Life insurance plays a part in many estate plans. In a small estate, life insurance may actually create the estate and be the primary financial resource for your surviving family members. Life insurance can also be used to provide liquidity for your estate by providing cash to pay for final expenses, outstanding debts, and taxes. There are many other strategies you can use to pass on as much of your wealth as possible.

Learn the Basics

For many families, estate planning is about ensuring financial peace of mind for a surviving spouse, making sure assets are divided equally between children, and making sure as much of their estate passes to the next generation as possible. Here’s how to get started.

Asset Maximization

Asset maximization is a strategy we can use to ensure you’re getting the greatest benefit from often-overlooked financial assets like retirement accounts, CDs, pensions, and Social Security. For many clients, we can maximize retirement income by relocating underperforming assets.

Year-End Gifting

Year-end gifting is a financial strategy that allows to you pass wealth to the next generation tax-free. The government has set limits on the amount you can give, but it’s still a great way to reduce the overall value of your estate. This may decrease the likelihood that your heirs will have to pay estate tax.

Always consult your accounting, legal, and tax advisors before implementing any recommendations. This material does not constitute tax, legal, or accounting advice. It cannot be used for the purpose of avoiding any IRS penalty.

Asian grandparents smiling in their kitchen, cooking together

Estate planning has multiple purposes: it helps you and it helps your loved ones. How does it help? By thinking ahead now, you can protect your assets and make sure those assets get used or divided up according to your wishes after you’re gone. Plus, it helps your loved ones by providing a clear and easy path for them to follow after you pass away. Long story short, it’s all about making sure what you want to happen happens.

But what is your “estate?” Your estate is the total amount of assets you leave behind when you pass away. That might include cash in your bank account, stocks, real estate, retirement accounts, and/or your possessions. Depending on how much you leave behind, your heirs may be subject to estate tax.

Here are a few must-do steps and must-know rules to keep in mind during your family estate planning process. Rather talk to a real person and just get started? Give me a call today!

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Step 1: Create a Will

Senior couple looking at documents together while they work on estate planning

The first step in making sure your estate is handled the way you want? You have to tell people what you want to happen with a last will and testament.

Think of your will as a set of directions. What do you want to happen to your cash? Your home? Your possessions? A will explains how you’d like these things to be divided up. Here’s how to get started:

  1. Create an inventory of your assets and debts. You need a master list of what you own before you can think about who should inherit your estate. Don’t forget things like retirement accounts and stocks. The list of debts is also important; when you pass away, your estate will need to pay these off before anything else happens.
  2. Assess your family’s needs. How much of your estate will you leave to your family? What are their future needs? This is especially important if you have young children.
  3. Establish your directives. Write down who should receive what – money, assets, property, etc. Nothing is too big or too small.

It’s a good idea to work with professionals who provide estate planning services. This includes an attorney, a financial advisor, and an insurance advisor during this process. Your insurance and financial advisors can help you create your list of financial assets and assess your family’s needs. Your attorney can ensure your will is a valid legal document.

Keep in mind that even when your will is legal, it must still go through probate and be approved by a court. It can also be contested if people close to you (like children or a spouse) feel they were treated unfairly by your will. That’s one benefit of using life insurance in estate planning – it avoids all these problems, as we’ll go over below.

Want to learn more? Give me a call and tell me what you want to achieve – I’ll find financial strategies that can make it happen.

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Step 2: Consider Estate Tax

Estate tax is a federal tax imposed by the government on estates that meet a certain value threshold. As of 2024, the estate tax threshold is $13.61 million. If your estate is worth at least that much, it will lose 18%-40% of its value in estate tax, which must be paid in order for your heirs to inherit.

The problem? Sometimes those taxes require selling some or all of the most valuable assets in the estate. If you’re like most people, you’d rather those assets be passed down to your loved ones. Proper estate planning can help ensure that happens.

If your estate is over or near the estate tax threshold, proper planning can ensure as much of that value gets passed to your loved ones as possible.

Cute senior couple on the couch together

There are a few well-known strategies that can help you reduce the value of your estate:

  • Spend your assets so your estate totals less than the current estate tax threshold when you die.
  • Make charitable gifts to reduce the value of your estate (we’ll go over this in more detail below).
  • Set up a trust and transfer assets into the trust. The trust becomes the owner of those assets, not you personally – reducing the overall value of your estate.

