James Ferraro, JD | Vice President & Legal Counsel
One of the best gifts my parents gave me was the opportunity to reach my personal and financial goals. Neither of them had a college degree, much less a graduate degree. But they worked hard, saved, and planned well, forming a foundation for me to build upon. Their efforts allowed me the opportunity to grow up in a comfortable suburb, go to college, and eventually go to law school. I owe much of my career and lifestyle to their careful estate and financial planning.
Wealth Management is typically considered to be made up of estate and financial planning.
Effective estate planning and financial planning can’t be done in isolation. You can intellectually separate these disciplines if you believe financial planners create investment and tax strategies for the present and estate planners create the same for the future. Separating these disciplines in this way is like building a house without blueprints. You can start by adding walls and positioning rooms as it suits you day by day and week to week, but unless you understand how it all fits together, you won’t be satisfied with the result and, like Jefferson’s Monticello, you may ultimately tear it down and start over wasting time, energy, and resources.
One of my most colorful clients once told me that his estate plan consisted of having the very last check he wrote bounce. I hear others notably say, “well you can’t take it with you, so you should spend it while you can,” followed by a retort, “you never see a hearse pulling a U-Haul trailer.” The problem with a spend-it-now philosophy is that no one can predict longevity or future health. Further, if you see paying taxes as a system where a government decides how to spend your hard-earned income, spenders usually fall short in the end and may not leave a family or charitable legacy.
Between now and the fifteenth of April, many of us are specifically focused on how well we planned throughout the year for an inevitable personal income return. Congress has put many tools in the tax code to benefit savers and strategic wealth planners. For example, the rate paid by a taxpayer on their earned income is more than the rate paid on the gain realized when a share of stock held for more than one year is sold. Additionally, the amount contributed to a traditional employer-sponsored 401k retirement plan or IRA allows a taxpayer to defer paying income tax on the amount contributed up to $23,000 in 2024 with an additional $7500 for those employees aged 50 and older. These contributions grow free of capital gains tax and are taxed as ordinary income during retirement when, presumably, a taxpayer has much less earned income. Saving in an employer-sponsored 401k plan and paying a lower tax rate when you sell the stock for a long-term gain is part of effective financial planning when compared to spending every dollar you earn after first paying taxes at a higher rate on the total amount of earned income. The more you pay in taxes now and at your death, will reduce your prospective legacy.
What if you don’t sell appreciated stock during your lifetime? Under current law, if your heirs inherit the stock and sell it immediately following your death, they won’t have to pay capital gains tax, so effectively, the increased value of this investment is not subject to taxation; this is commonly referred to as “stepping-up cost basis.” Tax-deferred retirement plans offer an additional benefit for a person with a thoughtful financial plan. With proper planning, your spouse may further defer taxes by receiving what is left of a retirement plan following your death through a “spousal rollover” while making your retirement plan part of his or her own. Not only does a spender pay income tax on the entirety of his earnings, but he also loses the opportunity to support his spouse, another beneficiary, or a charity upon his death. Lastly, without a proper IRA or 401k beneficiary designation, these assets made part of a thoughtful financial plan may be taxed as ordinary income tax upon your death. In these examples, it is hard to tell where financial planning ends and estate planning begins.
Unfortunately, father time has an undefeated record, so planning for efficiently transferring your estate at your death should be another carefully planned-for inevitability. No one is forced to write a will or make an estate plan. We are all free to plan or choose not to do any estate planning. Don’t worry. If you don’t have an estate plan, the state you called home has a plan for you. Each state has laws governing the estates of those who die without a will or intestate succession. Typically, these laws favor married couples having all their children from their marriage by providing that their entire estate passes to their surviving spouse or is available for their spouse to use. If you have children from a prior marriage, a deceased child, or a child with disabilities, the outcome may not be as you would have intended if you had a more thoughtful estate plan. Not to mention, ownership and distribution of any property by intestate succession is a judicial process delaying the transfer of your assets and reducing your legacy through legal fees, court costs and executor’s expenses.
Estate planning is more than planning for the inevitability of your death; it is also planning for the possibility of your incapacity due to an accident or the natural aging process. When a person is no longer able to manage his finances and has not earlier planned by creating a Financial Power of Attorney, the sole legal solution is to have a court appoint a Guardian, Conservator, or Curator to act in his place and in his stead. The time and expense of administering a Guardianship Estate followed by an intestate Decedent’s estate can easily diminish all his financial planning, leaving little for heirs and descendants or creating a charitable legacy.
Wealth Management without giving due consideration to estate planning can be a house of cards. The gains and rewards of thoughtful financial planning can all be lost or reduced by the time and expense of instate succession, financial guardianship, and taxing retirement plan assets immediately at your death. Following a blueprint when building a house is worthwhile. Planning creates a home you can enjoy with your family and friends for time to come. Estate and financial planning, when considered collectively, is essential to thoughtful wealth management by creating a foundation leading to opportunities for your heirs or leaving a meaningful charitable legacy to be enjoyed by others long after you are gone.
If you would like to learn more about estate planning, please get in touch with one of our trust and estate planning advisors. We are ready to help.
