Something Personal Episode 6: Why Estate Planning Is For Everyone
Vice president David Walters dispels the myth that estate planning is only for the very wealthy or very old. In this episode, David explains why sooner is better for financial planning around what happens after you die, and where someone should begin when preparing wills and other estate planning documents. He and host Amy Laburda also dive into the basics of the federal estate tax, along with the federal gift tax and how the two taxes are related. Discover who needs to pay estate taxes; some dos and don’ts of designating executors or trustees; the pitfalls of “sweetheart” wills; and much more.
About the Guest
David Walters, CPA, CFP®, has extensive experience in the firm’s tax, investment planning, estate planning and accounting practices. He also serves as a member of the firm’s investment committee and its Entertainment and Sports Team. David has been part of the executive team since 2021 and became a client service manager in 2006. He is based in Hillsboro, Oregon, having established Palisades Hudson's West Coast presence in 2012. David is among the authors of Looking Ahead: Life, Family, Wealth and Business After 55; his chapter on estate planning is the basis for this episode. For David's full biography, click here.
Episode Transcript (click arrow to expand)
Welcome to “Something Personal”, the podcast where a team of financial planners lend you their expertise, sometimes on death, sometimes on taxes, and today on both. I'm Amy Laburda, the editorial manager at Palisades Hudson Financial Group. My guest today is David Walters, a Certified Financial Planner™ and a vice president at our firm. Thanks for coming, David.
Thanks for having me.
So a lot of people think estate planning is something that is mainly applicable to wealthy people. The word “estate”
probably has a lot to do with that. But in reality, who actually needs estate planning?
Everybody. Everybody can benefit from some degree of estate planning, whether that's something very simple, like naming a guardian for your children, which anyone with children should do. Or in cases where we're talking about people with wealth, something like transferring assets into a trust to reduce estate taxes. There's a whole host of things that estate planning covers that
in one way or another can apply to everyone.
OK. And talking about not only stage of life, but age, when should someone start putting together an estate plan?
As with any planning, I mean, the earlier the better, especially if, like I was saying, if you have kids, at a minimum, you should have a will that names a guardian for your children. So, you know, that's obviously something you would do very early in life. As you start to accumulate wealth or, you know, as you're on a path where you would generate enough wealth that you
potentially need to start thinking about these things, like estate tax and gift tax. You want to start planning early, because that's where you can really start to minimize the effects of those taxes, by tackling it early rather than when it becomes a real issue that's hitting you in the face.
So say you've convinced a listener and they're starting for the first time. Where should they get started?
Well, you want to start thinking about what your goals are.
Your main focus may be transferring assets to your heirs efficiently or to make charitable contributions or to ensure a smooth succession of a family business. These types of transfers can take place throughout your life or at your death, and your priorities are going to inform the plan. You also probably want to take into account the wishes of your family and beneficiaries. You obviously don't want to be leaving assets to people or
leaving people with assets that they don't want. You know, you want to start generating these thoughts as early as possible, and then you can start thinking about, you know, ideally with a professional, how you might address some of those concerns to reach your goals.
We've established not everyone is affected by the federal gift and estate tax, but say you're one of the people who are or might be. How do you fit that into your estate planning goals?
Well, so the federal estate tax is, you know, determined by the value of your estate, obviously at the time of your death.
If the total value of your estate is below the threshold that is taxable, then the estate tax doesn't apply. For 2023, that threshold is $12.92 million per person. If your gross estate is greater than this amount, then the executor of your will needs to file an estate tax return. You want to put your executor in touch with professionals who can help with this process. If you might fall into this category someday, like I said, then you want to start planning and putting things in place well beforehand so you can minimize the impact of any
taxes that might be due and ensure that things go smoothly during the estate administration process.
So you mentioned your gross estate being over the cutoff. Does that mean the executor might have to file a tax return, even if you don't actually owe any tax?
There are certain situations where you would want to do that, yes. There's something in the estate tax law called portability, which I'll touch on in a little bit, where you actually would want to file an estate tax return even if your estate is below the threshold. So, yes.
