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 2018, a filing is required for estates with combined gross assets and prior taxable gifts exceeding $5.6 million (see the full IRS rule). That’s the threshold that beckons the tax man. While tax reform is under debate in Congress and changes to the estate tax are possible, it's still uncertain how that might play out. For now, that $5.6 million figure represents the valid level for planning purposes.
While that might sound like a lot, even if you don't meet the estate tax threshold, lack of 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.
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 say keep as much as possible out of your estate.
One option 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 starting in 2018, up from the previous $14,000. 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 when the grandparents (or any other party for that matter) create the account do they get the break from Uncle Sam. Note that each child can be the beneficiary on more than one account.
You can front-load up to five years of 529 contributions—totaling $70,000 per child in 2017, per individual contributor (that doubles to $140,000 if you are a married couple filing jointly)—without hitting IRS gift-tax rules. And for 2018, these totals will increase to $75,000 per child, per individual, so $150,000 for couples filing jointly. Please check individual plan rules for more details.
Under Lock and Key
Trusts are another way you may be able to 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, 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, lowering 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 like) 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.
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 you make sure 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.
Estate Planning Basics and More
Our Financial Consultants can get your estate plans on track. Try our tutorial on the topic: it covers trusts, probate, and more.