Personal Finance

No Tax on Your Estate? You Still Need a Plan

By Daniel J. Friedman

Learn more about Daniel on NerdWallet’s Ask an Advisor

With all the debate and discussion related to estate taxes over the years, you might think that taxes are the single most important consideration in estate planning. In reality, the federal estate tax exemption of $5.43 million for individuals and $10.68 million for married couples means that the tax does not apply to the vast majority of estates. Meanwhile, most states don’t have an estate tax at all.

But that doesn’t mean you don’t need a plan. For most people, the main focus of estate planning is not taxes but inheritance planning — figuring out how to pass on assets to loved ones in the most beneficial manner, financial and otherwise.

The most common estate planning questions we get from clients center on how their assets will be distributed and what will happen when they aren’t there to make decisions. They include:

  • When I’m gone, how will my money be transferred to the next generation?
  • If I’m not able to manage my affairs, who will?
  • If something happens to me, who will make medical decisions on my behalf?

These are just a few of the important questions an estate plan should address.

We recently chatted with a new client about his circumstances. He’s in his 50s, unmarried with two young adult children, and he has a net worth of approximately $3 million. He has investment assets spread out among several brokers, real estate holdings located in different states and managed by family members, and valuable personal belongings.

When he came to us, the estate planning documents he had in place were almost 10 years old. He works with several stockbrokers and annuity salespeople and has long-term relationships with an attorney and with a CPA who prepares and files his taxes. Yet not one of these professionals made sure his estate plan was current.

Our client was primarily interested in getting all of his important estate and financial documents — like wills, trusts and beneficiary designations — updated, organized and consolidated in one place. Now that we have reviewed everything, he can clearly communicate his wishes to his children, especially regarding their inheritance.

A big part of the inheritance will be in retirement accounts. Most of his liquid assets are in IRA and 401(k) accounts with a designated beneficiary, so those assets will pass directly to the beneficiary. It’s important to note that such a beneficiary designation takes precedence over the provisions of a will or trust.

Some of his non-IRA accounts have been set up with a “Transfer on Death” beneficiary designation, which also trumps a will or trust. In this case, the assets will pass to the named recipient on the account without having to go through probate (the legal process of administering an estate after a person’s death).

Making sure your beneficiary designations are in place and up to date can help avoid the onerous probate process, which this client’s estate is now well positioned to do. On top of that, our conversations yielded tens of thousands of dollars of potential tax and financial savings.

Because he was working with so many people (and everyone seemed to have tunnel vision, focusing only on one piece of his financial puzzle), no one had guided him to address the whole picture. Our conversation helped him realize he needed to sit down with his attorney and update his plan.

Now, no matter what happens going forward, he will have peace of mind knowing that his inheritance wishes will be addressed. Can you say the same? Have you reviewed your estate plan lately? If you haven’t updated or reviewed your documents, it may affect your inheritance plan.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.