Amy Laburda 03:54
OK, so that's the estate tax, but we also mentioned the federal gift tax. How does that work?
So the estate and gift tax are two kind of — They're separate but related systems.
The gift tax is meant to make it so that people can't transfer large amounts of assets during their life to try and avoid the estate tax. Anything under $17,000 per year is not subject to the gift tax, so you can give someone $17,000 per year. There are other exceptions that aren't subject to gift tax. For example, tuition payments or medical payments that are paid directly to the institution are not subject to gift tax either.
Amy Laburda 04:32
What if you were to give an adult child the money for a down payment on a house? Would that be subject [to it]?
Yeah. Other than the few exceptions I just mentioned, it doesn't really matter what the money is used for. The same $17,000 limit applies.
OK. So if every year you gave your child less than the excluded amount, so currently $17,000, then no gift tax applies at all. It resets every year?
Right. Also, if you're married, you and your spouse can each give $17,000. So
you could give a child, for example, $34,000 and be under the annual gift tax amount. Simple annual gifting like that can be a very powerful tool, especially if you're dealing with gifts from parents and grandparents to multiple children or grandchildren. When you're considering a gift to grandchildren, there's something called the generation skipping tax. This is an additional tax from the regular gift tax and estate tax.
It's basically to prevent people from skipping a generation and giving a vast amount of money to grandchildren, a future generation, and therefore not paying an estate tax at the middle level. The generation skipping tax, it's essentially the same rate as the estate tax. You have the same annual exemptions and lifetime exemptions for the generation skipping tax that you do for the regular estate tax.
They are different and they are separate. But you have those same exemptions. So for example, if you were creating a large trust for your grandkids, you might allocate some of your lifetime GST exemption to that trust so that it doesn't get hit with the generation skipping tax.
Gotcha. So you start with the same level on both of them, but you have to state which one it is if you're using them?
Yes. And you do that when you're filing the annual gift tax return.
In any year where you make a taxable gift, you need to file a gift tax return with the IRS. This is not the same as your income tax return. It's a totally separate form. On that return, you're disclosing how much you've gifted during the year and whether or not you are allocating any of your exemptions to that gift.
So is that form usually due April 15th or whenever
Tax Day is?
It is. The due date is the same as your federal income tax return. And if you extend your income tax return, you also can get an extension on your gift tax return. And on the topic of spouses, I'll jump back to that concept of portability that I was talking about. Again, this is something that kind of came into the estate tax law within the last
five or so years, five or 10 years. This has to do with the lifetime exemption that I mentioned earlier, not the $17,000 annual exemption, but that $12.92 million amount. When the first spouse dies with unused lifetime exemption still left,
the surviving spouse can claim that unused exemption for their own future use. Essentially, the first spouse's unused exemption is transferred over to the surviving spouse so it's not wasted. This is a very important tool for families where estate tax may be a consideration now or at some point in the future. Now again, note that the estate tax return must be filed for the first spouse claiming portability in order to do this. So that was the situation where I was mentioning — where you might want to file an estate tax return
even when no tax is due to claim this portability exemption.
So lawmakers have built some of these exceptions into the law already for lifetime gifts and bequests. But are there other ways, when they're working on an estate tax plan, that people can use this advance planning to minimize effects of this tax?
Absolutely. One common thing people do is establish what's called an irrevocable trust. Trusts have a colloquial association with the wealthiest people,
and certainly the estate tax really does apply only to people with substantial wealth, but trusts can be a useful tool for anyone who might choose to exercise greater control over the way their assets are transferred or handled. It's important to note: Once you create an irrevocable trust and transfer assets into it, you cannot get those assets back. The assets are no longer considered to be owned by you personally, and therefore they're not part of your estate for estate tax purposes anymore,
although you might have to pay gift tax or use your lifetime exemption when you contribute assets to those types of trusts.
OK. So in addition to those types of trusts, are there other options people might consider?