Unfortunately, federal estate tax isn’t the only tax you may have to contend with. There are also state estate taxes and state inheritance taxes. Not all states have estate and/or inheritance tax, so it’s a good idea to look into these ahead of time. State estate tax can only be levied by the state you live in when you pass away. State inheritance tax can only be levied by the state your heir lives in when they inherit some or all of your estate. As of 2024, 17 states and District of Columbia have an estate or inheritance tax - check with your local tax professional to find out if yours is one of them.

Need a little help figuring out the federal and state tax implications? Or working on trust and estate planning? Give me a call today or click the button below to schedule time to talk.

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Step 3: Consider Charitable Gifting Strategies

Need to reduce the value of your estate? One good way to do that is by using the yearly federal gift tax exclusion. You may hear this strategy referred to as “year end gifting.” That’s because there are calendar-year limits to how much you can gift without paying the associated federal gift tax or having your gift count toward your lifetime gift exemption.

As of 2024, the yearly federal gift tax exclusion is $18,000 per person per gift per year.

This means you can gift up to $18,000 per calendar (tax) year to a person without paying gift tax. That’s a big opportunity to spend down some of your estate! If you have children, siblings, nieces, nephews, grandchildren, or other close family members, you can give each of them $18,000 per year with zero tax obligation to yourself. If you have a spouse, they can give the same amount per year to any or all of those individuals, too.

A lawyer writes about estate tax in a notebook at a desk that also holds a gavel and a set of scales

Let’s say you have an estate projected to be worth $14 million when you pass away in 10 years. But let’s also say that you and your spouse started a yearly charitable gifting habit, and gave away the maximum dollar amount to several family members per year. Over those next 10 years, here’s how something like that could stack up:

Spouse 1: Gives $18,000 to 3 children each x 10 years = $540,000
Spouse 2: Gives $18,000 to 3 children each x 10 years = $540,000
Spouse 1: Gives $18,000 to 6 grandchildren each x 5 years = $540,000
Spouse 2: Gives $18,000 to 6 grandchildren each x 5 years = $540,000
Grand total given away in 10 years: $2,160,000
Initial estate total: $14 million – gifted total of $2,160,000 =
New estate total: $11,840,000 - now below the estate tax threshold!

Thanks to current gifting rules, this strategy lets you create a steady flow of cash from you to your loves ones on a yearly basis.

Want to learn about more year end gifting strategies? Give me a call or schedule time to talk!

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Step 4: Use Life Insurance for Estate Planning Purposes

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As we mentioned above, life insurance is an additional way to leave money to your loved ones or a charity after you pass away. The benefits of life insurance in estate planning are numerous:

  • Income-tax free death benefit in almost all cases
  • Avoid probate, unlike a will
  • Cannot be contested, unlike a will
  • Cannot be seized by creditors
  • Payable immediately upon the claim being filed and approved
  • Can be used to pay estate or inheritance tax

The catch? Make sure you review your beneficiary designations! If you leave outdated beneficiary information with your insurer, your policy’s death benefit could go to the people you didn’t intend. Whenever you have major life events – a marriage, birth, death, adoption, or divorce in the family – you should check your life insurance beneficiaries and update them if needed.

Because life insurance pays out a cash benefit, it’s an easy way to compensate one of your heirs who might not be inheriting something that’s hard to divide, like a home or business.

Young black family of four sharing a meal together in their kitchen

Here are just a few of the ways life insurance can help you leave equal shares to your kids:

  • One kid inherits the family home, the other gets an equal life insurance payout.
  • One kid inherits the family business, the other gets an equal life insurance payout.
  • If one kid doesn’t want the family home or business (or lives too far away for that to be convenient), you can leave them a life insurance death benefit and dispose of your home/business assets as you see fit within your lifetime.
  • See? That’s just the beginning of how life insurance can help during the estate planning process. It’s a great tool to have to create the legacy you want to leave for your loved ones, a favorite charity, your alma mater, and more.

    Got questions about estate planning for blended families? Or about using life insurance for estate tax planning? Let’s talk! Call me now or click the button below to schedule a time to talk.

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