I’ve heard it said that estate planning is a process some people avoid, because they link its completion to somehow accelerating their own demise or other uncomfortable events.
I’m not superstitious myself, but I do understand an element of that sentiment. Very few of us are comfortable with contemplating our own mortality or the effect it may have on our family members. At the same time, nobody wants their loved ones to be stuck with a “mess” due to a poorly planned or unplanned estate.
With that in mind, here are six critical estate planning tasks to consider:
1. Conduct an Annual Beneficiary Review:
Wills don’t govern who inherits certain assets, such as funds held in tax-deferred retirement accounts (401(k) plans, IRAs or Roth accounts). That’s why you need to formally name primary (and possibly contingent) beneficiaries. Further, you should also review these beneficiaries every year for potential revision, especially if you experience life events like marriage, the birth of a child, divorce or the death of a loved one.
It’s also important to review any life insurance policies, especially after divorce.
We’ve encountered many situations where a new client is surprised to find that his or her ex-spouse is still listed as the (unintended) named beneficiary on their insurance policy.
2. Prepare a Will:
Some people feel they don’t need a will, especially those who are younger or have a “simple” financial situation. But what they might not realize is that everyone, at all stages of life, can benefit from having a will in place. For instance, a will can help you formally name a guardian for your minor children in the event that you or your spouse passes away or becomes incapacitated.
Additionally, wills are particularly important for people who have personal items (such as jewelry or any kind of collection) that are meaningful or valuable to them or their loved ones. It may also be a good idea to get these items appraised every few years and have an open, honest discussion with your family ahead of time to ensure everyone is onboard with the plan. In some cases, transferring these assets to your loved ones during your lifetime might be financially advantageous (more on this later) and can also prevent confusion or conflict down the road.
3. Complete Advance Directives and Other Control Delegations:
These documents allow other trusted family members to step in and help make decisions if you cannot. It’s not a fun outcome to envision, but it’s important to address. Advance directives may include health care directives and/or living wills, which specify your wishes or to whom you wish to delegate decision-making responsibilities. Also, medical release-of-information forms and durable powers of attorney empower others to have access to records and/or act on your behalf to make financial decisions if you are unable.
Fifteen U.S. states (including my home state of Minnesota) currently impose an estate or inheritance tax, in addition to the federal estate tax. For the sake of length, I won’t go into an in-depth explanation of how these taxes work or who might be affected; however, it’s important to note that almost all state estate/inheritance taxes can impact families with much smaller estate sizes than those who are only affected by the federal estate tax system.
4. Take Advantage of the Annual Gift Tax Exclusion:
Related to tip number two, you should also consider gifting financial assets to your family members using the annual gift tax exclusion limits. Making gifts during your lifetime can favorably reduce the size of your future estate (and therefore, how much estate tax might be owed), compared to a scenario in which you keep those assets instead.
In 2015, you can make gifts of up to $14,000 per year (this limit is periodically increased under federal tax law) without triggering a gift tax, which is related to the federal estate tax I mentioned above. For those with a larger net worth, such gifting can result in a gradual, appreciable decrease in the size of their eventual taxable estate. For example, if you have three children, you can make gifts of up to $14,000 to each of them (assuming you have the means and desire to do so), under the exclusion limits. If your children are married, you can also gift that amount to each of their spouses. And if you are married, your spouse can also gift the same amount. That’s a potential estate reduction of $168,000 in one year alone — which could save you thousands of dollars in future estate taxes.
5. Consider Life Insurance Coverage:
Life insurance can help ensure that your estate/heirs have cash available to pay future estate taxes. If you follow this strategy, you or your spouse should consider forgoing personal ownership of the policy. If you do own the policy, the death benefit proceeds will be included in your (or your spouse’s) eventual estate, which in turn could increase the taxes owed by the estate.
On the other hand, if the policy is owned under an Irrevocable Life Insurance Trust (ILIT) — which is created to benefit your heirs — then those policy proceeds will not be included in your estate and no additional estate taxes would be created. The ILIT will collect the money from the insurance company in the future, and your heirs can benefit from those funds. Moreover, you can personally make annual exclusion gifts to the ILIT each year, so the trust has funds available to pay premiums to the life insurance company.
There are many important details involved in this strategy, so be sure to enlist the help of your attorney and financial advisor when making arrangements — which brings me to my last point…
6. Huddle With Your Experienced Advisory Team:
Ensure that all of your professional advisors — including your attorney, financial advisor and certified public accountant (CPA) — are brought up-to-speed, and are knowledgeable and competent to help advise you about these estate planning issues. Make sure that they are well-informed about your family goals, understand how your estate planning documents can help you achieve them and actually receive copies (paper or electronic) of your various estate planning documents, including any revisions that are made to them.
It is a good idea to re-engage with your advisors every three to six years to ensure that your estate plan is still current with tax laws, family changes and other financial/life circumstances. They can also help with other ideas and options, so you know your plan is still consistent with your desired outcomes, which may in fact change over time.
Lastly, do not “put off” estate planning, even if you think that your wishes or circumstances might be different in five, 10 or 20 years (this is the “why put ourselves through this process if it will all change anyway” syndrome). Most of the items and strategies discussed above can be modified (though be sure you understand which, if any, strategies are irrevocable). Once you’ve taken these steps, you will likely sleep better knowing that you’ve prudently addressed these issues for your family’s sake down the road.