There’s a lot riding on a successful estate plan – use these five tips to help ensure your plan achieves your goals.
There are many ways in which your plans could be derailed, ranging from a lack of planning to an estate plan that’s impossible to implement in a way that honors your wishes or is useful to your heirs.
It’s essential that you craft an estate plan that’s specific enough to ensure your wishes are followed, durable enough to accommodate the inevitable surprises and strategic enough to transfer your assets to the next generation in a tax-efficient manner.
“You have to be very intentional, and also flexible, to make sure that your wealth and values are perpetuated in the way that you want, says Curtis Fessler, Vice President and Wealth Strategist at Regions Bank.
Here are five estate planning tips that can help you ensure that your plan achieves your goals.
Create a Formalized Estate Plan
The first step to successful estate planning is simply getting started. Having an estate plan in place is crucial to ensuring your vision is carried out as you’d like. Yet, the majority of Americans don’t have a will, according to a 2019 caring.com survey.
Keep in mind, a functional estate plan requires much more than a simple will. Be sure to make separate arrangements to address issues such as power of attorney, advance medical directives and assets that transfer outside of a will, such as a business partnership interest. These arrangements are especially relevant for larger estates, which may be subject to high taxes unless appropriate steps are taken.
“If you don’t put a formalized plan in place, then the government’s plan is used instead, and in all likelihood, it’s not going to benefit your heirs or those that you love in the manner you would have preferred,” says Fessler. Use this estate planning checklist to get started on your plans.
Update Assets and Beneficiaries
After you’ve created a thorough estate plan, remember to keep it up to date based on any life changes. Life isn’t static, and finances, relationships and circumstances are apt to change. Consider the extent to which these changes might affect your estate plan, and make updates as necessary.
“You want to do everything you can to avoid the potential costs, time and conflict,” Fessler says. “Make sure your plan remains relevant, and that you’re crossing your T’s and dotting your I’s.”
In fact, Fessler recommends revisiting your plan with your wealth advisor every year or two and making updates as needed. You’ll want to adjust your estate plan to reflect any changes in your family, such as marriages, divorces, births and deaths. Further, update the asset components, taking into account things like new property or business interests. The goal is to make sure any new changes are reflected in your estate plan and beneficiary lists.
Consider Your Team and Tax Laws
Another aspect of your estate plan that merits occasional review is the list of people who will be entrusted with carrying out your wishes, such as your estate’s executor or those granted medical power of attorney. Make sure these people remain willing, capable and qualified to fulfill their roles. Fessler recommends choosing an executor who is not a relative in order to sidestep potentially negative family dynamics.
Additionally, it’s important to note that tax laws aren’t written in stone, so you should periodically review changes to the tax code with your advisor to evaluate whether they warrant changes in your estate plan.
Anticipate the Estate Tax
People with large estates must mind the estate tax, which claims 40% of the value of estates above $11.4 million, potentially putting a serious dent in the amount you intend to pass on to your heirs.
Thankfully, with a little planning, it is possible to substantially decrease that tax burden. One strategy is to transfer money out of the estate during your lifetime by making gifts to individuals or to trusts. In the latter case, you could establish a trust (or multiple trusts) with a specific purpose that you choose — perhaps to benefit a family member or a philanthropic cause. This gives you control over the ultimate allocation of those funds while reducing the size of the estate for tax purposes.
Under current tax law, gifts of up to $15,000 are exempted from the gift tax (a different tax with rates ranging from 18% to 40%), so long as each gift is to a different person or entity. What’s more, if you’re married, each spouse is allowed to make a $15,000 gift to the same person or trust each year without triggering the gift tax. That gives you substantial flexibility in reducing the amount of money that’s subject to the estate tax, as long as you’re proactive.
“Getting some of your assets out of your name and into a trust can be extremely beneficial, so we always discuss whether there are ways to do it without interrupting our clients’ needs, wants or wishes,” Fessler says.
Failing to take advantage of annual and lifetime gifting exemptions, currently low AFR and 7520 rates and asset valuation discounts could prove costly. Gifting is an “exclusive” tax whereas making a bequest is “inclusive.” For tax purposes, gifting may be excluded from an estate whereas a bequest would be included as part of the estate.
Under current tax law – assuming one’s lifetime exemption has been exhausted – making a $1 million gift during one’s lifetime would result in a $400,000 tax to the IRS, thus totaling $1.4 million. In order to net the heirs the full $1 million via a bequest at death, the estate would need assets totaling $1,666,667. This amount would be taxed at a rate of 40% and net the heirs that same $1 million.
Don’t Make Assumptions
It’s easy to have blind spots when it comes to your estate. For example, perhaps you assume that all of your children value the family business equally, or that they’ll wish to keep your vacation home for generations. Before you formalize an estate plan that relies upon those assumptions, it’s wise to share your plans with your loved ones and beneficiaries to make sure they’re on the same page.
“When people communicate their vision to their heirs while they’re still here, it reduces a lot of potential conflict in the family,” says Fessler.
Upfront communication can also help to ensure that your assets are distributed where they are most valued. For example, one of Fessler’s clients owned a ranch and assumed his children would love it as he did. When he asked them about it, however, he learned that they planned to sell it instead. This realization prompted the client to oversee the sale of the ranch himself, ensuring it was sold to a party that would use the ranch as he wished.
There’s a lot riding on the successful creation, maintenance and execution of your estate plan. By planning carefully and communicating with your family, you’ll increase the odds that your vision will be carried out after you’re gone.
Contact a Regions Wealth Advisor for assistance to help set your estate plan on the right path — one that honors your wishes and considers possible tax advantages.
