Estate planning

What is estate planning?

In its simplest terms, estate planning is the process of taking control of your assets. An estate plan is a set of instructions that spell out the way property should be managed during life and distributed at death. Estate planning offers a number of benefits. For example, an estate plan can help you:

  • Avoid conflict. The way assets pass to family members or other heirs can be complex. Clear documentation of your decisions concerning the distribution of assets can help avoid conflicts by minimizing the sting of unfulfilled expectations while ensuring that plans steer clear of unintended consequences.
  • Expedite settlement. By providing executors and administrators with a blueprint of expectations, you can considerably reduce the time required for estate settlement.
  • Shrink expenses. Written directives ensure efficient estate transfer, which can minimize expenses, conserve estate assets, and provide for an orderly distribution of the estate.
  • Execute philanthropic goals. Comprehensive estate planning allows for the fulfillment of charitable intentions when you plan to distribute assets to personally meaningful charities.

Take action

Despite the important benefits that accompany an estate plan, many still hesitate to take action. Why?

  • Little time. Everyone is busy these days, but we never know what tomorrow will bring, so it’s important not to procrastinate.
  • Unwanted difficulty. Estate planning doesn’t have to be complex—even basic steps can have a big impact.
  • A touchy subject. It’s not easy to think about death, much less plan for it, but the true focus of estate planning is taking care of ourselves today and our loved ones in the future.
  • Modest assets. Estate planning is not just for the wealthy.

Five reasons why estate planning is important

There are many reasons to make or revise an estate plan. Let’s look at the most obvious.

  1. The federal estate tax. Today, most estates avoid the federal estate tax since the exemption amount (the amount not subject to tax) is $13.61 million. For those subject to tax, the top marginal tax rate is a punitive 40 percent. An effective plan can ensure maximum protection from this tax.
  2. State inheritance and estate taxes. While an estate used to receive a credit on its federal return for estate taxes paid to a state, now only a deduction is available. Many states impose an estate and/or inheritance tax on residents, so in some locations, state taxes can be a significant planning consideration.
  3. Linked gift and estate tax exemptions. Lifetime gifts are linked to the estate. This means taxable gifts made during life are added to the estate to calculate the exemption amount. Giving assets during life rather than through a will at death has its advantages—mainly, taxpayers benefit from an $18,000 annual exclusion. This means a person can give up to $18,000 to any number of individuals every year without tax consequences ($36,000 if a gift is split with a spouse).
  4. Portability. An attractive provision in the estate tax law provides full portability of one spouse’s unused exemption amount to the surviving spouse. For example, if a husband leaves everything to his wife and uses no part of his exemption, he leaves his wife his entire $13.61 million exemption amount. She can add his exemption to her own exemption for estate planning purposes, sheltering $27.22 million—but only if the executor files a federal estate tax return for the husband’s estate and requests
  5. Tax-wise giving. In addition to providing for the orderly disposition of assets, comprehensive estate planning ensures that an individual can meet important charitable intentions. Beyond benefiting society, philanthropy—combined with income tax strategies and wealth management—can be a powerful means of realizing estate planning goals. From simple, revocable gifts to complex charitable strategies, estate giving benefits society while ensuring that individuals and their families can take advantage of tax-wise planning options.

Potential problems when you don’t have a will

  • Your spouse may not receive all the assets you intended. Without a will, a formula in state law determines asset distribution.
  • A court will appoint an administrator—it may not be someone you know and trust.
  • There will likely be higher fees and a possible loss of estate.
  • You cannot plan for special needs or unique circumstances.
  • You cannot distribute specific assets to specific people.
  • You cannot distribute gifts to charities that are meaningful to you.
  • Without identified heirs, assets could be lost to the state.