The Three Steps to Estate Planning

The Three Steps to Estate Planning

As complex as it can be, there are three steps to estate planning:

1. Accumulate Assets
2. Determine What Will Be Done With The Assets
3. Determine How Assets Will Transfer

Let’s discuss them each, in turn.

Accumulate Assets:

Asset accumulation includes many things. Of course there is earning income and saving a portion of your income. Then there are things like buying real estate, including your home. Other types of assets include stocks, bonds, and other market instruments. For accredited investors, a variety of private placements are an option. And now, due to equity crowdfunding, some of these higher risk/higher return investments are available to a wider variety of people.

A primary asset, and key source of wealth for many people, is a business. If you own all or a portion of a business, this is a very significant asset that must be included in your estate planning. An often overlooked asset type, is life insurance. We’ll discuss what we mean by that later in the article. Keep in mind that it is best to plan how your assets will be used in the future, as you accumulate. Waiting until you are “all set” financially, is a strategy for failure.

Determine what will be done with the assets:

A great way to begin to determine what to do with your assets, is to make a list of your current and future needs. Where would you like to live, what lifestyle the intent to maintain, and so on. You have children, with educations to be provided for, etc. Next, add your current and future desires, which are not always the same as needs, despite what we tell ourselves. Lastly, consider the current and future needs of the loved ones you intend to provide for. You may choose to use a T-chart with your wants on one side and your needs on another. Or perhaps the wants and needs for yourself on one side, and those of you loved ones on the other. However you choose to do it, this is an important step in the process.

Other considerations include charitable giving, preserving wealth, your business interests, the taxes and costs related to distribution, and any dependents or dependents with special needs. Once all of that is outlined, the cost of those needs and lifestyle choices can be estimated.

Determine how assets will transfer:

Now that you have your goals for yourself and your loved ones, you need a plan to make it happen. Part of that plan will include the accumulation of sufficient assets to achieve your goals. Some of the gaps, especially early on, can be filled with life insurance. And in fact, specific types of insurance can play a key role in transferring and preserving wealth. The most important thing to realize about asset transfer, is that it requires advanced planning to minimize the tax burden and other expenses.

The tax burden can be significant. In fact, federal estate tax is 40% on estates over $5.45 million for an individual (as of 2016 – with annual adjustments). State taxes on estates or inheritances can also be significant, and often have a much lower threshold. For example, New Jersey taxes any estate over $675,000. Given the home values in New Jersey, a significant portion of homeowners will have a taxable estate.

Minimizing the tax burden is extremely important. Especially because the tax on non-cash assets must be paid in cash. That means the estate taxes on the value of your home, your stock and bond portfolio, other real estate holdings, business holdings, and many other types of assets, must be paid in cash by your heirs. As you can imagine, that can cause a significant cash-flow issue at a very difficult time. And unfortunately, decisions made under such circumstances are often not the best ones, and are unlikely to support your goals. Provisions need to be made to minimize the taxes due, and to facilitate the payment of them. This is why advanced planning, and an annual review, are essential.

One strategy that can be deployed over time, is to gift cash or other assets. Currently, a person can gift up to $14,000 and a couple can gift up to $28,000 to an individual per year, without the individualbeing taxed on the gift. Please note that the total amount that can be gifted, is limited to the $5.46 million excluded from federal estate tax. So in reality, this strategy is quite limited and takes a long time to implement (all amounts in this paragraph are based on 2016 exemption amounts).

Fortunately, more sophisticated strategies exist. These include Family Limited Partnerships, establishing a Family Office, various types of trusts, and various types of insurance products designed to help transfer and preserved wealth. It is important to realize that not every product or strategy is right for every person or situation. And situations change over time. That is why it is essential to work with the team that takes the time to understand your interests and concerns, and is aligned with achieving them. To help ensure our alignment with your goals, we positioned ourselves so that we can offer the best programs from every provider, and we also offer flat-fee consultations and assessments. Be sure your advisors are equally independent, so you get what’s best for you.

At Absolute Conclusions, we pride ourselves on staying informed of the best practices and best plans available. Our core goal is to help you create and maintain your legacy. Our independent status enables us to align completely with your interests, and we can also offer fee-based consultations, insurance audits, and reality-checks to provide further peace of mind. Please remember that the buy-sell agreement and funding plan should be reviewed annually, and at any time a significant change in the business size or scope occurs. If you have any questions or feedback on this article, click the Schedule a Call button to set up a no-cost, no-obligation consultation.

Please note: This document is intended to provide introductory information on the subject matter. Absolute Conclusions does not provide tax and legal advice. You should consult with independent financial, tax and/or legal professionals before making financial investment or planning decisions.