Estate planning can seem a bit overwhelming, but it can really be boiled down to some basic objectives, many of them important to high earning attorneys:
- Basic estate planning: The MOST important part of the estate plan is to make sure your Will, healthcare power of attorney, and financial power of attorney are up to date. Have you had children since it was created? Have you been divorced? Has your executor or someone listed in your will passed away? Review these documents to be sure that they match your current goals and objectives. It may also make sense to have a revocable trust to eliminate probate. Read my article, 4 Reasons You Should Consider a Revocable Trust to know what it does and doesn’t do.
- Advanced estate planning strategies: Once someone has a taxable federal estate ($5,430,000 for an individual or $10,860,000 for a married couple in 2015), it may make sense to use more advanced estate planning strategies to remove assets or the growth of assets outside of the estate. One example of these strategies is a Grantor Retained Annuity Trust (GRAT) which removes all of the growth of assets from an estate (in excess of an interest rate provided by the IRS). Strategies like this can remove hundreds-of-thousands or millions of dollars from a taxable estate. Check out my GRAT Guide to learn more.
- Irrevocable life insurance trust (ILIT): Often times, the proceeds from a life insurance policy will bring a family over the estate tax limit, either at the federal or state level. Moving the policy into an ILIT removes the assets from the estate and may save your heirs hundreds-of-thousands of dollars in estate tax. If you already have an ILIT, make sure premiums are paid from a trust account to make sure the IRS does not move the assets backs into the estate.
- Philanthropy: For those charitably inclined, the retirement assets should be the first assets earmarked for charities. The charity will receive 100% of the assets while individual beneficiaries will only receive the after-tax amount. For example, you can leave $100,000 to your children within your IRA. The funds will be moved to an inherited IRA upon your passing and they will distribute the funds over their lifetime. They will pay ordinary income tax on all distributions so they will not receive the full amount. In comparison, assets left to a charity would leave the entire amount to the organization. If you have philanthropic goals upon your passing, make sure you think about what assets will go to charity to make sure the charity and your heirs receive the largest amount possible (and the IRS receives the least!).
- Annual gifts to family members: The easiest way to reduce assets from a taxable estate is to make an annual gift to family members in the amount of the annual exclusion provided by the IRS ($14,000 per person in 2015). A married couple can give $28,000 to each one of their children and grandchildren. Gifts can be made directly to the individual or in trust.
Estate planning can be a bit overwhelming, but it doesn’t need to be. Start with these basics and make sure to keep your plan current – it’s important to make sure your family is taken care of! Next, take the time to review some of these other strategies that may allow you to maximize the amount of assets that will eventually go to your heirs or charities you wish to support.