Advanced Estate Planning Concepts

Introduction

Part one in this series gave an overview of estate planning — from a basic discussion of wills and trusts to why estate planning is important. However, estate planning goes beyond the basics, especially as one is nearing or is already retired. Advanced estate planning will help you with three major things: asset protection, taxes, and making sure your legacy is smoothly passed to your loved ones.

While retirement planning has already occupied center stage, advanced estate planning will effectively help you protect your hard-earned wealth. Now let's explore some of the techniques and resources that can help you advance your estate planning. 

Advanced Estate Planning Tools and Strategies 

You can reduce taxes and safeguard your estate by using a variety of techniques and resources. These tools often come into play as your estate grows in size or complexity.

1. Revocable Living Trust: With a living trust, you maintain control of your assets during your lifetime; however, it allows you to avoid probate after death. The assets held in a trust will be distributed according to the terms you have set out without court involvement from the probate court, saving substantial time and money for your beneficiaries.

2. Irrevocable Trusts: Unlike revocable trusts, after an irrevocable trust is set up, no modifications or changes are allowed to be made to it. These are typically used in reducing estate taxes and insulating assets from creditors. Irrevocable trusts are very common among high-net-worth individuals as part of their overall estate planning.

3. Charitable Trusts: If one of your aims is philanthropy, the establishment of a charitable trust will ensure that part of your wealth is given to causes close to your heart. You'll also achieve some tax benefits while giving to charity.

4. Life Insurance Trust: The creation of a trust to hold an insurance policy you own allows your beneficiaries to avoid paying estate taxes on the death benefit when you die, and therefore, receive the full value of the payout.

Minimizing Estate Taxes 

Among the major concerns for those with larger estates is the estate tax. Fortunately, there are ways to minimize these taxes and ensure that more of your hard-earned wealth goes to your heirs.

1. Gifting: Each year, you can give a certain amount of money to individuals without it being subject to gift taxes. By gifting assets while you’re alive, you can reduce the size of your estate, thus lowering the estate tax liability.

2. Generation-Skipping Trust: This type of trust allows you to leave assets to your grandchildren, bypassing your children to avoid additional estate taxes. This might come pretty handy if your children are rich and you want to extend your estate for generations.

3. Family Limited Partnerships: An FLP lets you transfer the assets to your children or other heirs at a reduced value by lowering the amount of taxes the estate would have to pay. This is quite useful if one wants to retain control of the assets while gifting them over time.

With some or all of these tools, you can save your heirs from substantial taxes and have them receive more of what you struggled for.

Protecting Your Estate from Creditors

One of the more important areas of thorough estate planning is protecting your assets from creditors. This is pretty important to people in high-liability professions (professions where lawsuits are common) or if you have incurred a lot of debt.

1. Asset Protection Trusts: This is a trust designed in such a way to protect your assets from creditors and against any lawsuits. Conveying your assets into an offshore or domestic asset protection trust provides shelter from any legal claims against them.

2. Homestead Exemption: Homestead exemption in some states protects a sum of the value of your home from creditors. That in itself can be a surety that at least your primary residence is safe.

3. Tenancy by the Entirety: For married couples, such ownership as tenants by the entirety offers protection to the property from creditors. Under this arrangement, a creditor cannot attach the property for satisfaction of debt owed by only one spouse.

By including these protective strategies, you can ensure your estate will remain intact, even in the face of potential financial difficulties.

Estate Planning for Retirement

Your retirement plan and estate plan should go hand in glove with each other so that financial security is ensured in your old age. In retirement planning, one has to look at the estate plan to see whether it aligns with the goals of retirement. After all, what is the use of saving and investing carefully for retirement if your assets are not protected or distributed according to your wishes?

Here are some key ways your estate plan and retirement plan should intersect:

1. Beneficiary Designations: When approaching retirement, consider reviewing the beneficiary designations on your retirement accounts, pensions, and life insurance policies. The beneficiary designations supersede any direction in your will or trust; it is, therefore, crucial that they reflect your updated desires.

2. Tax-efficient withdrawals: Most retirees need to make withdrawals from retirement accounts like IRAs and 401(k)s. You should consider the tax implications of each of these transactions. Proper estate planning could reduce the tax burden that beneficiaries would have to bear once retirement assets are distributed.

3. Long-term Care Planning: Consider, as part of your retirement plan, how you will pay for any potential long-term care. Adding long-term care insurance to your estate plan protects your retirement from being consumed by medical expenses.

In the above ways, you can protect your legacy and allow your loved ones to benefit from your hard-earned retirement and estate plans in the most positive way.

Conclusion

Advanced estate planning protects your lifetime wealth and assists in effectively transferring that wealth to the next generation. By using tools like trusts, tax-saving strategies, and asset protection, you can minimize the risks and costs associated with settling an estate. As you plan for retirement, remember that estate planning is just as crucial—ensuring that your assets are used the way you intend, long after you’ve enjoyed your retirement. Be sure to revisit both plans regularly and adjust them as your life circumstances change.

For more on retirement planning, make sure to take a look at our article on Retirement Planning for Everyone.