Estate Planning Basics – Your Family Will Thank You

by and | Apr 20, 2023 | Estate Planning

The term “estate planning” may bring angst and hesitation to some, but hopefully this brief write-up will encourage you to start the process. It is a lot simpler to get started than you might think!

There are many reasons why families delay important planning related to their affairs and financial matters. Our purpose is not to focus on those reasons. Instead, we want to enlighten you that the process can be manageable and beneficial for your heirs.

One of the first things to note about estate planning is that it includes a wide array of topics. Most notably, it applies to many families, regardless of their wealth or the complexity of their financial situation.

Tax managers

The Basic Basics

Having a current and updated will is one of the most important aspects of estate planning. A properly drafted will helps ensure your assets end up with whom you intended. Another major aspect of a properly drafted will is it allows you to take advantage of the maximum lifetime estate and gift tax exemption at the time of your death (more on that below).

Other relevant documents to prepare include a durable power of attorney (financial and medical) and medical directives. You should also review your beneficiary designations for all your retirement accounts.

The basics can be handled after discussions among your family and a consultation with an estate attorney. Beneficiaries can be updated by contacting the applicable plan (e.g., 401k, IRA) custodians.  Then your affairs will be in order!

The Intermediate Basics

Everyone has likely heard of wealthy families having to pay estate tax upon their death.  The key here is what defines “wealthy” these days?  Currently, as of 2023, if your individual adjusted taxable estate is under $12.92 million, you will not owe any estate tax upon your death. This approximate $13 million figure is referred to as the lifetime estate and gift tax exemption.

You may see this figure and think, that makes it easy for me – my net worth is well under that figure – I have nothing to worry about. Not so quick!  Under current law, this lifetime exemption is scheduled to be reduced to approximately $6.8 million in 2026. Presumably, this exemption figure will subject many more families to estate tax.

So, what can you do? The goal is to keep your lifestyle as is, while potentially reducing any estate tax many years down the road. Believe it or not, if you apply a growth rate of 6% to your assets, they will double in about 12 years. Keep this in mind when you think the estate tax may not apply to you.

Let’s take an example of an estate currently worth $5 million. Under the mathematical premise mentioned above, this will grow to $10 million in 12 years and $20 million in 24 years. That’s not a long time considering current life expectancy. Imagine the figures if you are younger – the numbers only compound more!

The other takeaway from this example is to note that the lifetime exemption is currently indexed for inflation. Granted, inflation has been high in the recent past, but a more reasonable figure would be to use a 3% annual inflation rate. Therefore, for purposes of this example, the lifetime estate and gift tax exemption will be about $13.4 million in 24 years.

Yes, we know there are a lot of numbers flying around, but we are reaching the most important point. Under this example, and without the completion of any effective estate planning, the taxpayer would owe about $2.3 million in estate tax upon their death. The current estate tax rate is 40%.

On the other hand, with some nominal estate planning there is the potential to save about $1.1 million in estate tax. By properly gifting $1 million to your heirs today, these transferred assets can grow outside of your estate.  It should be pointed out the $1 million of assets being gifted (transferred) is still in the family. It is simply no longer in your estate and not subject to estate tax upon your passing.

Although almost any type of asset can be used for gifting purposes, you want to transfer assets that have the highest likelihood of appreciation.

There are a few things to note on this example. For one, it is an incredibly oversimplified example. However, keep in mind that the very basic benefits outlined here can easily be magnified to be much more meaningful.

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In Closing

No more numbers!  We encourage you to make the time for estate planning – whether it be simple or more involved. Our team can help you get started. The discussions we have together can provide additional details and comfort in completing your estate planning journey. Your family will be grateful.

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