Commonly we find that individuals believe that estate planning is only for the super-wealthy—that they need only be concerned with estate planning if their net worth is greater than the IRS estate exemption amount.
As of January 2018, the IRS estate exemption amount was increased to $11,180,000 per person. This amount was further adjusted and increased for inflation as of January 2019 to $11,400,000. Simplistically, this means estates valued above this level are subject to the federal estate tax (40%!), while estates below this level are distributed to heirs tax-free.
With this in mind, it could lead a lot of clients to believe that they don’t need a plan; their estate will never be taxable, so why bother with anything more than a simple will? Or worse yet, why even bother with a will when everything will pass to their spouse or their children anyway? But will it?
Why You Need an Estate Plan
Estate planning is your best way of communicating to your heirs after you are no longer able. It is not necessarily a tax planning strategy. Depending on your desires, it can mean that you are providing for multiple future generations, or it can mean that you are providing for specific needs of your spouse or children. It can also mean that you are sharing your wealth with various charitable organizations. These decisions can also have tax implications, most of which can be planned around as needed. But generally, we don’t like to see “the tax-tail wag the estate-planning dog.” We believe that the two goals of tax and estate planning should work hand-in-hand, not one leading the other, to fulfill your goals.
“Shirtsleeves to shirtsleeves in three generations” is a much-used proverb in the wealth management industry to describe the pattern of generational wealth. As the Scottish say, “The father builds, the son sells and the grandson begs.” Think about it. This means that the greatest “threat” to your wealth is not taxes. It’s your heirs. Careful estate planning can potentially avoid wealth being mismanaged or squandered. Having said that, people differ in the ways they think about wealth and the generations to come. We find that some of our clients meticulously approach their planning and try to make provisions for every eventuality. Some clients don’t give it a lot of thought, assuming that the next generation will “figure it out.” Frank Bragg tells a story of an older client with a very large estate who vehemently refused to create an estate plan which would save his heirs a lot of money. He told his advisors, “No fancy planning for me…I want it to be an absolute disaster when I die!”
There is no one “right” estate plan for all people. The beautiful (and complex) part of estate planning is that it is entirely flexible and customizable to your unique situation. You can tailor your plan to match your specific objectives—including passing along your values in addition to your wealth—for generations beyond your death, if that is your desire.
As advisors, we want to help you think proactively about your “long game”—to grow, preserve, and transfer wealth for future generations or charity—and less about your “short game”—saving taxes. If you are successful with your long game, you will likely also be successful with your short game.
We believe that the best estate plan is not just a legally drafted will but a full set of legal documents (including a will) that not only includes the instructions regarding whom you want to receive property, what you want them to receive, and when they can receive it but also:
Knowing how to incorporate these instructions in your plan might seem daunting, but fortunately your advisors can help you find appropriate solutions to accommodate your desires. Your main task is being able to articulate those desires. Thought of another way, there are basic questions which you (and therefore your estate plan) should be able to answer:
I know it can bring up uncomfortable emotions to think about your own death or be daunting to think about the answers to these questions. Talk to your advisors who can help you chip away at these questions. We encourage you to think about one piece at a time. Answer the “easy” (for you) questions first. Complete at least a first draft of your documents and know that you can (and should) go back to revise the documents once you have more clarity on the answers to the more difficult questions. A quick review of the intestacy laws (what happens by law if you don’t have a will) should reveal to you that having something in writing is better than nothing; I don’t know anyone who would choose to pass their assets in the exact way that they would pass under the laws of intestacy.
Even the best plan must be reviewed and updated periodically as needed as your family and financial situation (and laws) change over time. Review your existing estate plan every three to five years, whenever a major life event occurs, or when the tax laws change.
Above all, be sure to communicate and share your plans with a family member or friend, so they know where to start when you are gone. Take a look at Debbie Taylor’s One Last Gift for a simple checklist you can include in your plan for survivors. And for an additional resource, Lynn Araujo wrote a wonderful article titled Estate Planning 101. I would encourage you to re-read her article and then consider this a refresher (or, Estate Planning 102).
At Bragg we work with clients who have sticking points in their estate plan. We find that, as a disinterested third party, we are really good at helping individuals and families work through these sticking points. We are also happy to help you have meaningful conversations about your estate and financial affairs with your loved ones. Just give us a call. We would love to see you.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.