The term “estate planning” conjures specific ideas about leaving assets to heirs, fighting over Mom’s jewelry and lengthy entanglements with the probate court. While all of those things may come to pass, a good estate plan strives to avoid those outcomes and also works proactively during the planner’s lifetime to protect assets. The manner of distribution established by your estate plan is irrelevant if none of your assets are left at death.
Holistic estate planning is aimed at planning for assets at death but, more important, planning for assets during your lifetime. The word “estate” simply means everything you have accumulated, saved and invested. Therefore, “estate planning” means having a plan for all your “stuff.” A sound plan requires input from professionals across multiple practice areas to ensure that nothing is missed and no unintended consequences negatively impact you.
For example, if your attorney recommends a course of action without understanding the tax implications, you may find yourself with a much larger tax bill than you expected. If your financial planner neglects to properly set up your required minimum distributions (RMDs) on your IRA, you will be assessed a costly penalty.
How many professionals should be involved in preparing your holistic estate plan? Two? Three? We say five. The five professionals that should have input in your estate plan to give you the most peace of mind possible under the current laws and regulations are: an attorney, financial adviser, tax professional, health care expert and insurance agent. These five individuals represent the five most significant risk areas in your retirement years.
Legal estate planning
The foundation of any good estate plan is the legal plan. Estate planning attorneys counsel on options regarding important documents that protect your legal rights and enforce your wishes. They also can educate you on how to protect your assets in the event of issues like lawsuits, divorce or long-term care.
Other specialized issues that an estate planning attorney should address in your estate plan are spendthrift concerns, meaning beneficiaries would likely lose most or all of their inheritance quickly if they inherit a lump sum. This could be because they spend frivolously but could also mean they are the recipient of benefits that would be lost in the event they have too much money.
Other spendthrift issues are children who are divorcing and may lose a portion to a future ex-spouse, beneficiaries who have outstanding IRS tax bills or loved ones struggling with addiction.
Because estate plans need to evolve over time as circumstances and laws change, it is important to build a plan that anticipates future occurrences and builds flexibility. Your attorney should be able to educate you on ways you can retain the right to amend any documents you put in place as well as how to build the proper contingencies.
An example of a solid estate plan would include a health care power of attorney, living will, durable power of attorney, a last will and testament, and possibly a trust. Powers of attorney allow for a designated representative to handle your affairs and make decisions on your behalf if you are incapacitated. A living will establishes your final wishes regarding life support, which alleviates your loved ones from being burdened with that decision. A last will and testament establishes a final distribution plan and appoints the person responsible for carrying that out. Finally, a trust is a tool that can establish distributions over time to any spendthrift beneficiaries, avoid probate and protect assets from risks like taxes and long-term care spenddown.
Financial estate planning
The legal plan is the foundation of a good estate plan, but the financial plan is the showpiece we build on top. The legal plan gives us the confidence to be as bold as we choose to be with the financial plan. A sound financial plan is designed to provide confidence that we will not outlive our money while being able to accomplish our goals.
Your financial professional should be able to adapt the advice they give you as your phase of life changes. While you are still working, the goal is often to grow the money as much as possible within your chosen risk level. However, once you retire, the goal typically changes to protecting what you have accumulated. The change in goals requires a synchronistic change in approach. How much your money is at risk should decrease as you age because you have less time to wait for the market to recover.
Estate planning with a financial planner involves evaluating lifetime income, including the loss of some of that income when the first spouse dies. It also involves balancing how much money is invested in the market vs. how much is invested in tools that reduce your risk. While most of the professionals we are discussing cannot use words like “guarantee,” the financial plan may include certain “guarantees” so that you will know you will not run out of money.
We have all heard the saying, “Don’t put all of your eggs in one basket,” and that is true of a sound financial estate plan. Diversifying your estate to include a variety of investments, such as stocks, bonds, life insurance, annuities, CDs or any variety of other tools can allow you to build, not just any structure on your foundation, but the home of your dreams.