Yeah. I mean, there are a lot of them. Estate planning covers a wide gamut of things. For example, there's irrevocable life insurance trusts. Those are specifically used for life insurance policies, where a gift is made to the trust to buy an insurance policy, and then the proceeds from that policy at death
are not included in that person's estate. There are things called qualified personal residence trusts. Those are, you might've heard the term QPRTs. That's another different type of trust where you put your home into a trust, and the value at which it goes into the trust is discounted for gift tax purposes. And then at the end of the trust term, your house will pass to the trust beneficiaries, most likely your children or heirs, and it won't be included in your estate. Another
planning technique I've used a lot is intra-family loans. That's not an estate planning vehicle per se, but it's an effective mechanism in kind of our toolkit, where older generations loan funds to younger generations at low interest rates. There's a whole host of options, of things that you can do depending on what your particular goal might be and what you're trying to accomplish. And they can usually be tailored to fit your needs.
Amy Laburda 10:26
And so just to remind our listeners, what's the definition of both a trustee and a beneficiary when you're talking about trusts?
So at a very basic level, and I'll use an example here, someone creates a trust. Let's say I create a trust. I'm the trust creator. I might name my — and the trust is for the benefit of my son. I might name my brother as the trustee of the trust. So my brother,
he doesn't own the assets. He's, in a sense, managing the assets for the benefit of my son. So my brother's the trustee, my son is the beneficiary. And my brother would be, based on the terms of the trust, in charge of managing the assets for the benefit of my son, distributing them to him. An individual can be a trustee, or you could have a trust company or a bank as a trustee. I generally prefer an individual trustee as opposed to an institutional trustee.
Trust companies in certain situations can be great and maybe necessary, but they are probably a little more rigid in how they have to handle it, and they might not have the personal relationship with the beneficiaries. So like I said, if a trusted family member or friend is an option for a trustee, that's usually the way I like to go.
Obviously, you want to pick someone that you have total faith in. But
on a legal level, what obligations does a trustee have to the trust if they agree to serve?
They have a fiduciary responsibility to act in the best interests of the beneficiaries of the trust, current and future, rather than in their own best interests. So yes, there are rules as far as how they're required to manage the trust.
So it sounds like if you're concerned that estate tax could be in play,
there's a lot of planning and administration going on even before you get to writing a will, which I think is the first thing a lot of people think of with estate planning.
That's right. If you have enough wealth where estate tax is even a consideration, then you need to consult an experienced advisor or attorney who can work with you in putting a plan together. You know, one thing you usually want to avoid is something called a “sweetheart” will or an “I love you” will, where you just leave everything to your spouse, since it doesn't offer any protection from creditors or liability.
Those can be appropriate in some situations, but often there's just a better way to go about things, and a professional advisor or attorney can give you those options.
Whether or not you have any estate tax considerations, what are some steps that everyone needs to take?
Well, first, you're going to want to compile your important documents. Have a list of where they can be found. Typically I advise two trusted people should have that list.
Amy Laburda 13:06
And what documents would you normally expect to be on a list like that?
Stuff like your will, any trusts you've created, advanced medical directives, memorial instructions, personal records, legal financial documents like deeds and insurance policies, retirement accounts, titles to cars, life insurance policies. The list is long. It's also a good idea to make
your important, a list of your important online accounts and passwords. Because you know, just imagine how difficult that will be for whoever's trying to administer your estate if they don't have access, or knowledge even, of how to access any of your online accounts. Or, you know, it's not a bad idea to create an inventory of your assets, so that nothing gets forgotten and then provide some sort of access or guidance on, you know, how to find those things or access those things.
a tip I will bring in from an earlier conversation I had on a different episode: It's important to have these in a place that is accessible. So a safety deposit box could be a problem unless someone has a power of attorney.
