Estate Planning: 6 Steps to Securing Your Loved Ones’ Future

How do you ensure the financial stability of your loved ones once you are no longer with them? In this post, we’ll discuss the steps you can take now to safeguard the wealth you’ve created, protect against risks, and leave a legacy that will be remembered for generations to come.  

Appoint the Right Decision Makers 

Any time you begin planning for the time after you are gone, appointing the right person or group of people to carry out your wishes is necessary. Whether it is a trusted family member, friend, or a combination, you will want to make sure this position is filled with those who have your best interests at heart. This role has many titles, including executor, personal representative, or potentially trustee(if you’ve established a trust).

While in theory the person carrying out your wishes is simply following your directions, it’s usually not quite so simple. There are lots of little decisions to make after someone passes away, and almost all of them carry a lot of emotions with them. Be mindful of who you are placing in this capacity and how they will handle the responsibility of ensuring your estate wishes are followed.  

Risk Management 

Risks come in all shapes and sizes. While insurance can be a common way to transfer some risk, not all risks can be insured. One such risk people don’t consider when setting up their estate plan is the liquidity of their estate when they pass. For instance, if someone passes away with a sizable real estate portfolio, there may not be any immediately available cash to pay for final expenses. If a property cannot be sold in time, the estate may have to take on short term debt to pay for the expenses. One such way to protect against liquidity risk is through life insurance. While the most common use for life insurance is to protect against loss of income, it is also a very effective tool to protect against liquidity risk.  

Another risk to keep in mind is creditor risk. If the estate owner with unpaid liabilities passes away without the proper documents or creditor protections in place, assets of the estate(and potentially what would be going to heirs) are at risk of being lost to creditors.  

Lastly, a lack of clearly defined beneficiaries can create claims against the estate for those who might deem themselves the rightful beneficiary. This can arise in the case of blended families, multiple marriages/children, or even extended family. A qualified estate attorney can provide the best advice on how to structure beneficiary or trust arrangements to make sure the estate’s assets are distributed according to the estate owner’s wishes.  

Awareness of Tax Implications 

Taxes are always a topic of consideration when it comes to estate planning. While estate tax is one of the highest taxes in our current tax code, the majority of people won’t reach the currently high federal estate tax exemption. If this is the case with you, the more common tax strategies you might consider are; 1) state estate tax and 2) cost basis step up.

Usually at lower asset levels than federal estate tax, state estate tax can be a more common occurrence. If you are in a state that has an estate tax, preparing now can be very valuable for future planning. Currently, those of us in the Rocky Mountain region in Montana, Wyoming and Utah don’t have to worry about state estate tax. However those further west in Oregon and Washington do have state estate tax.

Second, a tax advantage that may be encountered for estate owners is the step up in cost basis. For most individual, joint, or revocable trust accounts, a step up in cost basis to the decedent’s date of death occurs when the owner passes. This newly stepped up basis then transfers to the heirs just as if it were originally purchased on the decedent’s date of death. This can be very favorable for investments that have been held for many years with a low basis. These assets can then be sold by the heirs with little or no tax implication to fund other goals, or to reinvest in other areas.  

Leaving the Right Assets to the Right Heirs 

Many of those with a sizable estate may consider bequeathing money to a favorite charity upon their passing. However, many people don’t realize the tax implications of gifting out of different types of accounts. If tax-deferred money such as an IRA or 401k is gifted to an individual, that money will become taxable to the heirs upon distribution. However, since charities are tax exempt, gifting money from tax-deferred accounts can be one of the most tax-efficient ways to give to charity as there are no tax implications for the charity. There are also many other strategies that can be utilized when deciding what and to whom assets should be left.  

Deciding If It’s Best to Give Now or Later 

In conjunction with giving the right assets to the right people, deciding when to give is also an important consideration. There is a saying, “it’s better to give with a warm hand than a cold one.” If you are considering giving, you most likely enjoy seeing the emotional results and reaction of those you are giving to, not just the financial benefits. In this case, it may be worthwhile considering taking advantage of lifetime gifts in order to enjoy these benefits while you are able to see them for yourself. Consider anyone who may have a need that you could substantially help, or someone who you know would be especially grateful for such a gift. As it stands today, the annual gift tax exclusion is $18,000 per person.

Simplification vs. Complexity 

A final step that someone can take during the estate planning process is to simplify as much of his or her estate as possible. Two common actions that can be taken are 1) asset consolidation and 2) using will substitutes. For people with accounts spread out at multiple locations, consolidating similar account types at one firm or location can greatly help heirs to manage the distribution process. This can also include rolling over funds from qualified retirement plans into IRAs or consolidating bank accounts at one bank.  

Secondly, even if someone has taken the time to set up a trust or other estate planning vehicle, oftentimes will substitutes can be an equally effective, yet simpler strategy. The most common will substitutes are TOD(Transfer on Death), POD(Payable on Death), or a joint account with rights of survivorship(WROS). The beneficiary designation simply needs to be made with the custodian holding the assets, and they will then be distributed to the beneficiaries on file without having to consult any estate or trust documents.

Ultimately, a solid estate plan can involve a lot of moving parts, but being intentional about improving the overall process for heirs can leave a much better inheritance experience for future generations. Just like it is with investing, a lot of little, good changes over time will yield fruitful results.  

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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.