Southwest Florida's Health and Wellness Magazine Health and Wellness Articles
By Adam Day, CFP®, RICP®, CFT-I™ – Senior Wealth Advisor
Estate planning is a process of protecting your assets and transferring them to your beneficiaries in an efficient and tax-saving manner.
Planning for what happens after you pass away can also include intangibles, such as key-values you want to imprint on the next generation. The bottom line is you should have a plan in place for all of it.
Last month we shared the basics and the importance of getting this plan started, including powers of attorney, the living wills, and ensuring all beneficiaries are adequately updated; this could also mean a trust.
However, there are many situations that could warrant a larger, more involved estate plan, like when an individual’s net worth and future estate lies above the federal estate tax exclusion; the federal estate tax exclusion is the amount below which your estate is not subject to taxes when you pass away, adjusted for inflation each year. In 2023, the amount per person is $12.92 million, and the current exclusion was doubled under the Tax Cuts and Jobs Act (TCJA) and is set to expire in 2026. Unless Congress extends or changes it, the exclusion will revert back to $5 million (adjusted for inflation) after 2026.
Things to think about for High-Net-Worth Estate Planning
If you have a high net worth, estate planning can be more complex and challenging. This is usually where a trust comes into plan. Trusts are legal entities that can hold assets for the benefit of certain beneficiaries. Trusts can offer many advantages for high-net-worth individuals, such as asset protection, privacy, control, flexibility, and tax savings. If you’ll recall, there are two main types of trusts:
• Revocable Trust: A revocable trust is a trust that can be changed or revoked at any time by the person who created it (the grantor). A revocable trust allows the grantor to retain control over the assets in the trust and avoid probate (the legal process of settling an estate). However, a revocable trust does not provide protection from creditors or estate taxes, as the assets are still considered part of the grantor’s estate. A revocable trust becomes irrevocable upon the death of the grantor.
• Irrevocable Trust: An irrevocable trust is a trust that cannot be changed or revoked once created without the consent of all beneficiaries (the people who will receive the assets in the trust). An irrevocable trust transfers ownership of the assets to the trust, meaning they are no longer part of the grantor’s estate. This can provide benefits such as asset protection, estate tax reduction, and charitable giving. However, an irrevocable trust also means that the grantor loses control over and access to the assets in the trust.
One of the main goals of estate planning is to minimize taxes, such as state tax, gift tax, generation-skipping tax, inheritance tax, and income tax, that can affect the value of your estate. An irrevocable trust is often used in one of its many forms to help with tax planning. Here are a few examples to help with tax planning within estates:
• Spousal Lifetime Access Trust (SLAT): A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse and potentially other family members. The grantor spouse uses their gift tax exemption to make a gift to the SLAT for the benefit of their beneficiary spouse. The beneficiary spouse can access the trust assets during their lifetime, while preserving them for future generations. A SLAT can also be used to fund life insurance policies that may provide liquidity and protection for the estate. Keep in mind, a SLAT also has some risks and limitations to be aware of before creating one.
• Grantor Retained Annuity Trust (GRAT). It is an irrevocable trust that allows you to transfer assets to your beneficiaries while retaining an annuity payment for a fixed term. The annuity payment is based on an IRS interest rate (Section 7520 rate). If you survive the term and the assets appreciate more than the Section 7520 rate, then your beneficiaries will receive the excess value free of gift or estate tax. A GRAT can be a powerful tool to transfer wealth to your heirs with minimal tax consequences.
Estate planning is not always about giving to family members. Many legacies include charitable giving and planning. Charitable giving through an estate is a great way to maximize your generosity; it is also another way of reducing your taxable estate while supporting those causes that you care about. With the proper planning, you can make charitable contributions during your lifetime or at death, enjoy possible income tax deductions as well as estate tax savings, and even have an income stream that pays you or your beneficiaries. Here’s a few examples of some of these tools:
• Establishing a donor advised fund: as mentioned in a previous article, a donor advised fund is a great way to create flexibility around your giving. In terms of estate planning it allows you to name a beneficiary of your fund so that the giving will continue after you pass away.
• Using life insurance or a charitable gift rider: You can name a charity as a beneficiary of your life insurance policy or add a charitable gift rider to your policy, allowing you to make a substantial gift with relatively small premiums and receive an income tax deduction for your contributions.
• Charitable Remainder Trust (CRT): A CRT is an irrevocable trust that pays you, or your beneficiaries, an income stream for life or a term of years, then distributes the remaining assets to one or more charities of your choice. A CRT can provide income tax deductions, capital gains tax deferral, estate tax reduction, and philanthropic satisfaction.
• Contributing a charitable rollover from your IRA: If you are 70½ or older using a QCD, you can transfer money directly from your IRA to a qualified charity without paying income tax on the distribution; or name a charity as a beneficiary.
As you can see, estate planning can get to be complex and every situation is unique and requires careful analysis and planning. It’s so important to consult with an experienced estate planning attorney, financial planner, and tax professionals to help you design a customized plan that suits your needs and goals. Email Adam at aday@wqcorp.com with your questions or to set up an initial conversation.
Want to learn more?
Email me at aday@wqcorp.com with questions and be on the lookout for next month’s article as we dive into more complex topics.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Not legal or tax advice. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. Wealthquest Corporation is an SEC registered investment adviser with its principal place of business in the State of Ohio. Registration does not imply a certain level of skill or training. For more information about Wealthquest, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov/ or contact us at 513-530-9700.
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