Yes. And I'll also just mention that a lot of clients that I deal with, married couples, there's often one person who handles a lot of these things, or handles most of these things. And
like I said, just imagine if you're the other person and you don't have the lifetime of knowledge of how to manage all this stuff or what even all this stuff is, paying bills, stuff like that. So you want to take that into consideration as a couple, is what if the one who's been doing this for forever all of a sudden weren't there? You want to set it up so that the other person can step into their place.
All right. Let's back up a little bit to the first thing on this list of documents, your will.
So what happens if you don't make a will?
That's called dying intestate. It's not ideal. This will make it so that it's the probate court's responsibility to decide where your assets go. Probate laws vary from state to state, but they're generally consistent in their order, where assets will go first to the surviving spouse; then to children or direct descendants; then to parents;
then to the descendants of parents like siblings, nieces, nephews; then to grandparents; and then to the descendants of grandparents, like aunts, uncles, first cousins. That may be how you want your assets to flow, but maybe not at all how you want your assets to flow. And probate can be a long and cumbersome process. So you definitely want to, you know — Dying intestate, as I said, is not ideal.
So you mentioned that in most states everything goes to your spouse if you have one.
If you just plan to leave everything to your spouse anyway, do you still need a will?
It's still a good idea. It streamlines the process and avoids extra expenses. And like I said, to the extent you can avoid leaving anything to the probate court, you want to do that, just because it's a long, cumbersome, expensive process. And just leaving a will will make sure that everything just runs much more smoothly.
OK, so everyone needs a will. Can you write it yourself, or do you have to hire a lawyer?
David Walters 16:05
I mean, if your assets are really simple and you only plan to leave them to a few beneficiaries, I suppose you could very well write your own will, especially with the help from books, software, websites. Sites like LegalZoom are okay in the most basic scenarios. Your will should establish your identity, revoke any former wills, name an executor, name guardians for any minor children, say how you prefer any debts to be paid,
confirm your wishes for establishing trusts, and provide for any pets.
Like leaving assets to your pets?
You can. Well, you can't actually leave them to your pets, though some celebrities have actually tried. But you can appoint a caregiver and make that person the beneficiary for the assets that were meant to go toward the care of the pet.
While we're talking about wills, are there any other major misconceptions you've run into with clients about what you can or can't put in a will?
David Walters 16:58
One thing I hear periodically: You shouldn't create conditions for your gifts or requests. Like, “I leave my beach house to my grandson provided he marries a nice girl.” I mean, that one's actually illegal, but other conditions, like if you want to leave the beach house to your grandson as long as he has a job, that's just overly complicated and vague, in that case. And that can just lead to all sorts of problems. Although some people do create
trusts with conditions — like, for example. A condition might be on when an asset can be distributed, for example. But the condition needs to be definable, like a distribution upon obtaining a degree from a four-year university, or something like that.
Yeah, I assume you don't want to include anything like “a good job,” because there's no way to know what that would be.
Right, who's to say what a good job is?
Sure. So you mentioned that conditions are a bad idea, and sometimes not legal in your will, but that you can more often set them up in trust.
Is that a thing, if you have a client who comes to you and wants to do that, that you would say is OK? Or is it a thing you would discourage them from, even though they technically could do it?
Yeah, it's one of those things that you technically can do. I've rarely advised someone to do it. It complicates things and, you know, it's in my view not always a great way to elicit the behavior that you want.
I'd rather see in a scenario like that, assuming you have a trustee who's a trusted family member or someone that you can rely on, and you have what I'll call a problem beneficiary, I'd rather have the trustee have discretion over when they should be making distributions to that beneficiary, rather than having something hard-coded in the trust. Like some sort of metric that
the beneficiary must meet. Because even if it's something definable, sometimes it's something that they can accomplish, but maybe they still shouldn't get that distribution and a person can make that judgment better than a trust document that has something hard-coded into it. So I like giving trusted advisors — in this case, the trustee who has a fiduciary responsibility — I like giving them the power and control to say, ”This beneficiary is ready for a distribution” or “This beneficiary is not ready for a distribution.”
