Initial Guide to Estate Planning
Although it can be an uncomfortable subject to think about, estate planning is an essential facet of financial planning that can help ensure a smooth transfer of your assets when you pass. Establishing a detailed plan can help avoid probate and preserve your wealth for your spouse and heirs, as well as allocate charitable donations to entities of your choice that you wish to support. Unsurprisingly, it is beneficial to be proactive about developing an estate plan before your health is compromised, as well as periodically checking or updating your plan. This can help alleviate stress revolving around the financial future for you and those around you who will serve as each respective agent or beneficiary in your estate plan.
❖ Identify Assets: The first step in the process is to take stock of all of your assets, this can be as simple as writing down a list of your various investment and banking accounts, along with your home, other real estate, business interests, insurance policies and annuities, as well as property or valuables, including jewelry and art.
❖ Tax Implications:
➢ Understanding taxes as a result of an estate transfer is crucial for all parties,
and a primary input in the tax equation is called the Basic Exclusion Amount. This is a dollar value that changes throughout time in accordance with inflation; it serves as the “cap” for each decedent, beyond which a decedent may be liable for federal, estate and gift taxes. It may be considered a good problem to have - in 2021 the amount is $11.7 million for each decedent. [1] Beyond the $11.7 million, the 2021 tax rate is 40%. Building on this, there is an Unlimited Marital Deduction, which allows transfer to a spouse at any amount, free of federal tax for US citizens.
➢ Generation Skipping Transfer (GST) Tax is another element in the tax consideration of an estate. GST tax refers to the “transfer of money or property, as a gift or inheritance, to a person who is two or more generations below that of the grantor. The giving party is referred to as the "transferor" and the recipient is known as the ‘skip person’. While the skip person is often a grandchild, it could be any non-spousal family member, who's at least 37.5 years younger than the transferor.” [2]
➢ The role of gift taxes does come into play when an estate is settled, a sometimes-overlooked reality. The annual gift tax limitation is $15,000 for individuals and $30,000 for married couples annually, and any amount of your unused exemption throughout your lifetime can be applied to your estate at the time of death. “Unused” refers to the fact that exceeding the $15,000/$30,000 limitation in any year will erode your lifetime gift and estate tax exemption by the dollar amount that exceeded the exemption. The $11.7 million exemption applies to gifts and estate taxes combined—whatever exemption you use for gifting will reduce the amount you can use for the estate tax. The IRS refers to this as a “unified credit”. [3] The exemption amount is also $11.7 million, and is also taxed at 40% beyond this ceiling, similar to GST and estate tax exemption limitations.
❖ Estate planning mechanics:
➢ Establishing a revocable trust is commonly a favorable tactic in estate planning for a number of reasons; namely to avoid probate and keep your estate distribution private, omitted from public record. A revocable trust also mitigates stress for your heirs and makes the distribution of your assets straightforward and manageable.
➢ An irrevocable trust has more specific use cases, of which a predominant advantage is the ability to designate how and when your assets are distributed to decedents and remove the assets placed into the irrevocable trust from your overall taxable estate. The assets placed in the trust also are omitted from the grantor’s tax liabilities. [4]
❖ Naming an executor: A crucial aspect of estate planning is ensuring that an executor is identified, to ensure that the specifics of your plan are carried out properly. This person’s role is to gather and distribute the assets, as well as make certain that the paperwork and other administrative duties are carried out as they should be.
It is imperative to work with an estate planning attorney and tax professional to both establish a concrete estate plan as well as implement a given plan throughout the settlement of an estate. A financial advisor can also help identify gaps within a plan and work with you to devise a cohesive estate plan that considers the different variables that contribute to your overall financial picture. As an estate is settled, it is common for a financial advisor to be involved in the various meetings that take place between you and the tax professional, as well as the estate attorney due to the fact that a financial advisor will likely already be familiar with the plan and its inputs. Overall, being proactive in creating a detailed list of your assets to be included in your estate is a meaningful first step. Identifying beneficiaries and an executor, along with other agents in the form of a trust can dramatically benefit the tax implications when assets are distributed, and also keep your financial matters out of the public eye. A trust can serve as a guiding document that creates a smooth glide-path for the distribution of your assets, which in a time of loss and grief can also greatly reduce stress for your loved ones who survive you.
Disclosures & Sources:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.
1) IRS - Estate and Gift Tax, 2021, Exclusion Amount
2) Investopedia - Generation Skipping Tax - GST
3) Charles Schwab Resource Center - The Estate Tax and Lifetime Gifting
