Filing taxes often puts our financial lives under a microscope, and that’s a good thing – we take stock of where we stand financially and we can review strategic opportunities for how we take income, how we spend, and how we invest.With all of this information already out on the table, a sound next step is to shift focus to your estate plan. Tax and estate laws are constantly changing, so the planning process can be complex and you should enroll the help of professionals in each area as you get started. But there are also a few core elements of planning that have been fairly constant over the years, and we’ve assembled them into an estate planning checklist for you as a basic guide.
4 Estate Planning Tips to Help You Build a Strong Foundation for Your Plan
1) Review Your Beneficiaries Every Year – Having your beneficiaries (as well as your wills and trusts) updated regularly will ensure your assets are passed to your family as you desire. The cost of not having up-to-date beneficiaries can be steep—your assets could end up in the wrong hands, or even worse, in probate court. Some studies show that probate can cost anywhere from 2% - 5% of the assets that go through the process, which can be a huge sum of money.1 On a $5 million estate, that could mean paying up to $250,000 in fees!Tip: The beneficiaries you designate on accounts like 401(k)s and IRAs—or on policies like annuities and life insurance—typically supersede what you designate in a written will, making it ever-important to review and update your beneficiaries each year.1
2) Create a Will (and trusts, if applicable) and Update Documents Regularly – Your will is your tool for determining specifically how your assets are distributed, how your debt is settled, and who should administer the estate. You can write the will yourself, but to ensure your family avoids the courts and potential probate fees, it’s a good idea to seek legal counsel. Read our article about how Mickey Rooney’s legacy was almost muddied by unclear estate planning documents, specifically where he wanted to be laid to rest. The lesson is that specific language in your will is critical.
Tip: It could also make sense to grant Power of Attorney (POA) to a trusted member of your family. POA would typically grant that trusted person access to make decisions on your accounts on your behalf, like making trades or withdrawing cash if there is a need. Also related is power of attorney for health care, in which you give someone the authority to make health care decisions on your behalf.
3) Know the Gifting and Estate Limits - In 2015, the estate exemption amount is $5.43 million. Any assets above that amount may be subject to estate taxes, the top rate of which could mean up to a 40% tax. Gifting limits in 2015 are still $14,000 per person, such that you can give $14,000 each year to as many recipients as you like.2
Tip: Don’t forget about charitable giving, which can be another great strategy for reducing the size of your estate over time. It may potentially save tax dollars each year.
4) Talk to Your Family About Your Estate Plan – One of the better ways to ensure that your estate matters are handled the way you want is to prepare everyone involved for what to expect. That often means having a challenging conversation with your family about your plans. This is a much better alternative than having the family addressing estate issues in a courtroom.
Tip: Have your financial advisor moderate the conversation. Your financial advisor should be someone your family feels comfortable approaching, and should also be an “objective” party who knows the ins-and-outs of the plan without getting caught up in the emotional aspects of it.
Have a Wealth Manager Walk You Through the Checklist
The estate planning process can be complex, and we recommend enlisting the help of a financial advisor and estate/tax attorneys when you create and manage your plan. One of our Wealth Managers can help you get started by talking you through each element of your plan and recommending areas to look for additional help. Give us a call today at 1-800-541-7774 or contact us here and one of our Wealth Managers can help answer your questions.
Sources:
1. Fidelity
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice, either expressed or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