Tax estate planning
The last few years have seen some sweeping changes to the tax laws, which have had a dramatic impact on estate planning. As our colleague Larry Hendrickson of G&H Financial Group likes to say, “If you’ve been doing your own taxes, it’s time to fire your accountant.” Never has it been more important to have a professional giving you tax advice.
The SECURE Act of 2019 and the SECURE 2.0 Act have dramatically changed the way beneficiaries will benefit from your efforts and the legacy you have built. Now is the time to learn your options for the how, when and who of paying the taxes on all qualified retirement accounts. Does it make more sense for you to pay some or all the taxes now? Should you do a Roth conversion or move assets into a trust? How will the children be impacted if you leave the full tax bomb for them to dismantle? The answers to those questions of course require the financial planner and the attorney to weigh in to understand the full picture.
The IRS also just quietly eliminated the step-up in basis on inherited property that passes outside of probate. Prior to March 2023, beneficiaries who inherited property through an irrevocable trust would take ownership of that property at current fair market value, not at the cost basis of what the grantor of the trust originally paid for the property, thereby eliminating capital gains taxes.
With Rev. Rul. 2023-2, the IRS stated that such property is now inherited at current fair market value, making the beneficiaries responsible for those capital gains taxes after all. The alternative is to allow the property to pass through the probate process, thereby subjecting the asset to creditors’ claims, legal fees, court costs and other maintenance during the 13 months, on average, it takes to finalize the probate process.
Because tax laws are changing dramatically, it is critical you consult a tax professional regarding the options in your estate plan.
Health care estate planning
Statistically, most senior bankruptcies are due to health care-related costs. Input regarding Medicare coverage and options, as well as long-term care options, will go a long way toward having peace of mind about long-term care. We strive to eliminate talking about what we “hope” a plan will achieve and implement tools we know will cover the cost of the health care that is a natural part of aging.
You must always be mindful in estate planning of how your income can impact your Medicare premiums. Health care estate plans factor in out-of-pocket costs, co-pays and, of course, what happens if you or your spouse should need assisted living or skilled nursing care. Some solutions to these concerns come from the financial or legal plan, which again exemplifies the need for multiple professionals to work together on your overall estate plan.
Insurance estate planning
Insurance planning is one of the easiest and cheapest aspects of planning, but it can have the single biggest financial impact. Not being properly insured on your property and vehicles can leave you exposed to damage claims more than your policy limits, which would then expose your personal assets to foreclosure and loss. This is particularly true regarding umbrella policies.
For instance, imagine having a worker at your home, cleaning the gutters, who trips and falls from your roof, resulting in permanent spinal damage. They sue you and receive a judgment of $797,000 for lost lifetime wages and health. Your homeowner’s policy covers you for $300,000 per incident, so the remaining $497,000 could end up coming from your personal assets.
If you had purchased an umbrella policy, then the additional amount would have been covered by that policy. Given you can buy $1 million of umbrella coverage, often for less than $200 per year, it is almost negligent not to have it.
A qualified insurance professional can review all your liabilities with you and discover where you may need additional coverage. Although unlikely, all it takes is one bad accident to wipe you out. When the cost is so high and the solution so cheap, it is a must.
Beyond basic liability coverage is having your health care plans correctly evaluated and adjusted. Many people are not aware of the costs Medicare does not cover and can be surprised to find themselves still owing thousands in medical bills every year. Picking the right plan for them can help reduce these costs significantly.
Estate planning is one of those areas that we tend to put off until something happens. One reason is that we don’t want to think about it, or maybe we can’t even imagine something happening to us or our loved ones. But another reason is that many of us believe all we need is a simple will or to go ahead and transfer assets to our children now.
However, the changing landscape of taxes, health care and financial legislation is making simple planning a thing of the past. Gone are the days of doing things on the honor code or a handshake. Everything must be meticulously planned and documented, or your loved ones will undoubtedly be left with a mess and very little to show for their efforts in cleaning it up.
Sound, holistic estate planning will allow you to build the kind of legacy that generations to come may enjoy.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.