Four Steps to Smart Estate Planning

Four Steps to Smart Estate Planning

By Alan G. Orlowsky, J.D., C.P.A.

The estate tax is the biggest single tax that most affluent families will ever pay. The tax rate for estates worth $3 million, for example, is currently a dizzying 45 percent.

If you´ve accumulated wealth through years of hard work, sacrifice, and perseverance, you´ll certainly want to transfer that wealth to your loved ones and/or your favorite charities – not just after you die, but while you´re still alive and well – rather than to the IRS. That´s the primary goal of estate planning. Estate planning also helps you transfer valuable assets to your heirs according to your wishes.

Smart estate planning can save hundreds of thousands of dollars in estate taxes, yet many families wait too long to take estate planning seriously. Some think setting up a plan is too complex and expensive, but that´s not necessarily true. A few hours spent planning with a capable adviser today can help save hundreds of thousands of dollars later. And the sooner you begin planning, the broader and more flexible your choices will be.

Step 1: Prepare Four Key Documents

The key elements of good estate planning are a will, trust, health-care power of attorney, and durable power of attorney.

The purpose of a will is to distributes your valuable assets according to your wishes in a sensitive, humane, and orderly fashion, and in a way that minimizes resentment and jealousy among family members – so that your legacy is that of a warm and generous provider.

A trust is an agreement that lets you transfer property to another person (the trustee) to hold, manage, and distribute according to the specifications of the agreement. There are several different kinds of trusts, each of which, if properly drafted, provide significant tax benefits. Often there are good non-tax reasons for having a trust as well, especially when your heirs are too young to manage the property themselves.

A health-care power of attorney lets you appoint someone (sometimes known as the patient advocate) to make important medical decisions for you in the event you cannot communicate with your doctor.

The durable power of attorney lets you designate someone to manage your assets in case you are too sick or otherwise unable to do so yourself.

In my experience, it´s remarkable how many people die with outdated or inadequate estate-planning documents, and their estate becomes a complicated, contentious mess. An able adviser (attorney, accountant, or financial planner) can help you draft those four documents so that they achieve your goals efficiently and prevent conflict. You should review and update these documents periodically, or whenever there´s a significant change in your financial status or marital status.

When you compose or review your documents, remember to use the Credit Shelter loophole and consider the Generation Skipping Tax for Gifts and Trusts. These are powerful provisions when used properly, and can save literally millions of dollars in estate taxes.

Step 2: Give Away 11 Grand

The IRS lets you give $12,000 per year each to any individuals you choose, or $24,000 to each individual if you are married, without incurring gift tax. The gift can be cash or an investment of the same value. This is a way to gradually transfer a portion of your wealth from your estate to your heirs, without paying tax. Not only that, but you´ll enjoy the gratitude of those to whom you give the gifts while you´re still alive.

Again, I´ve found that this method of wealth preservation is sadly underutilized by most individuals. When you consider that $12,000 today may be worth much more when you die, the tax savings can be enormous.

Step 3: Buy Life Insurance

The proper use of life insurance is a simple method of defeating the estate tax. If you place the insurance policy in an Irrevocable Life Insurance Trust, the proceeds from the policy will pass to your family members free of both estate tax and income tax.

Don´t wait until you´re too old or sick to take advantage of this estate-planning tool. It may not be the best way to shelter your wealth in every single case, but it´s always worth considering when you review your estate plan.

Step 4: Give to Charity

Charitable gifts are exempt from the estate tax. If you give now, instead of at your death, you will enjoy the benefits that your gift confers on the recipient; and you will be able to deduct those gifts from your taxable income. If you want to give money to charity but are concerned that you might need to use these funds during your lifetime, consider a Charitable Remainder Trust (CRT), which lets you make the gift while you´re still alive, but permits you to use the interest and dividends from the funds during the remainder of your life – a real win-win situation.

Choosing an Advisor

When you hire a professional estate planner, choose someone who understands not only the laws, regulations, documents, and strategies of estate planning. You need a person who can communicate those ideas in simple layman´s terms, will take the time to listen to your needs and wishes, and who understands human nature and family dynamics. Ideally, the adviser you choose should have experience with people in your particular circumstances, in terms of financial status and family relationships.

About the Author

Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.

Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.

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