Karen Lapina

Estate planning can often be off-putting to clients as just the idea can trigger uncomfortable thoughts and emotions. No one really wants to think of their own demise for starters. And many times, it’s brushed off with comments like, ”Our kids will get everything, and they’ll know how to deal with it” or “I know it’s something we need to think about.”

Having a will is one thing but formal estate planning, which should also include a living will, medical directive, and healthcare power of attorney, is often thought of as something only the “ultra wealthy” need to worry about. Although it’s true that if you die as a married couple with less than $25.84MM in your net estate (everything you own less everything you owe at the second passing), your estate will not be subject to federal estate tax. Cut that in half if you are single. Also note that this amount is scheduled to be cut in half (and adjusted for inflation) at the end of 2025 per the Tax Cuts and Jobs Act (TCJA) that passed in 2017.* Most Americans will fall under this number when they die, and therefore may think there’s no real planning to be done, especially if you have multiple family generations to follow you. Another thing to consider if you live in Pennsylvania—like many of our clients, every net dollar in your estate (regardless of how large) will be subject to inheritance tax if assets go to a non-spouse—that includes children and other relatives. This ranges from 4.5 to 15 percent* depending on who gets what. This is a tax that’s generally hard to avoid altogether but there are ways to reduce the sting that your heirs may feel.

Let’s use an example of a couple that’s accumulated $7MM at retirement with a projected estate of $12MM at the end of their life expectancy. Even if that $12MM is not subject to estate tax, there are still a myriad of things to consider, as most people want their heirs to handle this properly and potentially continue to allow it to grow. Let’s also assume that this couple has three adult children, two of whom are married, one is divorced, and all have children of their own. They currently have a will that was drafted when their kids were very young and only have each other listed as their primary beneficiary on their IRAs without any contingents listed.

They’ve worked hard for many years to accumulate these assets and would like their children to be good stewards of their estate. But what if one child’s spouse has a spending problem, and the family is always in debt? What if a grandchild has special needs? What if the divorced child is having trouble finding a solid career and can’t really support themself or their children without help?

Every family dynamic is different, and with a well-thought-out estate plan, family wealth can be protected and set up to benefit each one of your heirs individually. With properly aligned beneficiary designations and the use of a trust—either one that’s established while you are still alive or a testamentary trust that comes to life at your death—you can feel confident that your family’s needs will be met, and your assets protected at the same time.

Beneficiary designations are required on retirement accounts such as 401(k)s, 403(b)s, and IRAs. Upon your death, these accounts will immediately be distributed to your beneficiaries without the need for probate. These beneficiaries also take precedence over what may be in your will, which is why it is so important to review them periodically. This goes for life insurance contracts as well. We’ve all heard stories about someone dying who never took their ex-spouse off their life insurance policy. We also recommend adding contingent beneficiaries as well in the event your primary predeceases you. Otherwise, the account will go to your estate and may lose its tax qualified status.

A trust is another popular tool to ensure your assets are protected from creditors, ex-spouses, or any future lawsuits that may pop up for your heirs. The language in a trust can be customized, and it can allow you to easily keep your assets in your blood line if you so choose. There are many different types of trusts. It’s important that the right one is used, and that the language is presented in such a way that it’s adherent to your wishes but also falls in line with IRS guidelines for tax purposes. A trust can also be listed as a beneficiary on a qualified account but, again, it must be worded in such a way that sustains the tax-deferred status of the account.

A financial advisor at Fragasso can explain what might be most appropriate for your situation, and they can work directly with you and your estate attorney to help facilitate the drafting of your comprehensive estate plan.

* Source: revenue.pa.gov/TaxTypes/InheritanceTax/Pages/
Investment advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor.