Reflections

Five Rules of Estate Planning

Save yourself large amounts of stress and money with these five estate planning guidelines.

keyProper estate planning can save your family large amounts of stress – and money – when they are at their most vulnerable. Yet it’s not something that most clients want to talk about. Thinking about death is uncomfortable for anyone and facing the reality could mean conquering some emotional demons. Even worse, estate planning often seems complicated and unwieldy.

Still, taking care of your estate now means that you can rest easy while knowing you’ll be prepared for whatever happens. Read below to see the Five Rules of Estate Planning.

1.   Create a Trust

Some people assume that unless you have a sizeable estate, it’s not necessary to hire a lawyer to create a will. But an experienced attorney can create a bullet-proof will that won’t get held up in court. They can also draft Powers of Attorney for Property and Health Care. Last, they can understand your situation and explain how other planning techniques might save you time and money, such as creating a Trust.

Creating a trust allows grantors to have more control over what their heirs can do with the money and how they receive it. This can be especially important should something happen to you and your heirs are too young to take responsibility for the assets. A trust can have specific rules, so your heirs don’t receive their inheritance all at once or they can only use them for specific reasons, such as college tuition or medical needs.

By creating a trust you can also transfer property without going through probate court or exposing your assets to public record. An estate attorney can usually create a basic will for a few hundred dollars, and will charge a little more if you need a trust. The cost you pay to create and maintain a trust will likely be far less than the fees that can pile up should assets need to go through a lengthy probate process. It also makes for a simpler and more expedited process for your survivors to handle.

2.   Buy the Right Amount of Life Insurance

Life insurance is critical for anyone who has dependents and not enough assets to provide for them indefinitely. If the answer to the question what keeps you up at night is, “What will happen to my children when I’m gone?,” then buying the right amount of life insurance is likely your best solution.

Think of insurance as an expense, not as an investment. Your savings and investments should be your main tools to reaching goals, such as retirement and education. Insurance needs are simply to do one job: replace an economic loss. Fortunately, the right kind of insurance at the right amount is not that expensive. Term insurance, which lasts for only a set period, such as 15 or 20 years (until the dependents you are worried about can take care of themselves), is by far the least expensive and typically most appropriate form of protection.

So how much insurance is right for you? First, you need to calculate the economic loss you are replacing. Then aim for a death benefit large enough to replace that economic loss with earnings from investments. Let’s say your salary is $75,000. At minimum, your insurance benefit should be large enough to provide $75,000 annually if it was invested in a diversified portfolio. The total benefit amount will vary based on the length of time needed until your dependents can take care of themselves and your expected investment return.

3.   Plan for Estate Taxes

Individual estates above $5.45 million are subject to estate tax. In 2012, tax law changes made “portability” of the individual estate tax exemption permanent, meaning a surviving spouse can carry over any unused portion of their deceased spouse’s $5.45 million exemption. Adding the two individual exemptions together, this means that a couple’s estate is not subject to estate tax as long as it is below $10.9 million.

To benefit from the full $10.9 million estate tax exemption, it is required that a surviving spouse timely file a federal estate tax return, known as “Form 706” for short.  Form 706 is due on or before nine months after the deceased spouse’s date of death.

Republicans have long called for a repeal of Federal estate taxes, and with their party now in control of government, all eyes are on potential legislation to eliminate the estate and gift tax in 2017. The reality is that repeal is not certain, leaving the world of estate planning under a cloud of uncertainty. For now, it remains desirable to shift assets out of the estate to avoid future taxes.

The most common strategy is to utilize the annual gift exemption, currently at $14,000 for individuals and $28,000 for married couples. An annual gifting strategy, compounded over many years, can remove incredibly meaningful sums from a taxable estate. Consider gifting appreciated assets as well, allowing you to avoid capital gains tax on investments that might otherwise be sold during your lifetime.

4.   Protect Your Business

Entrepreneurs have a unique set of estate planning needs that can unfortunately be catastrophic to their legacy and their business if left unaddressed. Loss of business value, litigation, material dissipation of assets, and tax-inefficiency are all risks that can be avoided with good planning. The following are a few ways you can protect your business.

Buy-Sell Agreement. The first step to creating a solid business continuity plan is drafting a buy-sell agreement. The buy-sell agreement creates an obligation for a pre-selected buyer to purchase ownership interests, based on trigger events. In effect, it provides a self-created exit strategy. Not only can buy-sell agreements name potential buyers, it can pre-determine valuation methods to be applied at the time of purchase, avoiding potential disagreements and litigation.

Asset protection. The most well-written estate planning documents are meaningless if a business owner has been sued and lost all their estate assets prior to death. Asset protection vehicles – S corps, LLCs, Limited Partnerships – prevent a creditor of your company to claim your personal assets. As businesses grow, it is often beneficial to create multiple asset protection entities, such as a separate entity to hold a firm’s real estate and another for the operating company. In this scenario, real estate assets would be protected against a lawsuit against the operating company.

Succession Planning. Not planning for business succession can lead to ruin of wealth that an entrepreneur worked so hard to create. Successor directors and a contingency plan can be named in documents to avoid disorder. In the event of an owner’s disability,a Limited Power of Attorney for Business Decisions can ensure that the best individual steps in to keep the firm running.   The more general and commonly held Power of Attorney likely leaves a spouse or other individual unrelated to the business with decision-making responsibilities.

5.   Talk to Your Heirs

After you’ve created your estate plan, talk to your family about how they will be affected by it. Your estate plan may clearly define which tangible assets will be passed on to the next generation, but to develop a lasting legacy you need to start a conversation with your family members about what’s really going on behind the money.

You can start simple by explaining how the will or trust works, so they don’t have to hear it from an attorney first. This might be uncomfortable, but having an honest conversation now instead of worrying if everyone will get along after you’re gone can provide great relief.

Estate planning isn’t something only the wealthy need to do. No matter the state of your assets, planning for the future can help you make better choices and help your heirs even more.

Windgate does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources as of 6/30/2017; however, its accuracy, completeness, or reliability cannot be guaranteed.

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