Amy Laburda 19:17
And it sounds like it comes back to a thing we've talked about in other episodes of the podcast, which is communication. So in that case, you would sit down with the trustee, presumably, and say, “Hey, this is kind of what I have in mind. These are some of my concerns.” It is ultimately up to them, but you could talk to them about what your intentions are, I assume.
Right. And there are like side letters that aren't binding in any way, but you can kind of give — The creator
of the trust can state their wishes, at least. So that the people that are in charge of the trust, whether, it could be 50 years down the road, at least know what the original intentions were. And I just, like I said, when you're drafting any estate planning document, you want to draft them for flexibility. And so that the people, the trusted people who are in charge, can
have the flexibility to make the right decisions in the moment, rather than being obligated to do something that was maybe thought about 50 or 60 years ago. But many things can change over that period or be interpreted differently over time periods. So I like flexibility as opposed to hard coding anything in.
Yeah. And the whole trick with estate planning as a discipline seems like it's: You won't be there to say what your wishes are, so
you have to allow for that.
Right. And you want to set it, you know, you want to set things… You can only control things so much when you're gone, but you want to set things up so that the people that you've put in, you know, that you trust and have put in charge of facilitating all your assets in your estate, can make the right decisions for you.
All right. Let's back up a little bit. You mentioned one thing a will should do is designating an executor. What goes into choosing who should serve as your executor?
David Walters 21:04
Well, you want to choose someone you know to be trustworthy, fair, honest of course, capable of fulfilling the entire fiduciary duty. Ideally, your executor should be practical and organized. The executor's tasks will involve a great deal of paperwork, important deadlines. You don't want to select someone who will find the job completely overwhelming. That said, I mean, in most cases, they're going to want to hire professionals to assist them, so
having those professionals in mind beforehand is helpful, especially if your executor might not fit all the criteria I just mentioned.
Sure. And as you said before, in general, you want to discuss your estate planning choices, but I assume it's very important to tell someone before you name them your executor, so you don't surprise them.
Yeah. I mean, it would be a nice thing to do, because being an executor is a big job.
Sure. And as you mentioned before, in some cases, they may need to file an estate
tax return for the estate or handle the portability election.
That's right. And again, especially in that point, they'll probably want to engage the family accountant or attorney to help them with this. I would say think of choosing an executor more as asking someone to help you with a very big complicated task, rather than thinking that it's like an honor you are bestowing on someone.
So you definitely shouldn't base it on who expects you to name them, in the absence of anything else.
No, you want to pick the right person for the job.
we touched on making a will, setting up these trusts, lots of complicated plans, potentially a lot of paperwork, digital or physical. Once you have all these plans in place, you've put them somewhere safe. Can you just lock them up and walk away?
No, no you can't. As with anything financial, the last step in estate planning is keeping your plans up to date. Your situation might change, your wishes may change, the tax laws may change. Of course that happens more often than you would think.
Amy Laburda 22:59
So what kind of personal changes would trigger “it's time to update your estate plans”?
Well, you know, just changes in, you know, remarriages, you know, death of children. Anything where a family dynamic is changing in a material way due to something like that, you know, might be something that you want to relook at your estate plan.
Amy Laburda 23:23
So we have not yet found the mysterious exception to “don't set it and forget it,” which seems to be true of pretty much everything we do at Palisades Hudson.
So David, we've covered a lot of ground. Was there anything else about estate planning that you would advise your clients to keep in mind, or that you want to make sure people always do?
I mean, I would just reiterate: Start early, consult a professional.
This isn't really something you generally should be doing on your own. And there's a vast array of estate planning vehicles out there that might be a good fit, depending on your situation and your goals. An experienced professional will be able to work with you to craft the right plan that fits your needs. I guess I'll leave it at that.
Great. Well, David, thank you so much for coming on the podcast today.
Thanks for having me.
“Something Personal” is a production of Palisades Hudson Financial Group,
a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books: Looking Ahead, Life, Family, Wealth and Business After 55
and The High Achiever's Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes, and performers. Both books are available on Amazon, in paperback and as e-books.