One of the major areas in financial planning I tend to see my clients overlook, or even avoid thinking about, is proper estate planning.
You may believe that your current arrangements are all taken care of in a will that leaves everything to your spouse. However, if you’ve named anyone else as a beneficiary on other documents — life insurance policies, retirement or pension plans, joint property deeds, etc. — those instructions, not your will, are going to govern the disposition of those assets. You want to ensure that all your instructions work harmoniously to follow your exact wishes.
In addition, you may want to consider alternative asset ownership arrangements under certain circumstances. A simple estate plan may leave everything to a surviving spouse and enjoy the unlimited marital deduction against all estate taxes. Spouses can choose to take advantage of their applicable estate exclusion1 amounts in life or at death through portability. Not taking advantage of both of these exclusion amounts may result in a larger estate tax burden at the death of the second spouse. Yet these are taxes that can potentially be minimized with careful estate planning. In fact, due to recent legislation, much of estate planning is now about minimizing income taxes rather than estate taxes. Many states also have their own estate tax regimes and apply different (lower) estate tax applicable exclusion amounts, which you will need to consider with your estate planning professional.
A few points to consider:
Part 1 — Communicating Your Wishes
- Do you have a will?
- Are you comfortable with the executor(s) and trustee(s) you have selected?
- Have you executed a living will or health care proxy in the event of catastrophic illness or disability?
- Have you considered a living trust to avoid probate? Is a living trust even appropriate?
- If you have a living trust, have you titled your assets in the name of the trust?
Part 2 — Protecting Your Family
- Does your will name a guardian for your children if both you and your spouse are deceased?
- If you want to limit your spouse’s flexibility regarding the inheritance, have you created a qualified terminable interest property (QTIP) trust?
- Are you sure you have the right amount and type of life insurance for survivor income, loan repayment, capital needs, and all estate settlement expenses?
- Have you considered an irrevocable life insurance trust to exclude the insurance proceeds from being taxed as part of your estate?
- Have you considered creating trusts for family gift giving?
Part 3 — Reducing Your Taxes
- If you are married, are you taking full advantage of the marital deduction?
- Is your estate plan designed to take advantage of your applicable exclusion amount?
- Is your estate plan designed to minimize income taxes if estate taxes may not be an issues?
- Are you making gifts to family members that take advantage of the annual gift tax exclusion?
- Have you gifted assets with a strong probability of future appreciation in order to maximize future estate tax savings?
- Have you considered charitable trusts that could provide you with both estate and income tax benefits?
Part 4 — Protecting Your Business
- If you own a business, do you have a management succession plan?
- Do you have a buy/sell agreement for your family business interests?
- Have you considered a gift program that involves your family-owned business, especially in light of “estate freeze” rules? (These rules were enacted by Congress to prevent people from artificially freezing their estate values for tax purposes.)
Remember, estate planning is very complex. And while a simple will may adequately serve the estate planning needs of some people, you should meet with a qualified legal advisor to be sure you are developing a plan that is consistent with your objectives. In addition, be sure to recognize that estate planning is also an ongoing process that may require periodic review to ensure that plans are in concert with your changing goals. Because estate planning often entails many facets of your personal finances, it often involves the coordinated efforts of qualified legal, tax, insurance, and financial professionals.
1The estate tax exemption is $5.45 million for 2016, with a top tax rate of 40%.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.