By Mike Bergen, CIMA®
We all experience the death of friends and family members in our life. In financial planning, we often find ourselves involved in the aftermath of those deaths. If the deceased planned their estate before their death, it usually makes it easier on the survivors. Before I go any further, l want to make clear that I am not an attorney, and this column is not intended to provide legal advice. These are simply some topics to consider and to discuss with your attorney and other advisors as you craft your estate plan.
The first estate planning issue to address is creating a will. A will names an executor or personal representative for your estate. This is the person who will handle your final affairs after you’re gone. Perhaps the most important function of the will is to name a guardian for your minor children. Finally, a will also determines who gets what, although beneficiary designations on things like insurance policies and retirement accounts will generally supersede the will. It is, therefore, very important to check your beneficiary designations regularly. In addition, you should update them whenever you have a major life event, such as marriage, divorce, birth or death.
Another important estate planning issue to consider is establishing healthcare directives. Healthcare directives provide instructions to caregivers when you are unable to. Along with healthcare directives, you should consider creating powers of attorney. A durable power of attorney will appoint someone to handle your affairs like receiving income and paying expenses when you are incapacitated. A healthcare power of attorney will establish a representative to make medical decisions and communicate with caregivers when you cannot.
You may also want to consider establishing a trust. There are many different types of trusts, but one of the primary purposes is to avoid probate. Avoiding probate often means that the estate can be settled more quickly and privately. Trusts will also allow you to protect heirs who might be irresponsible with the inheritance. If you have a loved one with disabilities, a special needs trust can provide for their care after you’re gone. Trusts are a very complicated topic and one that is important to discuss with your attorney, accountant and financial planner.
One of the main purposes of estate planning has traditionally been to reduce or eliminate estate taxes. In 2022, an individual can leave $12.06 million to heirs and pay no federal estate or gift tax. Unlimited assets can pass between spouses, federal estate tax-free. If your assets are above that threshold, you can use gifting to reduce the size of your estate. An individual can give up to $16,000 in 2022, so a married couple could potentially give up to $32,000 to an individual recipient. Over the years, gifting has been a popular estate planning tool because in addition to reducing the size of your estate, you get the satisfaction of seeing the recipients enjoy the gift while you are alive instead of after you’re gone. Determine what order you want to draw down your assets based on the liquidity and taxability of each one. It is usually advisable to use taxable assets first, but it is important to discuss this with your CPA and financial planner.
Estate planning also includes making a plan for the distribution of your retirement assets, such as pensions and 401(k)s. Keep a list of former employers with whom you are entitled to retirement benefits, and make sure your family, attorney and financial planner know about these. You might want to consider consolidating IRAs to make things easier on your heirs.
While estate planning may not be the most enjoyable financial task to complete, it can make a big difference to your family after you’re gone. Some basic estate planning can save time and money, and ensure that your wishes are carried out.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Asset allocation does not ensure a profit of protect against loss.
Securities and financial planning offered through LPL Financial, a registered investment advisor.
Member FINRA/SIPC.