Pay Attention to the Details Now to Prevent Chaos Later
When Pablo Picasso died, he did so having failed to ever draft a will. Many of his paintings were used to settle a huge tax bill to France, via transfer to the Musée Picasso in Paris. The rest were fought over by his illegitimate son, Claude, and his five siblings. It took over six years and $30 million paid to lawyers and appraisers to settle the estate.
The actor James Gandolfini (aka Tony Soprano) died in 2013 of a heart attack in Rome, leaving 80 percent of his $70 million estate to his sisters and baby daughter. Since his estate plan was will-based and went through probate, every detail was available for public scrutiny. Poor estate planning forced almost $40 million to be paid to the IRS in estate taxes. More than half of his hard-earned fortune will never reach the intended heirs.
Finally, most have heard about the bizarre drama surrounding the estate of Major League Baseball legend Ted Williams. At the time of his death in 2002, he had one will that said his body should be cremated and another that directed he be cryogenically frozen. A fight amongst his children soon ensued, eventually leading to his head being severed. Now, the head and body of the greatest slugger of all time are frozen in Arizona at Alcor Life Extension Foundation. ABC News has reported that his severed head is kept in a pot, separate from his body.
Most Americans do not identify as mega-wealthy or relate to public icons, but almost everyone has assets and people, organizations or causes about which they care. They don’t want to leave chaos in their wake or think that much of what they worked for will go to taxes that could be avoided. The good news is that infamous errors like the ones just described can be prevented with professional, thoughtful estate planning.
Do You Have an Estate Planning Blind Spot?
At FourThought Private Wealth we strive to answer two essential questions for our clients: “Am I going to be okay?” and, “Do I have any financial planning blind spots?” Estate planning and the efficient transfer of assets to loved ones is a common blind spot.
In a survey conducted in 2019 by Caring.com, it was discovered that 57 percent of U.S. adults do not currently have estate planning documents such as a will or living trust—even though 76 percent consider it important. The study asked 1,003 adults whether they currently have estate planning documents in case of their death, as well as the reason why not. The top four were “I just haven’t gotten around to it,” (50%), “I don’t have enough assets to leave” (22%), “I don’t know how” (6%) and it’s too expensive (6%).
In our practice we don’t see a high percentage of clients without estate plans, but we do see many estate planning mistakes—outdated approaches, technicalities or seemingly minor oversights that can wreak havoc later. Like James Gandolfini or Ted Williams.
We work with our clients to focus intently on the details of their estate plans, but a review always begins with a reminder of the big picture.
Why Estate Planning is Important
- Providing support and financial stability to your spouse. There are dozens of scenarios in which this can fail to happen. For instance, what if most of your income is from your pension? Will that income disappear when you do?
- Preserving assets for future generations. Although there is a spectrum of philosophies about inherited wealth, most people want to ensure that their assets eventually wind up in the hands of the people they care about and that the inheritance is used wisely, not squandered.
- Supporting a favorite charity or cause. Careful planning can ensure that at least some of your assets are used to further a cause that is important to you, creating a lasting legacy of philanthropic giving.
- Ensuring all of your assets will be distributed according to your wishes. Who do you want to have your wedding ring? Your home? Your precious heirlooms? There are likely many possibilities, but if you fail to specify it may cause turmoil.
- Minimizing taxes and expenses. You probably worked hard for what you have, so it would be a shame for an unnecessarily large portion to go to taxes. This is a major focus of estate planning, and it typically takes professional expertise to ensure your estate documents are written in a way that protects you and your assets.
- Ensuring that individuals you choose can make decisions on your behalf in the event of incapacity. Your estate documents aren’t only about your wishes after you pass away. It’s important to leave directions in the event you are alive, but unable to manage your affairs.
Maximizing What You Leave Behind
The goal of our estate planning and reviews is to maximize what our clients leave behind, so they can enjoy the confidence of knowing that they can do good, even after their lives are over. That might mean educating children or grandchildren, helping friends and loved ones or making a meaningful gift to a favorite philanthropy. This requires detailed planning, sometimes difficult decision-making, and close attention to several legal, financial and tax issues.
Minimizing Estate, Inheritance, and Gift Taxes
A big part of maximizing what you leave behind is minimizing taxes. Federal taxes on gifts and estates can be among the highest assessed on any financial transaction. In addition, some states levy their own estate or inheritance taxes.
Both estate and gift taxes usually have exemption limits, meaning you can give up to a certain amount without incurring tax. Many people use the gift tax exemption to transfer assets while they are still living as part of their strategy to maximize what their beneficiaries receive.
