Estate Planning: How to Keep More of Your Money

Planning what to leave heirs when a person dies is not something that can be done in one day.  Rather, estate planning requires knowledge, thought, and ongoing protection of assets in order to reach the goals of wealth distribution for future generations.

Estate Planning

Estate planning involves the process of accumulating, preserving, and distributing assets in order to achieve the financial goals of a person not only after death, but during their lifetime.  Estate planning is not one decision made one time regarding asset distribution such as a will.  Rather it is an ongoing process designed to accomplish accumulation, preservation, and distribution objectives, both during a person’s lifetime and after their passing.

Objectives of Estate Planning

There are three main objectives in estate planning that should be considered:  accumulation, preservation, and distribution.

  • Accumulation – Estate accumulation objectives involve the growth of assets and the net worth of those assets during a person’s lifetime.  By systematically channeling money into investment plans, savings, and insurance products, an individual can accrue assets over their lifetime.
  • Preservation – Estate preservation objectives comprise protection of any assets earned from working, profits, or investments during a person’s lifetime.  Due to unavoidable occurrences such as estate taxes, proper planning for this offset of estate shrinkage at a person’s death can be minimized.
  • Distribution – Estate distribution objectives deal with ascertaining and applying the tools and techniques that ultimately distribute estate assets to a person’s heirs in a strategic manner that is consistent with a person’s final wishes.

Unwanted Heirs

Many people assume that at their death, their assets are automatically distributed out to loved ones.  However, besides a person’s beloved heirs, there are a few “unwanted heirs” that also step forward.  These uninvited guests are the first ones in line to claim their share of the estate.  They can siphon off a significant portion of the total value of an estate, leaving legitimate heirs with much less.  Decreases in an estate’s net worth from taxes and costs include:

  • Federal Estate Tax
  • State Inheritance Tax
  • Estate Administrative Costs

For 2016, the official federal estate and gift tax exemption was $5.45 million per individual.  This means that the first $5.45 million is not subject to federal estate or gift taxes.  Even better, if married, that amount doubles to $10.9 million.  These amounts change yearly based on the inflation rate.  In comparison, the threshold in 2008 was only $2 million and in 2003 was $1 million.  

State inheritance taxes vary from state to state, according to taxfoundation.org, ranging from 20% to 0%.  In 2015, the state estate taxes were as follows:

  • Washington – 10% – 20% for any amount over $2.129 million
  • Maryland – 16% for any amount over $3 million
  • Vermont – 16% for any amount over $2.75 million
  • Minnesota – 10% – 16% for any amount over $1.8 million
  • Oregon – 10% – 16% for any amount over $1 million
  • Washington D.C. – 8% – 16% for any amount over $2 million
  • New York – 3.06% – 16% for any amount over $4.187 million
  • Delaware – 0.8% – 16% for any amount over $5.49 million
  • Illinois – 0.8% – 16% for any amount over $4 million
  • New Jersey – 0.8% – 16% for any amount over $2 million
  • Rhode Island – 0.8% – 16% for any amount over $1.515 million
  • Massachusetts – 0.8% – 16% for any amount over $1 million
  • Hawaii – 10% – 15.7% for any amount over $5.49 million
  • Maine – 8% – 12% for any amount over $5.49 million

All other states do not have a state estate tax, but Nebraska, Kentucky, Pennsylvania, and Iowa have state inheritance taxes with New Jersey and Maryland having both estate and inheritance taxes.

Estate administrative costs are items such as funeral expenses, probate costs, professional fees, final expenses, and debts.

Good News/Bad News

The bad news is that two things in life are unavoidable—death and taxes.  When a person passes, a portion of their estate may be siphoned off to pay federal and/or state death taxes.  Fees pertaining to administrative costs to deal with the required final expenses of an estate are also inevitable.  After all of these entities take their “piece of the pie,” what is left over is then given to a person’s heirs.  Items that are considered part of an estate include:

  • Personal property
  • Real estate
  • Business interests
  • Government benefits
  • Employer benefits
  • Life insurance

The good news is that with advanced planning, a person can make sure that more of their estate’s assets ultimately pass to their family.

Even if you do not have, or plan to have, over $5.49 million to pass on to your heirs, estate planning should still be considered.  Some of the items to include in your estate planning are:

  • Instructions for passing your values such as education, hard work, or religious practices, in addition to your assets.
  • Instructions for care if you become disabled or incapacitated before death.
  • Naming of a guardian along with an inheritance manager for any minor children.
  • Provisions for special needs family members where their government benefits will not be disrupted.
  • Provisions for heirs who may be irresponsible with money or assets and may need future protection from creditors or divorce.
  • Life insurance provisions for family members at your death.
  • Disability income insurance to supplement or replace income due to injury, illness, or long-term care insurance for an extended illness or injury.
  • Provisions for transfer of business interests at retirement or death.
  • The minimization of taxes, court costs, and legal fees.

As with all estate planning, whether a few thousand dollars or millions, this ongoing process is not a “one and done” event.  All estate plans should be reviewed periodically and updated as financial situations change.  Consultation with a financial expert is always the wisest course of action to ensure that your family ends up with the most of your estate.

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