Estate Planning at Any Age: It’s Not Just for the Wealthy

One of the biggest estate-planning delays comes from a common misconception: that estate planning is just for the wealthy. It’s not.

It’s true that in 2019, a filing is required for estates with combined gross assets and prior taxable gifts exceeding $11.4 million (see the full IRS rule). That’s the threshold that beckons the tax man. 

But even if you don’t meet the estate tax threshold, a lack of estate planning means that after your death, your money and other possessions could sit on the sidelines while fees and court costs eat away at your assets. Bottom line: everyone should take up some degree of estate planning.

First, let’s determine just what we’re talking about. Estate planning can mean putting together everything from a will and a health care directive to life insurance, naming guardians, and figuring out who gets your cash. Even things as simple as selling your car or paying your credit cards can become a long, expensive hassle for those you leave behind.

Name Names

Your first step is determining beneficiaries (including charities) for your insurance and retirement accounts. Just remember to track, and if necessary update, your beneficiaries so you don’t end up sending a fat insurance check or a hefty IRA payout to an ex-spouse or, if the beneficiary has died, to probate court.

Your will gets reviewed by probate court, becomes public, can be legally challenged by disgruntled relatives, and generally takes more time and money than you may have banked on before it gets where you intended.

And that introduces a little irony that’s one of the first rules of estate planning: Many estate planners recommend keeping as much as possible out of your estate.

Give Now

One way to give now is to make gifts of your assets while you’re still alive. Under current law, you can give up to $15,000 annually to anyone without incurring a gift tax. If you and your spouse team up, that’s $30,000.

And rather than leaving $100,000 for a grandchild’s college education, you can make contributions to a 529 college savings plan, potentially lowering your tax bill. Keep in mind that if the child’s parents set up the plan, they qualify for the tax treatment. Only the creators of the account (whether the grandparents or any other party) get the break from Uncle Sam. Note that each child can be the beneficiary of more than one account.

You can front-load up to five years of 529 contributions in 2019—totaling $75,000 per child, per individual contributor, so $150,000 for couples filing jointly—without hitting IRS gift-tax rules. Please check individual plan rules for more details.

Under Lock and Key

Trusts are another way to potentially keep your assets away from probate and tax costs to the full extent possible. To get a tax break, though, you’ll need to keep assets in an irrevocable trust. That means you give up control but not necessarily the benefits.

One consideration is the qualified personal residence trust, where you put your home into a trust for whomever you designate. This lets you stay in the home if you pay rent. If you put the home in a trust for a family member and then pay that family member rent, you’ll be passing on additional cash outside of your estate. Consult a financial planner to determine if such a trust makes sense for your situation.

Yet another tactic is a life estate. You donate your house to a charity now but continue to live in it for the rest of your life. After your passing, the property goes to the charity, which can use it or sell it. This brings two benefits: It gives you a tax deduction while you’re alive, and it keeps the property out of your estate, reducing your estate’s taxable value.

For the Cause

Another challenge lies in balancing your family’s unknown future financial needs and your desire to benefit those charities near and dear to your heart.

One approach is a charitable remainder trust, which is tax exempt and irrevocable. The trust actually buys an insurance policy on you (and your spouse if you choose) equal to the size of your gift, naming your family members as beneficiaries. The trust pays the insurance premiums and your family gets the income from the policy. Then, after the established time period of payouts has passed, the remaining assets go to the assigned charity.

Proper Authorities

There are naturally costs associated with the setup and maintenance of all these plans. But if you end up preserving more of your estate in the long run, it could be well worth it. Start by visiting an experienced lawyer to create a will, a health care proxy, and other basics. Then move on to an experienced financial planner, insurance expert, and estate or tax attorney. This team can show you how tax shelters, trusts, and insurance can give you ideas and alternatives now (and maybe tax benefits too). They’ll help ensure your concerns are covered while keeping heirs’ tax hassles to a minimum.

More Than Just an Asset Giveaway

Hopefully, it’s clearer now that estate planning isn’t just about giving away your assets. It can also help you set goals concerning what you want financially and personally in life. And beyond that, it can give you a chance to see your heirs or favorite charities benefit from some of your assets while you’re still enjoying your own retirement.