By Mallon FitzPatrick June 16, 2021
There are many things that catch us off guard. Estate planning should not be one of them.
Some may think of estate planning as an open-and-shut financial assessment, where designated boxes are checked during a professional planning meeting and files are neatly stored away until it is time to transfer assets.
In reality, estate planning can be a challenging, sometimes uncomfortable but often rewarding, process. And it is one that happens over time. Most people do not anticipate the questions it poses, forcing them to fully understand their charitable inclinations, plot lifestyle and eldercare expenses, and sometimes even, face how they really feel about their children.
Most of all, estate planning is a deliberate process, one that requires intentional thought. It is why we advise that you mentally prepare for some introspection—and avoid procrastination. Every family has its own dynamics, but assets generally end up divided among four buckets: personal needs, heirs, charitable causes, and taxes. And you can decide how to allocate to each bucket before it is time to transfer assets.
Once you address the weighty questions of your own needs and wants, family and legacy, there are potential new laws to consider. We should all be aware by now of looming proposals that would negatively impact estate taxes. Congress could move to dramatically reduce the estate tax exemption of $23.4 million for married couples and $11.7 million for individuals, costing millions in additional taxes for anyone who fails to take advantage of the current level.
Congress may also do away with the “step up” in basis, meaning you might no longer be able to pass assets to your heirs upon death without paying capital gains tax. The capital gains tax rates could rise as well, another reason to consider transferring assets now.
“Am I ok?”
At Robertson Stephens, we think about estate planning as both a quantitative and qualitative assessment of someone’s life and will help you determine what you value, then assign a dollar amount to that value.
We begin this process posing the question, “Am I ok?” to help us determine how your current state compares to your desired one. We create your financial plan by fully understanding your expected lifestyle needs and running thousands of simulations to determine whether a portfolio can withstand different market scenarios and support expected expenses.
Before gifting or donating assets, it goes without saying you should ensure your needs—and wants—are met. That includes maintaining your lifestyle while covering health and eldercare expenses, all with a margin of safety that accounts for potential long-term adverse performance.
Dividing up assets for the children
We then ask the next question, “Is my family ok?” to address family or the close friends and relatives you want to provide for. For most people, this means spouses, partners and children in particular.
Answering this question may be uneventful for parents who agree that all assets should be divided equally among children. It may force decisions around uncomfortable family dynamics, for example, for parents who cannot agree on whether a not a child should receive an inheritance, how the money should be divided amongst their children, or when the money should be transferred.
Once you decide how much to give each child, you will need to determine how they should receive it—whether it should be transferred immediately in full, or whether access should be controlled through a mechanism such as a trust.
Parents worried about children depending on their inheritance as sole income and then quickly deplete it, can set up a trust to restrict access until a certain age or limit spending to essential expenses such as health, education, a first home purchase and basic maintenance. In that sense, a trust can help preserve assets for future generations. Trusts are also especially important to consider if you have minor children that need to be taken care of.
In some cases, married couples who want to take advantage of the current lifetime exclusion, may choose to gift $23.4 million to an irrevocable trust to be eventually transferred to their heirs. Using a Domestic Asset Protection Trust the couple could lock in the current exemption while receiving income to help fund their lifestyle.
Leaving a legacy; finding a cause
Lastly, after we’ve addressed your own needs and those close to you, we focus on the topic of philanthropy. For this, we ask, “Is my community ok?” to understand what legacy you want to leave behind through charity.
If you are charitably inclined, we start by picking a cause. By identifying a specific cause, you can take a targeted approach, as opposed to supporting a broad movement such as fighting climate change, which could mean anything from advocating “green power” to preventing deforestation to reducing meat consumption. You will need to decide whether you want to donate to one cause, many causes or, in some cases, none at all.
The next question is how to donate. You can set up your own foundation or donate to other foundations. As part of this discussion, consideration is made of your and your families desired time commitment and the expected amount of taxes due on your estate and whether certain strategies can reduce that liability and redirect assets to charities instead. Some charitable strategies will help reduce your income tax, pass assets to heirs free of gift tax, and support a charitable cause.
As with other estate planning topics, the philanthropic discussion can become contentious if family members disagree on which charities to support. On the other hand, it can also become a bonding moment if the family can come together and agree on a mutual cause.
You have little control over tax policies, but you can control what happens with your estate by taking some deliberate steps. There are no right or wrong answers to these questions. Ultimately, estate planning is about helping you balance the equation regarding the value you place on your future, your family and the world.
Mallon FitzPatrick, CFP®, is a Principal and Managing Director at Robertson Stephens Wealth Management, LLC, an independent SEC-registered investment advisor that provides wealth management solutions for high-net-worth individuals and family offices nationwide.
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