Do I need a financial advisor for estate planning?

People are often surprised that estate planning is such a big part of my practice. And I will admit that, at first glance, it seems odd for a financial advisor to be involved. Executing the nuts and bolts of an estate plan is usually done by attorneys and accountants, after all.

But in my experience, the advisor often has a wider perspective that is invaluable for creating the plan in the first place. Ideally, they will have a comprehensive picture of their client’s assets, goals, and key relationships, which in turn will allow them to guide the client through three critical questions about their estate.

1. What goes to whom?

The answer to this question is obviously the meat of any estate plan; and because it is so personal, the more specific you can be, the better.

One thing you may not think to do, however, is clarify exactly which of your possessions are really yours to give away. If that sounds weird, ask yourself –

  • Are there things you own jointly with someone else like a spouse or business partner?
  • Are you still paying off any debt-financed assets?
  • Is there anything that already has designated beneficiaries?

Once you have sorted that out, the question of beneficiaries – i.e. the recipients of your estate – is very open-ended. You can leave your stuff to anyone, even entities like nonprofits or trusts, and there can be as many of them as you like. But once you have figured out who you want to include, you should also consider these questions:

  1. How exactly will things be divided?
  2. If a beneficiary dies before inheriting, how are contingent beneficiaries determined? This is also where the “per stirpes” vs. “per capita” distinction comes in handy.

2. Who should be in charge?

No matter how carefully you craft an estate plan, there will always be unforeseen questions, challenges and problems left in someone else’s hands.

That “someone else” is the other essential piece of your estate plan. Technically there are two important roles that can – but do not have to be – filled by the same person:

  • Power of Attorney (POA) – this term is often used to refer to the person empowered to make decisions on your behalf if you are incapacitated but still alive. But this is slightly inaccurate. Technically the POA is the document that designates that person, while they themselves are known as your attorney-in-fact or agent.
  • Executor – assumes responsibility for whatever loose ends are left behind after your death. If you have not already specified who that should be, the state will assign someone to do it. But most of us would like to make that decision for ourselves – hence the importance of establishing an executor ahead of time.

3. What about estate tax?

As the name suggests, estate tax is levied on the total wealth of a deceased person before it passes to their heirs. This is not an issue for many people, however, as the tax is only applied to whatever portion of the estate exceeds a certain dollar threshold, known as the estate tax exemption.

Like many other taxes, estate tax is found at both the federal and state levels, and different thresholds exist for each. The federal exemption is a hefty $12.92 million for 2023, but will likely drop by 2026 unless Congress interferes. Still, you may have to contend with state estate tax if you live in one of the twelve states that have it (thirteen counting Washington, D.C.).

In Washington state, for example, your estate will be taxed on any portion exceeding $2.193 million at your death. Here are all the state estate tax exemptions for 2023:

  • Connecticut – $12,920,000
  • Hawaii – $5,490,000
  • Illinois – $4,000,000
  • Maine – $6,410,000
  • Maryland – $5,000,000
  • Massachusetts – $1,000,000
  • Minnesota – $3,000,000
  • New York – $6,580,000
  • Oregon – $1,000,000
  • Rhode Island – $1,733,264
  • Vermont – $5,000,000
  • Washington – $2,193,000
  • Washington, D.C. – $4,594,000

A word of caution: life insurance payouts, although themselves not taxable, count as part of your “taxable gross estate.” This means your estate could end up exceeding the exemption amount upon your death even if it did not before! One workaround for this is an irrevocable life insurance trust (ILIT), which reminds me…

A word about trusts

You can think of an irrevocable trust as a safe where you stash part of your wealth. The catch is that you do not have the key to this safe. Instead, a third party – the trustee – keeps that wealth safe until certain conditions kick in. The coming-of-age of your heirs may be one such condition; another, of course, would be your death.

Trusts can be especially useful in two situations:

  • If you want to put specific restrictions on what happens to your assets after your death, other than having them just go to your heirs or charity of choice.
  • If you need to move assets outside of your estate before you die (e.g., to reduce or even eliminate estate tax). Usually for tax planning purposes.

Trusts can be extremely powerful estate planning tools if used well – but I have a bit of a chip on my shoulder about them because I frequently see them set up for no good reason.

Although estate planning can be complicated, it does not have to be. For many people, a well-drawn will is all that is necessary. The point is just to accomplish, ahead of time, the tasks that would otherwise have to be done (without your input) after your death, and to ease the burden on your loved ones as a result.