Formulating an Estate Plan with Minimal Taxes and Fees

Holidays are right around the corner, and soon families will be sharing meals and exchanging gifts across multiple generations. These gatherings prompt many to evaluate the status of their estate and their family’s broader legacy. It’s all too easy to procrastinate on estate planning decisions with the reasoning that there is ample time to take action down the road. The truth is that we never know how much time we have left.

Estate planning is the process of deciding for yourself, ahead of time, what you want to happen in the event of an untimely death, disability or health emergency. As the popular saying goes, you can’t take it (wealth) with you when you die. When it comes to what you’ll leave behind, there are basically three options for who will receive it: individual heirs, charities or Uncle Sam. Without comprehensive estate planning, you could inadvertently be naming the IRS or a creditor as your primary beneficiary.

Passing Your Legacy to the Next Generation

Estate planning is about more than just passing your assets on to the next generation. Estate planning gives you an opportunity to pass your legacy and values on to the next generation. Customizing the inheritances for your beneficiaries allows you to set goals for them and use your assets for motivation to achieve those goals, while still providing them for their health, education, and maintenance in reasonable comfort. If you have a sizeable estate or are worried your heirs won’t be wise with your money, you will be able to appoint a trustee to distribute your wealth in accordance with the terms of the trust. In addition to incorporating your family values into your estate plan, trusts can also provide strong asset protection of the funds for your children.

The appropriate estate planning strategies for your situation will depend on your objectives, state of residence, assets and several other factors. Effective estate planning will account for tax considerations and asset protection objectives to ensure that it is cohesive with the rest of your financial plan.

Physician Financial Advisor

Complex strategies and constantly-evolving estate tax law can make the process of formulating an estate plan seem daunting. However, cutting corners or procrastinating can be a costly mistake for you and your heirs. In times of grief, one of the best possible parting gifts you can leave your loved ones is the sense of security that comes with having a well thought-out estate plan.

Minimizing Estate Planning Taxes

There are some assets that can pass to your beneficiaries without a Will or a Trust. Some accounts such as retirement funds, annuities and life insurance policies let owners name beneficiaries for that particular asset. These beneficiary designations are a non-probate transfer, meaning they avoid the court, but the values of these accounts are still part of your taxable estate. Specialized trusts to remove these assets from your taxable estate are part of a comprehensive estate plan, and will serve to minimize the estate tax impact on the beneficiaries.

If you have a Revocable Living Trust as part of your estate plan, it may be the beneficiary or owner of any of the types of accounts listed above, so all of your assets will be distributed according to those customized distribution patterns.

It is recommended that you review your estate plan after any major life changes such as marriage, disability, the birth or adoption of children, divorce, the serious illness of a beneficiary, or a substantial increase or decrease in the size of your estate.

The funds in your 401(k) or traditional IRA will be subject to income tax unless it is passed to a spouse, or “stretched out” using special provisions in a trust. You can avoid leaving your beneficiaries with that tax bill by gradually converting traditional IRA accounts to Roth IRA accounts that have tax-free distributions. Since the amount converted will be taxable on your income taxes, the goal is to limit each year’s conversion so that you don’t cross over into a higher tax bracket.

Finally, one of the best ways to ensure your money stays in the family is simply to give it to heirs while you’re still alive. The IRS allows individuals to give up to $14,000 per person per year in gifts tax-free. If you’re worried about your estate being taxable, these gifts can bring its value down. Another way to reduce your estate value is through charitable contributions during your life, which can also be tax deductible, or through using charitable trusts. Certain charitable trusts allow you to retain an income stream from the assets you remove from your estate, and at death the money passes to the charity you choose.

Minimizing Estate Planning Costs

Many have attempted to draft their own estate planning documents with the help of software or a website. However, drafting wills and other estate planning documents without the oversight of an attorney can lead to mistakes that will be costly down the road. When seeking the advice of an attorney, remember that the cheapest option isn’t always the best. A skilled estate planning attorney may charge a higher price, but end up saving you money in the long run.

Make an effort to be prepared and decisive when meeting with an estate planning attorney. Before your first meeting, ask your attorney what documents and information you need to bring to your meeting. Similar to the way you might ask a patient the same questions from visit to visit, an attorney might repeatedly inquire about your financial situation to stay aware of changing circumstances. Keeping your physician financial advisor in the loop is also a good idea, so the attorney and financial advisor can coordinate your estate, retirement, and investment planning. The less time your attorney needs to spend gathering information, the less money you’ll ultimately end up spending.

Have Questions?

This article has been provided for informational purposes only and is not intended to be, nor should it be considered legal advice. Consult an appropriate legal professional regarding current laws and application to your particular situation. You should not make any decisions about any legal matter without first consulting with an attorney. This article is not intended to create, and receipt does not constitute an attorney-client relationship.