It’s important to have an estate plan in place—regardless of your wealth and the size of your estate.
Many folks believe they don’t need an estate plan because they have limited assets and only one or two heirs. They might think, “Why should I pay an attorney for something I don’t need,” or procrastinate because they don’t know what they want. Or perhaps they think: “There’s always tomorrow.”
At the very least, providing clear, written guidance to your loved ones on what to do in your absence is a chance to ensure your contributions toward a family legacy and your community continue in the manner you wish. The benefits of having an estate plan filter into other areas as well.
Taking care of family
Providing for your immediate family is perhaps the most important reason for having an estate plan. This is particularly important if you have children under 18, because a will specifies who will be their guardian should something happen to you. Without a will to follow, a court decides who will raise your children.
Even with no children, you may have other family members—parents, siblings, or even pets—who are unable to care for themselves or need help to care for themselves. There are specific ways you can provide for them through your estate plan, but the courts may direct your assets elsewhere if there isn’t a plan in place. Your assets are also susceptible to what’s known as laughing heirs, who are blood relatives minimally related to you and happy to laugh all the way to the bank with your assets.
Make your wishes clear
Another important benefit of good estate planning: It eases the strain on your family.
When you have an estate plan in place, your family members know and understand your intentions, alleviating the need for them to make hard decisions during an already difficult time. Clearly spelling out your wishes may also keep family from fighting over assets when you aren’t around to play referee. We’ve seen family members who were on good terms prior to the death of a loved one end up not speaking to each other because they all had different ideas of what the deceased wanted to do with their assets, whether cash or a sentimental object. Confusion, anger, and heartache could be avoided with an estate plan prepared ahead of time.
Start with a will
If you don’t spell out your wishes with clear instructions, this could result in the improper administration of your estate—a costly and frustrating scenario. A will is a good starting point for any estate plan, no matter the shape or size.
A will provides direction on where your assets should go. There are also ways to transfer your property to heirs outside of a will. Insurance, retirement plans, trusts, and certain other assets for which you completed a beneficiary designation form can pass directly to your named beneficiary.
Good estate planning involves more than just a will, however. For example, you can also plan for your own incapacity by establishing a person or persons of authority who can make financial and health care decisions for you. In addition, proper planning can protect your estate from shrinking due to taxes, unnecessary legal fees, or excessive administration expenses. This leaves more of your estate assets to your chosen beneficiaries, including charities.
You can allocate part of your estate to your favorite charity or charities. Beyond helping to achieve a certain goal, such as establishing a scholarship, there are ways to make charitable gifts that can result in reduced estate taxes—an outright gift made through your will is the most straightforward method. An estate planner can help you develop and implement these goals in a tax-efficient manner, especially as your estate becomes more complex.
If you have an IRA or other retirement or tax-deferred account, you may want to consider gifting all or a portion to charity. If left to your heirs, the distributions from those accounts will be taxable to your heirs as income. In contrast, not only are charities not taxed on the income, but your estate will receive a dollar-for-dollar deduction against the taxable estate for estate tax purposes.
Here’s an example:
If you leave a $100,000 IRA to your nephew, he’ll owe income taxes on the distributions he takes from that inherited IRA. At a minimum, he has to take an annual required distribution based on the value of the account and his age. However, most heirs end up withdrawing the full amount right away, which can push them into a higher tax bracket. Let’s say this pushes your nephew from the 25 percent bracket to the 33 percent bracket. The IRS will receive $33,000 of your $100,000, while only $67,000 will go to your nephew.
If you leave that same $100,000 to a charity, it can liquidate the IRA and spend the full $100,000 on its mission. You could then gift a different asset to your nephew instead of the IRA, such as a $100,000 taxable investment account; he would likely pay no taxes at all if he liquidates the assets soon after your death.
If you want to make a charitable gift and need additional income now, a charitable gift annuity (CGA) may be a good option. A CGA provides a stream of income and generally pays higher interest rates than certificates of deposit (CDs), around 6.8 percent for a single 80-year-old donor. Any principal remaining when the annuitant passes away goes to support the charity.
For those with larger estates, a charitable trust can help reduce estate taxes. They can also allow you to maintain some control over funds after you’re gone.
Life insurance and other options
Life insurance is another estate planning tool that, when used correctly, can improve the efficiency of your estate plan. A life insurance policy can provide assets for your heirs when you’ve given an IRA to charity or set up a charitable trust or annuity. It may also be used to provide enough cash to pay estate taxes or to help equalize gifts made to beneficiaries.
There are many other tools estate planners use that may fit your specific estate plan—from a variety of trusts to 529 accounts for the education expenses of children and grandchildren. Business succession planning should also be addressed as part of the estate plan, including the succession of both ownership and management, as it may not always be the same person or group of people. A good estate planner can help you determine which of these strategies might be appropriate for you. A directory of estate planning attorneys can be found on the Estate Planning Council of Seattle’s website.
It’s never too early to start your estate plan. Once you do have one in place, be sure to review it at least every five years and update it when there are significant life changes. These might include divorce, the death of a loved one, a marriage, or the birth of a child or grandchild. And while it might feel daunting, it’s important to include funeral and memorial instructions as well as passwords to access your social media accounts and digital assets.
Contributors Kathryn Garrison and Kelli Anderson are affiliated with the Estate Planning Council of Seattle.
Kathryn is a senior financial advisor with Moss Adams Wealth Advisors LLC who advises organizations on their investment strategies and prepares personalized financial plans and wealth strategies for executives and high net worth individuals. She can be reached at 206-302-6752 or firstname.lastname@example.org.
Kelli is an attorney and senior manager with Moss Adams LLP who has been in public accounting since 2007. She specializes in estates, gifts, trusts, and high net worth individuals. She can be reached at 206-302-6763 or email@example.com.