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26 May 2024

Three Levels of Estate Planning


May 26, 2024

Everyone needs an estate plan. For some, the stakes are higher than others.

From the couple that just had their first child, to the business owner whose assets at death may exceed the estate tax exemption limit (set to halve in 2026), the time to get your affairs in order is now!

We guide our clients through the estate planning process, and sometimes, help manage the engagement with an estate planning attorney. Our role is to connect what we know about their wealth and their values to the various techniques for ensuring that their wishes are fulfilled when they pass.

Who will take care of our dog if the Boeing goes down on our anniversary trip? Will people fight over my assets? Will the family vacation home have to be sold to pay estate taxes, or is there a way to cut out Uncle Sam? What philanthropic legacy do I want to leave?

The comprehensive planning work we have already done with our clients is a crucial input when they begin working with an estate planning attorney. Also, your advisor is a keeper of the wealth inventory that will make things easier for the executor of your estate when the time comes.

Let’s divide estate planning into three levels, according to what different clients might want to accomplish.

Level 1: I want my intentions carried out

Anyone with a pulse and some assets should make their wishes as clear as possible to their heirs and the courts.

Parents must go through the morbid exercise of determining who should care for their children in the event of their untimely passing.

Dying without a will is dying intestate. Each state has its own laws for dealing with such estates. The legal process of sorting through your assets is costly and rife with delays. And the state’s laws of succession may not align with your intentions. Get a will.

Other basic estate planning documents include living wills, durable powers of attorney and health care proxies.

Along with executing these important documents, Level 1 estate plans should make sure investment accounts and insurance remain up-to-date with primary and contingent beneficiaries. You may consider retitling individually-owned accounts to ones owned jointly or transfer-on-death, with a spouse or other beneficiary. These designations supersede the directives of a will and pass the assets along with much less delay if the beneficiaries or co-owners are alive.

Once an initial estate plan is complete, we recommend revisiting it about every five years to ensure everything still aligns.

If wealth has grown in amount and complexity, it may be time to graduate to a level 2 estate plan.

Level 2: I want to avoid probate

Even if you die with a will, the courts still have a role in the execution of your estate.

Certain assets will avoid probate – the process by which the courts take inventory of your estate and dole out wealth according to the provisions of your will. Those are: investment accounts and life insurance policies with a living named beneficiary and assets that are titled jointly with a surviving co-owner.

Everything else will have to go through the probate process before being allocated to your heirs.

Those with more significant assets and complex situations may wish to make things easier and faster for their heirs to take control of the wealth.

This is where revocable trusts come in. You may wish to place assets like real estate, high-value collectibles, bank accounts, and investment accounts into a trust that remains under your control until you die.

With a trust as opposed to a will, you can get a lot more prescriptive about how you want the assets passed along – perhaps minor children only a receive a stipend for their care and education until they reach a certain age, at which point they’ll receive the rest of the assets – which, in the meantime, will be invested under the care of a trustee.

Assets in a revocable trust remain in the estate of the grantor. Those who believe they have more wealth than they’ll ever need may wish to get assets out of their estate before they die to avoid or minimize estate taxes.

They need a Level 3 estate plan.

Level 3: I want to side-step estate tax

Thanks to the 2017 Tax Cuts and Jobs act, the estate tax exemption limit is abnormally high right now, at over $27 million for a married couple. In 2026, this amount is set to halve, exposing more estates to taxation. As such, there’s a bit of a mad rush to engage with estate planning attorneys.

There are dozens of strategies to consider if your goal is to minimize estate taxes. Getting into the details would turn this newsletter into a book, but here are the two broadest strokes steps in the process:

  1. Determine how much wealth you really need between now and when you die.
  2. Get the rest into irrevocable trusts, and therefore out of your estate.

A good wealth advisor can help you accomplish step one by taking inventory of your current wealth, lifestyle, and values, doing some math, and thinking through what options to consider. Then, we can quarterback the engagement with an estate planning attorney and insurance specialists to take the plan across the finish line.

Getting these assets out now confers two benefits:

  1. You’ll take advantage of the abnormally high lifetime gift tax exemption limit (which matches the estate tax exemption limit) before it halves, and
  2. It shifts the future growth of your wealth out of your estate as well. Depending on the time horizon, the associated tax savings could be truly gargantuan.

Write your own epilogue

We believe everyone should approach their estate plan with the utmost intentionality. It matters a lot what legacy your wealth will leave. Thinking about your death is never enjoyable. But to take care of those we love, it is a crucial exercise.

Some people are content to pay estate taxes, reasonable in their belief that their immediate heirs will still inherit plenty. We’d encourage them to think more creatively and broadly about who can benefit from their wealth besides the tax man.

For example, there are so many non-profits out there doing incredible work that align with your values. There are so many other people besides your own children whose lives would be changed if they were included in a program of annual tax-exempt gifts, which could reduce your ultimate taxable estate without carving into your lifetime gift tax exemption limit.

This is your life’s work. Write the epilogue chapter yourself. Don’t let it be ghostwritten for you.

It just takes a little planning, which we are here to help with.