Dear Clients and Friends,
In this issue of The Financierge, we are going to provide a refresher on some estate planning basics, talk about the impact the 2020 elections could have on tax and estate planning, and offer some proactive planning steps you might want to consider before the end of the year.
This has certainly been a chaotic year. Think about all the stress from the pandemic, social unrest, the volatility of world economies and markets, and now the uncertainty of the upcoming elections. Recently, I saw an Instagram video of a massive dumpster fire speeding down a river. The video had a simple caption – 2020! Holy smokes, what a year! I know we are all a little worn out, but I truly believe that in the middle of chaos there is always opportunity. So, let’s see what we can find.
Estate Planning Basics
Estate planning should be done the moment you have property, and remember, it can easily be updated as your family and assets change. Essentially, estate planning is a collection of legal documents that describe how you want your assets to be distributed to your heirs, and how you want your health and financial decisions handled if you cannot do so for yourself. As a refresher, I want to talk about four important areas: the benefits of estate planning, how we help in the planning process, common estate planning documents, and how your estate is taxed.
The Benefits of Estate Planning
In my experience, people who have an estate plan are more satisfied and confident about the future. They know that their loved ones will be taken care of, the legacy they leave behind is the one they want, and there is a multigenerational firm to take care of the family in the future. A properly designed estate plan will also protect assets and minimize expenses and taxes. As an advocate for preparing heirs to inherit their wealth, one of my favorite benefits is when a client creates a legacy video for their children and grandchildren. In this process, they can chronicle their story, share affirmations and blessings to their family, and provide loved ones with their life lessons and hopes for the future.
How We Help in the Estate Planning Process
As in any business, the combination of quality people, strong processes, and up-to-date technology drives success. We employ this formula in our estate planning process.
First, we begin with the Discovery Phase, where we ask questions, listen, and gather information about your goals for your family, wealth, business, and so on. Next, in the Analysis Phase, we collaborate with you and your team to analyze your current situation, explore options, and create a customized estate planning strategy. Then, in the Implementation Phase, we work with you, your estate planning attorney, CPA, and other identified resources to prioritize and implement your plan. And finally, in the Maintenance Phase, we manage on-going tasks, track changes to your goals and family, and ensure your plan is working effectively.
Common Estate Planning Documents
At the conclusion of the estate planning process, you will generally have seven types of legal documents that act as a “playbook” for your estate game plan. These documents include:
- A Will names an executor to administer the distribution of your assets according to your wishes.
- A Revocable Trust holds your assets for your benefit while you are alive and names the people who will receive the property when you are gone. These trusts are private, simply probate, and reduce cost and time. However, revocable trusts have zero tax and assets protection benefits.
- A Durable Power of Attorney appoints a trusted agent to act on your behalf for financial and legal matters.
- A Healthcare Power of Attorney appoints a trusted agent to make medical decisions for you when you no longer can, automatically giving that person access to your medical records.
- A Living Will expresses end-of-life care wishes, such as pain relief and life support.
- A Personal Property Memorandum allows you to gift personal property such as furniture, jewelry, artwork, and other items not covered in your will.
- An Irrevocable Trust is used to reduce taxes and protect assets. Common trusts include Spousal Lifetime Access Trust, Charitable Remainder Trust, Irrevocable Life Insurance Trust and a Dynasty Trust.
How Your Estate is Taxed
Can you imagine working hard and paying taxes your whole life, and then when you are gone 40% of your estate is given away for estate taxes? No wonder estate and tax planning are such big areas of opportunity. Let’s look at estate and gift taxes further.
First, there is a Federal Estate Tax of 40% that is imposed on the value of your taxable estate minus your “exemption” amount at death. For 2020, your “exemption” amount is $11.58 million per person. This exemption is scheduled to sunset at the end of 2025. Next, there is also a Federal Gift Tax of 40% that is imposed on gifts you’ve given over your “exemption” amount. There is also a Federal Generation-Skipping Transfer Tax of 40% that is imposed if you transfer assets to a beneficiary two or more generations away from you. And if that’s not bad enough, there could be additional taxes as several states have their own estate, inheritance and gift taxes.
The Impact the 2020 Elections May Have on Estate and Tax Planning
Depending on which party wins the elections, there could be several big tax changes. A victory by the Republicans will likely keep or lower taxes, and the estate and gift tax exemption of $11.58 million per person will remain intact. If the Democrats win, there will likely be higher taxes for ordinary income, Social Security, capital gains, qualified dividends, and corporate taxes. In addition, itemized deductions and the estate and gift tax exemption may be reduced, along with the elimination of certain estate planning techniques, the step-up in cost basis at death, and the 1031 like-kind exchange.
Proactive Estate & Tax Planning
As a result of these potential changes, here are several estate and tax planning opportunities you might want to consider this year to take advantage of lower tax rates:
- Increase Taxable Income in 2020 by accelerating income, converting to a Roth IRA, and/or delaying deductions and expenses until 2021.
- Sell or Donate Appreciated Property now or donate assets to charity.
- Use Your $11.58 million exemption (per person) outright, or in trust.
- Contribute Non-Taxable Gifts to beneficiaries up to $15,000 per recipient. If you welcomed a new child or grandchild this year, you can front-load a 529 college savings plan with the equivalent of five years in annual gifts, or $75,000 ($150,000 per couple). You can also give an unlimited amount directly to healthcare or educational institutions on behalf of anyone.
- Meet with your Estate Planning Team to discuss other advanced estate, tax and charitable planning strategies.
The Bottom Line
Estate and tax planning are critical components of multigenerational wealth management. A well-designed plan ensures your wealth is distributed according to your wishes, your assets are protected, and your taxes minimized. With the potential financial implications resulting from the upcoming election, now is a good time to proactively meet to discuss your estate and tax plan.
Please reach out if you have any questions at firstname.lastname@example.org.
Thank you for your time and may you and your family be blessed with health, prosperity, and wisdom.
Warm and best regards,
Don B. Saulic, CPA, CFP®
Managing Director, Partner