How Financial Advisors Can Help Create an Effective Estate Plan

What does estate planning have to do with your financial advisor?

Today I want to talk about why Estate Planning is on our services list. We’re not attorneys, so what do we, as financial advisors, have to do with estate planning?

Oftentimes, in addition to estate planning attorneys, those in the insurance industry talk a lot about estate planning — and that’s because they sell life insurance to help out when someone passes.

At CSH, we do have a commission-free insurance offering that we worked hard to find for our clients, but that’s not all when it comes to creating an estate plan. We’ll also help you create an effective plan. But what does that mean?

I certainly understand the confusion. The term estate planning gets thrown around a lot. And quite frankly, it means different things to different people even in our industry. To an insurance-driven firm, it might mean selling a life policy to pay future estate taxes or to help with the transition of a business.

To a Certified Financial Planner like myself, estate planning is one of the five sections of financial planning. It’s so important — it gets a category by itself just like investments or tax planning. Sometimes the estate plan is quite simple, but it still needs to be addressed.

How should an investment advisor or financial advisor aid in the estate planning process?

For the most part, financial planning and investment firms don’t execute legal documents themselves when it comes to an estate plan. An advisor should work with a qualified law firm to do that.

Effective estate planning should be considered a team concept that requires the inclusion of an entire group of professionals to work well — attorneys, CPAs, CFPs, etc. If your advisors don’t work well with others, this can be a huge hindrance to achieving your goals.

Advisors should also educate their clients on basic estate planning tools such as durable springing powers of attorney, healthcare powers of attorney, and how to use trusts to isolate and protect assets for future use.

A Tale of Two Estates: Probate and the Taxable Estate

First of all, it’s important to remember there are two estates when someone dies — the probate estate and the taxable estate.

The probate estate consists of assets that cannot be passed via a written document.

Proper Beneficiary Designations are CRUCIAL

Non-probate assets include IRAs, annuities, life insurance, and retirement plans. Properly assigning beneficiaries for non-probate assets is absolutely critical to getting the result you ultimately want.

Just assigning your IRA to your estate might seem to accomplish your goal, but remember, you just turned a non-probate asset into a probate asset. What are the implications? Your estate will pay a fee based on that probate asset. So assigning and titling beneficiaries properly is of the utmost importance to get the result you want. It’s best to have a guide, who has done this many times before, assisting you with this vitally important task.

The Taxable Estate

The taxable estate is everything you own including your probate assets. The taxable estate is the amount on which federal estate taxes will apply. Today a couple can have up to $12 million in assets before worrying about federal estate taxes. But that doesn’t mean it should be ignored. The exemption or maximum amount a couple can have in assets has changed drastically over the years. In the 1990s when I started, it was only around $500,000. If you had more assets than that, you could owe estate taxes. The current law is set to expire in 2026, so who knows what will happen after that.

In addition, states have their own estate tax laws. Illinois currently exempts $4M in assets. That might sound like a lot, but if you own farmland or other property, you might want to think about having a plan to exempt assets going forward. Some states, like Missouri, don’t have an estate tax at all.

Your advisor should be aware of tax laws and understand how to use the appropriate beneficiary designations.

The Gift Tax

When it comes to effective estate planning, there’s another tax to consider, and that is the gift tax. Gift tax actually works in concert with estate taxes. Gift tax rules can jump up and bite you.

Want to put someone on the title of your house? You might have just triggered the gift tax and created some negative income tax consequences. Usually, gift taxes won’t be due to the federal government, but you might have to file a gift tax return. Also, other tax benefits might have been lost by such a seemingly simple transaction. Again, it’s best to speak with an experienced guide before making ANY decisions like these.

While an advisor should play a major role in the creation of an estate plan, even a simple one, it is after the death of a client when an advisor earns his or her stripes.

You Need an Advisor You Can TRUST After Death

It’s not uncommon for one spouse to manage the family finances. An experienced financial advisor can be invaluable when such a person passes unexpectedly. The surviving spouse will have multiple financial decisions to make, generally at a time when finances might even be secondary to other challenges.

A star advisor will be helpful in making estate tax elections, deciding what assets to sell to pay expenses, meeting deadlines, and minimizing possible income taxes. The advisor should also understand individual taxes and estate/trust tax rules as well as tax basis. Estate and trust rules are a whole unique category of taxation. For example, the estate/trust might want to plan a distribution before year-end to minimize the high estate/trust tax rates. Additionally, the advisor should transition assets for a quick and safe payout.

After death, the surviving spouse will now have their own estate planning issues to think about. Are there children who might need financial help for college? How will that be funded? What assets should be used and should they be repositioned as the child gets closer to using them? What if the surviving spouse should pass? There are a lot of questions and scenarios to think through during a really stressful time.

A great financial planner should be able to help you think through post-estate planning scenarios and decide what is best moving forward.

At CSH we’ve worked with our clients on all these scenarios, but the bottom line is really this:

Do you have one person you can call to get unbiased advice and guidance?

“Is this the right thing to do at this time or should we wait?”

“Should I pay the house off or pay for college?”

“I’ll need cash soon. Where should this come from and will there be tax implications?”

Our goal at CSH is to give our clients peace of mind.

“Yes, you’re doing the right thing and it’s going to be fine.”

“Call us anytime and we’ll work through it.”

“Yes, you’ll have plenty of income going forward, and here is where it can come from.”

“Your challenges moving forward might be this, and here is how we can deal with it.”

Settling an estate can be a long road that seems to go on forever. Our goal is to simplify the process and aid our clients along the way. There will be others involved, but it’s helpful to have a quarterback who is decisive and understanding.

Our unique experiences in the tax world make CSH an excellent partner in creating a big-picture estate plan that makes sure all the moving parts will work when the time comes for your plan to go into effect. And our long-term relationship with many of our clients can ease the burden a bit when the unthinkable happens.

If you have questions about Estate Planning, Investment Strategies, Retirement Planning, Wealth Management, or Business Succession, please give us a call at 217-824-4211 or contact us on our website. We’ll be happy to speak with you and answer any questions you may have!