Three Key Estate Planning Strategies You Can’t Overlook

A great estate plan requires periodic updating, extensive analysis, and following these three important strategies.

  1. “Stress Test” Your Estate Plan Through Various Scenarios

One of the best ways to determine your plan is thorough and ready for virtually any scenario is to actually test it out in a variety of hypotheticals. What will happen if you suddenly become incapacitated? What will happen if your child, or children, pre-decease you? What rights, if any, will your child’s ex-spouse have to your estate’s assets? Putting your estate plan through these “stress” variables should not stress you out! Our view is going through these scenarios during calm times beats the alternative and is a valuable exercise on life in general.

  1. Avoid Excessive Taxation By Leaving Stocks to Your Loved Ones, IRAs to Charity

Many people have IRAs (traditional and/or Roth). What should be done with those accounts when you pass on? Well, if you designate a loved one as a beneficiary for your IRA, you could be creating a scenario where unnecessary taxes have to be paid. This is because IRAs left to individuals have to be liquidated over a specific IRS Schedule (Required Minimum Distributions usually must begin byDecember 31 of the year following the IRA owners death). The rules are complicated and you should align yourself with someone who understands the nuances of IRA beneficiary planning. Once the money leaves the IRA account then it is taxed as ordinary income, assuming it’s not a Roth IRA. By the way, Roth IRA’s normally have to be distributed over the beneficiary’s life expectancy. People often believe that once you have a Roth then there will never be Required Minimum Distributions. That statement is false because beneficiary’s have to take the distributions the same way they would have to if it was a traditional IRA.

One potential strategy (if it meets your goals) is to donate your IRA to a qualified charity, which will likely result in you owing no taxes on that donation. This does not mean you have to leave your loved ones out in the cold when it comes to your investments. If you own individual stocks, it is typically fine to leave them to your loved ones since they could be subject to a “stepped-up” basis that stems from your ownership, which may eliminate a significant portion of a potential taxable gain.  Another mistake people I often see people make is they think their beneficiaries will get a step-up in basis on their IRAs. Again, that is false.

  1. Make Sure Your Insurance Policies are In Order and the Premiums are Paid

A sound estate plan considers a wide array of scenarios and encourages proper financial planning. This may include life and long-term care insurance if it fits your budget and goals. However, to ensure your loved ones reap the fruits of your long-term investments, you need to take steps to ensure the premiums are paid on time and the policies are stored in a safe place. This is especially important if, or when, you develop health issues which may result in loss of memory. Unfortunately, many people wind up losing their long-term care coverage because they developed Alzheimer’s or another debilitating ailment and forgot to pay the premiums on time. Do not let this happen to you.

If you apply these three estate planning strategies, you’ll be well on your way to having a rock solid estate plan.