Here’s what goes into planning your estate
Estate planning is no easy task. It’s even less appealing when you think about the circumstances that might require you to. With a whirlwind of emotions going through your mind, it’s hard enough to think about your regular responsibilities. Now added ones just dropped in your lap.
We strongly urge families to hire lawyers or financial planners, due to the incredible amount of information one needs to know when it comes to Estate Planning. Also, without copious knowledge of the various tactics available to make the most of your accumulated wealth, you could be missing out on a lot of money.
We wanted to dive in and show you what it really means to plan an estate.
What’s what and who’s who?
First, you have to identify the fiduciaries, beneficiaries and the terms of inheritance. This sounds simpler than it is. Do you leave assets for everyone, or a select few? Who do you trust enough to select as your fiduciary? What are the terms and do they vary from family member to family member?
Where’s the money coming from?
When it comes to actually paying the estate tax, the estate’s assets will normally pay any tax due in accordance with state law, unless you choose to pay another way. Failing to choose the right way can change what each beneficiary inherits. For, example, a person might leave a $1 million IRA to a niece and a $1 million cash gift to charity. They intended that the niece and the charity each receive the same amount. A poorly drafted will or trust, however, could result in an unnecessary tax burden that has to be satisfied by a portion of the IRA.
Pay as little as possible.
Make use of the Lifetime Exclusion from Transfer Tax and the Annual Exclusion from Gift Tax. You can give away $5.45 million upon passing without paying gift or estate tax. You can also gift $14,000 a year a piece to as many donees as you want, adjusted for inflation. When a person passes away, any portion of the exclusion amount that she did not use during life may be used to protect assets from estate tax. You need to make consistent use of the Gift Tax exclusion in order to make it worthwhile, but it allows a person to transfer substantial wealth.
Make use of the Marital Deduction as well. This lets a deceased person leave an unlimited amount of his property to his spouse tax-free. Any estate tax is then postponed until the passing of the surviving spouse.
The top dog in saving your cash during estate planning is an irrevocable life insurance trust (ILIT). Usually, a life insurance policy is taxed at up to 40 percent after the client’s passing. You can avoid this by setting up a trust to the policy. When the person passes away, the trust holds the proceeds for the benefit of the beneficiaries and the proceeds escape estate tax. A client with a $5 million policy on her life who sets up an ILIT can save up to $2 million in estate tax as a result of a few hours of sound planning.
Wealthy clients may also be good candidates for a grantor retained annuity trust (GRAT). GRATs are one example of “estate freeze” techniques. They allow a client to transfer property to heirs. Any appreciation after the date of the transfer accrues for the benefit of the heirs and escapes transfer tax.
Often wealthy clients generated their wealth through their own business. If that’s the case, and the business was jointly owned with a non-relative, a Buy-Sell agreement should be in place. Having a buy-sell ensures that an orderly process exists for disposing of the deceased person’s interest in the business. Otherwise the will and trust of the deceased person should decide how the company should be sold or passed on.
Unfortunately, wealthy clients are often the targets of lawsuits or creditor claims. Real estate owned by a client can generate enormous liability if an accident happens or an environmental problem is discovered. For any clients already in the middle of a lawsuit, estate planners can make changes to the client’s situation that afford better asset protection.
Believe it or not, there are still numerous details that aren’t covered here, such as probate, post death planning and more. Perhaps most importantly, a good estate plan is flexible enough to allow changes to be made to accommodate changing circumstances in life. Review an estate plan after any major life event, but in any case every three to five years. Estate planning is not a process that is done and then set aside; it's ongoing and requires careful oversight by the client and the lawyer.