Estate planning is never just about money. It tells a story, or perhaps many, involving carefully built family businesses, passionate philanthropy, and the future of children, grandchildren, and succeeding generations. And as exciting or even overwhelming as this can sound, securing all of these involves careful and considered steps taken in the here and now.
Several steps and financial instruments can help you safeguard your legacy and benefit your family. But they need to be seeded and tended to well before you are gone. These are our recommendations, with the caveat that a skilled wealth advisor is essential for helping you put them into practice based on your specific financial situation.
Maximize charitable and family giving
Take full advantage of annual gift tax exemptions. In 2023, this figure is $17,000 for individuals, and $34,000 for couples. In theory, you can give amounts up to the exemptions to as many people and causes you want without needing to fill out a Form 709. The gift tax also wouldn’t apply to a religious organization, political donations over this amount, or exchanges of money between spouses.
While technically not a charity, many people will want to prioritize their children or grandchildren’s education. 529 plans are worth paying attention to. In Morningstar’s 2022 ratings, 34 plans received Gold, Silver, or Bronze ratings. A strong asset-allocation approach, robust processes for selecting underlying investments, and low fees are all ideal.
Note that it is also possible to fund a Roth IRA for minors under age 18. The Roth will have an adult custodian, but contributions to the account are made on the minor’s behalf. It isn’t a bad idea because, in this case, you’re leaving them lessons and a legacy.
Pay attention to shorter-term investment decisions
Short-term losses are seldom worth panicking about. But if you’re a little too disengaged, it can become easy to lose sight of the flaws in your investment allocations or strategy.
If you need to rebalance your portfolio, this could help you take advantage of better-performing stocks or instruments and minimize your tax exposure. If you earned more income than usual or came into an inheritance over the past year, this, too, could be invested with your financial advisor’s help.
Optimize your tax situation
This is perhaps the biggest concern for estate planning. The current estate tax exemption is just shy of $13 million for this year. No major changes to the tax code are expected with split control of Congress, but without any significant action, the provisions of the Tax Cuts and Jobs Act are scheduled to expire by the end of 2025.
An estate tax encompasses all of your assets – and again, barring any other changes, the current exemption will revert back to $5.5 million for individuals and $11 million for couples. Assets include a small business and/or your stake in the business, meaning some people who would otherwise assume they’re safe may find their estates pushed just over the line.
Depending on where you are domiciled, you may be subject to a state estate tax as well. Tennessee doesn’t have one, but Illinois does. Meanwhile, Kentucky and Pennsylvania have an inheritance tax, and Maryland has both types of tax.
Consider establishing a trust for the longer term
There are a number of different kinds of trusts, but all take a good deal of care to establish properly. You may have heard of revocable or living trusts, which provide the flexibility of altering at any point you want and continue to accrue income from the assets in the trust. Once you pass away, there is no need to go through probate, as the assets will pass on to the beneficiaries you name in the trust. However, revocable trusts are taxable.
Irrevocable trusts need your beneficiaries’ permission to modify, which can make them far more complicated to unravel. On the other hand, they won’t be subject to estate tax.
Life insurance, depending on how it is calibrated, is a trust avenue that can create simplicity and minimize tax liabilities. Typically, you won’t owe income tax on the proceeds, but estate tax is more complicated. Only policies owned by an irrevocable life insurance trust are totally exempt from at least federal estate taxes. It’s worth weighing your options sooner rather than later for setting up an irrevocable life insurance trust, or ILIT, prior to the sunsetting of the Tax Cuts and Jobs Act. Also, be sure to look closely at the fine print of tax law to avoid surprises regarding life insurance.
The best financial advisors take not a checklist approach, but a holistic one. This involves regularly reviewing your plan. Beyond a certain age, this needs to happen yearly. For people with complex assets and holdings, perhaps even more often than that. But after everything you have so painstakingly built, peace of mind is precisely what you deserve.