Estate and inheritance taxes usually are based on the value of the taxable estate and are paid before the assets are distributed to the beneficiaries.
Tax Advantaged Gift Strategies While You are Alive
One strategy you may choose to use is giving your loved ones or charities gifts from your estate while you are alive. There are several approaches, including:
- Giving an unlimited amount to your spouse tax-free
- Giving any number of people up to $15,000 a year in 2021 (or $30,000 for a married couple)
- Paying for tuition or medical expenses, as long as you make payments directly to the medical provider or educational institution. You can transfer an unlimited amount in this manner.
- Donating an unlimited amount of your assets to qualified charities. A donor-advised fund is a tax-efficient vehicle to donate your appreciated stock and receive a below-the-line tax deduction for the full amount donated (up to 30% of your AGI).
- Contributing to a Section 529 college savings plan. You can make a contribution of up to five years of annual exclusion gifts ($75,000 single and $150,000 married). (An important note – if you contribute the full five-year exclusion, you cannot make any additional annual exclusion gifts to the same person for that give-year period.)
Trusts aren’t just for the wealthy. It is important to analyze the pros and cons of trusts versus other types of estate documents such as simple wills. Trusts can serve many important purposes, such as:
- Protecting assets from beneficiaries’ creditors
- Protecting premarital assets from division between divorcing spouses
- Managing unique assets that are not easily divisible, e.g. vacation homes, pets, recreational vehicles, mineral interests, timber and commercial real estate
- Managing closely held business assets for planned business succession
- Holding life insurance policies, paying premiums and collecting the tax-free proceeds to care for beneficiaries, funding closely held stock redemptions or purchases, and providing liquidity to the estate
- Providing a mechanism for charitable gifting that can reduce income taxes and benefit the grantor as well as his or her spouse and their children
- Providing structured income to a surviving spouse that protects trust assets for descendants if the spouse remarries
- Reducing income taxes or sheltering assets from estate and transfer taxes
The terms of the trust can be tailored to satisfy your goals and any concerns you have, while still meeting the needs of your beneficiaries.
Special Situations and Considerations
Just as no two people are alike, neither are their financial affairs. Many people have unique situations that should be addressed in their estate planning. These can be more “blind spots” that our planners help identify. They might include:
Business succession planning. Do you own a company or a stake in one? Who will take over that stake, how will that look, and what role will they play in the company?
Beneficiary education. Are your heirs prepared for your gifts? Do they have enough financial education to understand their newfound assets? What steps can you take to help ensure your gift benefits them in the long term?
Special needs beneficiaries. If you have a beneficiary who is a young child or has special needs, you must put extra thought into protecting their inheritance. A revocable trust specifies what will happen to your property at your death and directs what portion of your estate should go to your child. Because Medicaid and the Supplemental Security Income (SSI) programs impose special rules about how much money a person with disabilities can have to remain eligible, your estate plan may also include a special needs trusts (SNT), which can ensure quality life for the child without affecting Medicaid and SSI payments.
Important Documents and Designations
Will: The most common estate planning document. A will lets you direct how your assets should be administered, to whom – and under what circumstances – your assets should be distributed, and who should manage your assets after your death.
Durable Power of Attorney (POA): An arrangement for someone else to handle your financial affairs if you are no longer willing or able to do so,
Health Care Surrogate: Enables a trusted family member or friend to make decisions about your medical care if you are unable to do so.
Living Will (Advanced Medical Directive): Provides instructions to the physician on the types of life-sustaining treatment you do or do not want if you are unable to communicate those decisions yourself.
IRA Beneficiary: The person who will receive the proceeds of any IRAs upon your passing.
Transfer on Death (TOD): A designation in your taxable investment and bank accounts that allows beneficiaries receive assets at the time of the person’s death outside of probate. This designation also lets the account holder or security owner specify the percentage of assets each beneficiary receives, which simplifies the asset distribution process after death.
FourThought Private Wealth is owned by FourThought Financial, LLC (FFLLC) is an SEC-registered investment advisor. For information pertaining to FFLLC please contact FourThought Private Wealth or refer to the SEC’s website,www.adviserinfo.sec.gov. This presentation is provided for informational purposes, not as personal investment advice. This presentation may contain certain forward-looking statements which indicate future possibilities. Any hypothetical example is intended for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of the process and the methodology. Any reference to a market index is included for illustrative purposes. It should not be assumed that your account performance will correspond directly to any benchmark index. There is no guarantee views and opinions expressed herein will come to pass. Past performance is no guarantee of future results.