Proactive Trust and Estate Planning: A Strategic Imperative

This article was updated June 28, 2024.

Crafting a trust and estate plan goes beyond legal necessity, but many underestimate the importance of a well-defined plan. Ambiguity can lead to delays and inefficiencies when beneficiaries and executors navigate the complexities of asset distribution.

The Value of a Well-Structured Trust and Estate Plan

A trust and estate plan is a strategy that aligns your legacy with your values and reduces disruption for your loved ones. It alleviates confusion or ambiguity that could arise among beneficiaries during the estate settlement process.

By detailing your intentions and instructions you can:

  • Create a smoother, more efficient administration of your estate
  • Provide your beneficiaries peace of mind
  • Reduce the likelihood of legal challenges or misunderstandings

Having a plan in place can also provide benefits during your lifetime, from opportunities for strategic wealth transfers to confidence that your assets will be distributed in a manner that supports your legacy goals.

The sense of security and stability offered by a concrete plan can also have a positive impact on the long-term health of your business.

Business Succession Planning

Business succession planning should be addressed as part of the estate plan, including the succession of both ownership and management, because those may not always be the same person or group of people.

Depending on your succession goals, a lifetime gifting plan of business interests to your successors can be an effective strategy to shift ownership and could be an effective estate tax reduction plan over time.

Preserve Beneficiary Interests Through Wealth Transfer Strategies

Without establishing a clear wealth transfer plan, your assets may be distributed in a way that doesn’t align with your wishes or intentions.

Providing for your family after your death is one of the primary benefits of creating a trust and estate plan. It’s particularly important if you have children under the age of 18, because your estate plan elects the guardian of your choice; otherwise, the court will choose their caretaker.

Even without minor children, you may have other family members who are unable to care for themselves or need help to care for themselves. There are specific ways you can provide for them through your estate plan, but the courts may direct your assets elsewhere if there isn’t a plan in place.

Your assets are also susceptible to what’s known as laughing heirs. These are blood relatives minimally related to you and happy to laugh all the way to the bank with your assets.

At minimum, one should have an updated will, health care directive, and durable power of attorney. Revocable and irrevocable trusts are also common ways to transfer assets to your predetermined beneficiaries, avoid probate, and specify conditions on when and how beneficiaries can access the assets.

Ease Familial Strain via Trust and Estate Planning

Another important benefit of estate planning: it eases the strain on your family.

When you have an estate plan in place, your family members know and understand your wealth transfer intentions. This alleviates the need for them to make hard decisions during an already difficult time.

Clearly communicating how your assets should be distributed upon your death could keep family from fighting over assets when you aren’t around to play referee.

Confusion, anger, and heartache could be avoided with an established trust and estate plan prepared and discussed with family before it goes into effect.

Explore Wealth Transfer Vehicles

There are numerous ways to transfer your property to your beneficiaries outside of a will. Insurance, retirement plans, trusts, and other assets for which you completed a beneficiary designation form can pass directly to your named beneficiary.

Strategic provisions in your will and, if needed, living trust can also protect your estate from shrinking due to:

  • Tax inefficiencies
  • Legal and probate fees
  • Excessive administration expenses

This leaves more of your assets to your chosen beneficiaries. You can also use the terms of your will and trust to control how and when your beneficiaries will gain access to the assets, which can provide another layer of protection and further alignment with your legacy goals.

Good estate planning does more than protect your assets and wealth from taxation. A comprehensive estate plan can prepare for your own incapacity by establishing a person or persons of authority who can make financial and health care decisions for you.

Supplemental documents such as a health care directive, medical power of attorney, and durable power of attorney both name the individual or individuals empowered to act on your behalf when circumstances require and provide guidance about your wishes.

Investing time now to formalize your instructions can save a great deal of heartache later on.

Strategic Charitable and Gift Planning

Charitable giving can serve a purpose beyond helping to achieve a certain goal, like establishing a scholarship.

There are ways to utilize a giving plan to reduce estate taxes. An outright gift made through your will or living trust is the most straightforward method. However, if you have a more complex set of assets or wealth transfer goals, you may want to consider a giving strategy that starts during your lifetime or leverages different charitable trusts.

Charitable trusts can offer significant tax advantages, especially in years where you have a large taxable event and can benefit from a charitable deduction. If crafted correctly, they can benefit you during your life, provide income to your chosen beneficiaries or charity, and reduce unnecessary estate and income tax.

Retirement Accounts

If you have an IRA or other retirement or tax-deferred account, you may want to consider naming a charity as your beneficiary. If left to an individual or individuals, the distributions from those accounts will be taxable to your heirs as income.

In contrast, not only are charities not taxed on income, but your estate will receive a dollar-for-dollar tax deduction against the taxable estate for estate tax purposes.

IRA or Retirement Giving Example

If you leave a $100,000 IRA to your nephew, he’ll owe ordinary income taxes on the distributions he takes from that inherited IRA.

Due to sweeping changes enacted under the SECURE Act and SECURE 2.0, he’ll be required to fully liquidate the account within ten years. However, some heirs, without proper planning, end up withdrawing the full amount right away, which can push them into a higher tax bracket.

For the purpose of this example, this could push your nephew from the 24% bracket to the 32% bracket. The IRS will receive $32,000 of your $100,000, while only $68,000 will go to your nephew.

However, if you leave that same $100,000 IRA for a charitable organization, that charity can liquidate the IRA and spend the full $100,000 on its mission.

You could then leave a different asset to your nephew instead of the IRA, such as a $100,000 taxable investment account or shares of a privately held business. If structured properly, he may pay no taxes at all if the assets are sold soon after your death.

Other Trust and Estate Planning Tools

There are many other tools estate planners use that may fit your specific needs. Those with larger, illiquid assets tend to leverage life insurance as an estate planning tool.

A life insurance policy can provide assets and liquidity for your heirs, outside of your estate, to pay estate taxes or to help equalize gifts made to beneficiaries.

Generation skipping trusts or special needs trusts are also common planning tools that may be appropriate depending on your specific situation.

We’re Here to Help

It’s never too early to start trust and estate planning.

Once you do have a plan in place, be sure to review it at least every five years and update it when there are significant life changes. These might include divorce, the death of a loved one, a marriage, or the birth of a child or grandchild. And while it might feel daunting, it’s also important to consider other items that might not seem as significant including funeral and memorial instructions as well as passwords to access your online accounts, social media, and email.

If you have further questions about what wealth transfer vehicles might suit your needs best, reach out to your Moss Adams professional.

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