Financial Education

5 Essential Estate Planning Strategies You Might Be Forgetting

Reading time: 5 Minutes

By John Schmoll

February 25th, 2019

You've worked hard to build your estate. A well planned estate plan will help protect the wealth you've created and ensure that it passes safely to the next generation. But, with so many separate pieces working together—from your trust to your will to your 401(k) and life insurance—it's important to plan and strategize correctly. Whether you're creating an estate plan for the first time or updating your existing estate plan, now is the time to make sure you aren't overlooking these essential strategies.

1. Make Your Estate Smaller to Minimize Taxes

At first, the idea of shrinking your estate might seem counter-intuitive. The smaller your estate, the less estate taxes you'll have to pay, which means the more wealth you may be able to transfer to your heirs and beneficiaries after your passing. This is of course assuming that your estate exceeds the current estate tax exemption amount ($11.4 million per individual federally and $5.49 million in Hawaii). The major downside to gifting is that it reduces your exemption amount for estate taxes at your death.

The best way to minimize your estate is to transfer ownership of your assets to your heirs before you die or donate to your favorite charity or cause. There are a few ways to do this:

  • Strategic gifting of assets to loved ones and others, either outright or in trust
  • Making qualified donations to charity
  • College funding

For example, a life insurance policy or home title can be moved into a irrevocable trust while you're still alive, which allows your heirs to receive the benefit of those assets under whatever conditions you impose in the trust. Assets transferred into the trust are not included in your estate at your death. Meanwhile business interests, investment portfolios and retirement accounts can remain in your name to provide the lifestyle you want now and in the years ahead.

Think of these strategies as tools to help you move your wealth into the right hands—those of your loved ones and favorite charities.

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2. Ensure the Orderly Distribution of Your Assets

Life is complicated, but that doesn't mean your estate settlement needs to be. You already know that you need to designate beneficiaries for any assets you will be passing on. But it's important to define these beneficiary designations as clearly as possible, to avoid probate court, potential lawsuits or family disputes.

Do you have children from a previous marriage? Children with special needs? A single piece of real estate that needs to be shared by several children? These are all situations in which simply naming your children as beneficiaries and calling it a day could lead to negative, unintended consequences. Instead, you should specify, in detail, your exact wishes for any of these situations in your estate plan.

For example, consider whether it makes sense to designate an heir as a direct beneficiary or if it would be better to set up a trust for them that will more prudently distribute the funds (This will likely be the case if they are a minor, have special needs, or have demonstrated poor financial judgement). And name contingent beneficiaries in case your primary beneficiaries are unable or unwilling to receive their proceeds.

Also, make sure you review and update your designations regularly, especially after major life events.

3. Make Sure There's Someone Ready to Take the Reins

No one likes thinking about potential worst case scenarios, but you should definitely prepare ahead of time so your wishes for your estate can be properly carried out. Designate a power of attorney (POA) as your trusted agent or person who can handle real estate transactions, financial transactions and make other legal actions as if he or she were you. The agent's power can be made effective only upon your incapacity (nondurable) or regardless of your capacity (durable). You can choose to make this agent a general POA, to handle a broad range of decisions, a limited POA, if you want to narrow their scope of power.

For medical decision making, you should have an Advanced Healthcare Directive (AHCD). This legal document specifies your end-of-life health care wishes and designates one or more agents authorized to make care decisions on your behalf. You should share this AHCD with your family, your doctor and the agent you've designated.

And consult with your estate planning attorney to see which power of attorney options make the most sense for your situation.

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4. Cement Your Legacy through Charity, and Lower Your Taxes Along the Way

Amassing the amount of wealth that you have likely took decades of hard work and smart financial planning. Your skill has put you in the enviable position of being able to fund causes you're passionate about. Even better, charitable giving can help reduce your tax burden.

With the right estate plan in place, including one that takes advantage of tools like a qualified charitable distribution (QCD) directly from a traditional IRA, you may be able to make your wealth do the most good.

Once you reach the age of 70 1/2, the IRS requires that you start withdrawing from, and paying taxes on, most types of tax-deferred retirement accounts. But, you may be able to use a QCD to satisfy all or part of the amount of your required minimum distribution (RMD) from your IRA, reducing or eliminating the taxable portion. For instance, if your RMD this year is $50,000 and you make a $25,000 QCD to a non-profit organization helping the people of Hawaii, you would only have to withdraw another $25,000 to satisfy your RMD, and would only be taxed on the $25,000 you received.

Since married couples can each donate up to $100,000 per year from their individual IRAs to charities eligible to receive tax-deductible contributions, you may be able to give up to $200,000 each year to charities through qualified charitable distributions.

5. Build a Smart Estate Planning Team

While there are some aspects of your estate planning that you've likely been able to accomplish on your own, tackling some of the estate planning strategies discussed here is best done with the aid of a savvy and qualified estate planning team.

Members of your estate planning team should include your attorney, your accounting and financial team, as well as a life insurance advisor.

Make sure all members of your team are connected and communicating with each other as well as you at every step to ensure your estate is aligned and structured to achieve your specific dreams and goals.


John Schmoll is a personal finance writer with more than 15 years of experience in the financial services industry, specializing in topics including entrepreneurship, personal finance, investing and more.

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