Estate planning is perhaps the most difficult piece of the financial planning process for most of our clients. While there is an aversion to discussing death and disability, it is still critical that you have a well thought out plan to pass on what you have accumulated. The process can be complex so here are some basics to consider.
Create a will
This is the first and most basic step in estate planning. A will provides an individual with the opportunity to appoint guardians for minor children or dependents as well as name an executor for the estate. The executor serves the vital role of gathering and disbursing the assets of an estate and seeing that all the tax related issues are handled. While most choose family members to fulfill this role, you might wish to choose a professional to handle these matters if your children are not able or unwilling to do the job.
Update beneficiary designations
You should review your beneficiary designations periodically to make sure they reflect major life events (births/deaths/marriages/divorces). If beneficiary designations on retirement accounts and insurance policies are out of date or inaccurate your assets could pass to people you did not intend to benefit.
Establish health care directives
In the event you become incapacitated or terminally ill, it is important to have your wishes regarding medical treatment documented. You can designate a “health care proxy” who will be authorized to make medical decisions for you if you are incapacitated. The rules governing health care directives can vary from state to state and can be affected by federal law.
Consider a power of attorney
It is important that your financial affairs will be managed if you become disabled. Documents like a durable power of attorney give someone you trust the ability to handle financial matters for you. Most of these are “springing” which means they would only come into effect if something were to cause you to be incapacitated. These also should be reviewed periodically to make sure the people named are still able to act for you due to life events.
Establish a trust
One of the primary purposes of a trust is to avoid probate and the costs and privacy issues associated with the process. A trust can also be a useful tool to control assets that are passed on to future generations from an asset protection standpoint. Many clients are not comfortable with their heirs having full control of all their estate all at once. This is especially true if the heirs are young or immature.
Plan for the distribution of your retirement assets
It is important to have a unified financial plan that addresses all your financial accounts. It is common for clients to have assets scattered among different financial institutions including old retirement plans and dormant accounts. This is especially important if you wish to pass assets in a specific way to specific people or organizations. Consolidate assets by type so that the distribution plan in your estate is carried out exactly as you want.
Use gifting strategies to reduce your estate tax liability
Gifting is an excellent way to reduce the taxability of your estate. In 2020 an investor can gift up to $15,000 per beneficiary on an annual basis. Couples can gift $30,000 per year per beneficiary. Charitable donations are another gifting strategy that can reduce your estate as well that can be tax deductible for income tax purposes.
Decrease or eliminate estate taxes
Property passing to a surviving spouse is generally exempt from estate taxes. As of 2020, there is a $11.58 million limit on the amount that be passed on to a decedent’s non-spousal heirs tax free. There are many different strategies that can be used to decrease or eliminate the effects of estate taxes on your estate.
Determine how to draw down your assets
During retirement it is important to consider what sources of cash are being used to maintain your lifestyle. These sources often have drastically different tax consequences. A discussion on the best way to draw from your tax-deferred, taxable, or tax-free assets for cash flow needs is important from a tax planning and ultimately and estate planning viewpoint.
At Southern Capital we are very comfortable with helping our clients navigate the tax and estate planning issues that may arise. Feel free to call and set up a time to visit about any of these matters or other planning topics.