneficiary should use the funds to pay expenses of the estate. Accordingly, this will avoid the expense of hiring a tax professional to complete the complicated estate income tax returns.

Typically, a small estate will influence your estate plan by forcing you to plan small and to plan properly for possible abatement. Additionally, if your estate has assets that will earn income after your death, some tax planning may need to happen.

How a Well-Funded Estate Will Influence Your Estate Plan

If you’re fortunate to have a well-funded, common estate, precise planning becomes important. Typically, well-funded estates have few restrictions, but proper tax planning and asset management becomes the focus. Accordingly, here are a few factors that will influence your estate plan for a well-funded estate:

• Although there will be enough assets to handle a large beneficiary pool, keep the beneficiary pool as small as possible. Since large beneficiary pools drive up the expenses of administration, avoid listing every person you met in life; keep the beneficiary pool to a precious few.

• If you opt to use a probate avoidance strategy in your estate plan, plan for expenses accurately. If you miscalculate your expenses, abatement could occur. To avoid the embarrassment of abatement from careless planning, make sure you commit enough assets to cover the obligations of the estate. Otherwise, you will create an unnecessary headache for your executor.

• Although estate taxes won’t apply to a common estate, estate income taxes may. If there are assets in the estate that earn income after death, designate beneficiaries to those assets. Additionally, if there are retirement accounts in the estate, designate beneficiaries to those accounts as well. Otherwise, the income becomes taxable to the estate at the higher estate tax rates. The result, is higher expenses for the estate and a tax headache for the executor.  

In a well-funded estate, the influence is to keep expenses down and avoid giving your executor unnecessary headaches.

Estate Size and Estate Planning

Basically, it only takes common sense to understand that the smaller the estate the more restrictions on your estate plan. However, people with common estates may not understand how to plan their estate properly. Consequently, mistakes result creating unintended consequences. To avoid similar circumstances, calculate your net worth and let the results influence the estate planning process. If you take the time to plan properly, then your beneficiaries and executor will be very happy.

Was this article helpful? What other factors do you know of that would influence your estate plan? Share your comments or questions in the comment area below.

References

Probate Shortcuts in Your State – This article lists the states and their laws regarding small estates. 

Recommendations

Plan Your Estate – Plan Your Estate by Nolo will guide you through proper estate planning.