It is common for
people to put off planning their estates. After all, no one wants to anticipate
his or her own death. In addition, many people may believe that only the
wealthy require estate planning or that all that is involved is tax planning,
which can be done “later.” They may well be wrong on both counts.
Your level of
wealth and the ultimate tax consequences of your estate becomes secondary to the
planning and care of your family and other heirs.
A well-structured
estate plan can be invaluable. Through it, you can control the distribution of
your assets and possessions, as well as name guardians for your children or
plan care for other dependents. While the estate planning process can raise
some difficult emotional and personal issues, your heirs will be glad you did
it, and you will know that your wishes are assured.
How to Begin?
Your first step
should be to assemble a competent, professional estate planning team. Your
attorney, financial professional, insurance agent, bank trust officer, and/or
accountant are all possible members of your team, depending on the size and
complexity of your estate. They can help you complete an analysis of your
current estate by looking at your financial position as of today and helping
you analyze your family’s needs for the future.
Does a family
member have special needs or require medical attention? How much will an
education cost when your children reach college age? How will your family’s
overall cost-of-living requirements change? How will estate taxes affect your
assets as they are currently held?
The answers to
these questions can help you develop an estate plan that will adequately
provide for your family’s needs.
What Information Should
Be Gathered?
A thorough estate
analysis requires gathering any and all materials involving current or future
income, property ownership, insurance, and legal arrangements already in place.
This includes records of the following:
- Current income from employment and all investments
- Any expected deferred compensation
- All retirement benefits, from Social Security (including survivors’
benefits), IRAs, pensions, and profit-sharing plans - Investment
documents, certificates, passbooks, etc. - Deeds to primary and vacation residences
- Personal property
- Life insurance policies of which you are the owner, the insured, or
the beneficiary - Trust agreements, if any
- Your will, if you have one
Current and
expected debts and obligations, including mortgage and loan balances, real
estate liens, taxes payable, consumer debts, and estimates of funeral costs and
estate settlement expenses.
Once assembled, a
complete analysis can begin, giving you the basis for a comprehensive estate
plan.
Steps to Estate
Preservation
If you begin
planning in a timely fashion, there are methods that may allow you to take
steps to preserve your estate and minimize estate taxation while satisfying
both the Internal Revenue Service and the courts. You can also potentially save
your heirs needless effort and expense. Consider the following steps:
- Use Your Applicable
Exclusion Amount to the Fullest. For 2022, the personal federal estate tax
exemption amount is $12.06 million (it was $11.7 million for 2021). This
means that when you pass away, the value of your estate is calculated and
any amount more than $12.06 million is subject to the federal estate tax
unless otherwise excluded. A married couple has a combined exemption for
2022 of $24.12 million - Plan a Gifting Program. Further tax shielding is gained through the use of the annual $16,000 gift exclusion, which is indexed annually for
inflation. This allows gifting (in the year 2022) of up to $16,000 each,
to any number of donees annually without payment of gift tax. (When a
spouse is involved in the gifting program, the annual exclusion will
increase up to $32,000). Provision must be made for the immediate use of
the gift by the donee; gifts of future interest will not qualify.
Professional assistance and careful structuring of your gifting program
are, therefore, essential. - Draft a Will. A will is a formal, legal document
instructing your survivors in the settlement of your estate. It is crucial
to the success of an estate plan that your will is properly written by a
qualified, experienced legal professional and witnessed simultaneously by
two parties. - Establish Trusts. Utilizing trusts can be an excellent
method of accomplishing long-term estate planning goals. Trusts, while
seemingly complex, are simply very powerful tools designed to help
individuals handle a variety of family and tax-related problems. - Plan Your Charitable
Bequests. The value of
all property transferred for “charitable” or “public” purposes is
deductible, with certain limitations, when determining the valuation of an
estate for tax purposes. - Utilize Life Insurance to
Its Fullest Advantage.
Life insurance can fulfill two important functions in your estate
planning. First and foremost, it can provide for the immediate cash needs
of your spouse or other beneficiaries. Second, and of equal importance,
the use of an irrevocable life
insurance trust (ILIT) can
prevent the inclusion of your life insurance proceeds in your estate and help
your executor pay your estate tax bill without having to sell estate
assets. - Title Assets Properly. The simplest and least expensive estate
planning technique for married couples is to take title to assets as
“joint tenants.” This will exclude assets from probate and may
eventually save legal costs.
community property states should remember that all income and assets acquired
by a married couple living in those states, except for individual gifts and
inheritances, are considered community property, half of which is included in
each spouse’s estate valuation.]
Remember: You Can’t Take
it With You
The careful
planning of an estate can require a great deal of expertise.
If you surround
yourself with a professional, supportive team as you begin the process, work
through its many stages and adjust your plans over time, you can prepare
yourself – and those you love – for the future.
