Estate planning is an essential part of any financial plan, but it’s often the last piece that people tackle. In fact, only 44% of adults age 55 and older have an estate plan. That means most families are left to pick up the pieces, navigate probate, and settle their loved one's estates on their own.
While it may feel like you have plenty of time to create an estate plan, delaying the process can actually result in hidden costs that can affect the value of your estate, the longevity of your business, and the peace of mind of your loved ones. Here is a guide to the potential drawbacks of waiting too long to start your estate plan:
1. Increased Taxes and Fees
The most common tax strategies involved in estate planning often require multiple years to implement, so advanced planning and timing are critical. Failure to plan can result in unnecessary taxes and reduced assets available to pass on to your heirs. Consider the following:
- Federal lifetime exemption: Currently set at $11.7 million, this can be used to exclude assets from your estate either during your lifetime or at death. It can be used to gift substantial amounts of assets during your life without paying gift taxes. At death, it can be used to pass your assets to your heirs without paying estate taxes. Depending on your current situation, it may make sense to gift your assets while you’re still alive, which requires planning to occur sooner rather than later.
- Annual exclusion gifts: This is another option that can be used during your lifetime to gift assets, thus removing them from your estate and avoiding gift taxes. Every taxpayer can give up to $15,000 per person to as many people as desired per year without incurring gift taxes or using the federal lifetime exemption. Over time, gifting to multiple people over several years can result in a sizable reduction in your overall estate. This can be an extremely effective way to reduce your potential tax liability, but it requires planning.
- Management fees: Many people have their assets in several places, managed by different people or firms. This can be costly in terms of management fees, and it can also be hard to identify exactly what you have and how it should be covered under your estate plan. Organizing your finances can take time, and the sooner you start, the more options you’ll have.
2. Potential Business Liabilities
If you’re a business owner, you need to think about your exit strategy and business succession plan in advance. Not only does it take time to decide who will take over and under what circumstances, but it also takes time to make sure the proper documents are in place to ensure what you want to happen actually takes place.
Common documents and estate planning vehicles a business owner might want to explore include:
- Trusts: Often used to avoid probate and minimize taxes when passing assets to the next generation.
- Buy-sell agreement: A legal agreement, similar to a will, outlining how a partner or owner’s share of a business should be reassigned upon death or incapacity.
- Key person insurance: A life insurance policy purchased to cover an important person such as an owner or executive. The benefits from the policy are then used to buy out that person’s share of the business in the event of death.
Each option listed above requires planning and coordination with an estate attorney. Without proper preparation, your assets will be dispersed according to state laws. In this instance, ownership of the business often falls into the hands of a spouse or children. In reality, many people want to pass their businesses on to a high-level executive or co-owner instead.
3. Mental and Emotional Costs
In addition to the financial costs that can come from delayed estate planning, there are also mental and emotional costs. If you wait to prepare your estate documents, you run the risk of becoming incapacitated or even passing away without a plan or protection in place for your loved ones. The last thing you want to pile on top of grief is stress.
A basic estate plan should include the following documents:
- Last will and testament: This document spells out your final wishes and names a person or entity to handle your financial affairs upon death. It will detail your assets, which heir receives what, and identify a legal guardian for any minor children.
- Medical directive and health care proxy: These documents outline the type of life-saving intervention you would like and identify a person authorized to make medical decisions on your behalf.
- Power of attorney (POA): This document allows an authorized individual to make financial and business decisions on your behalf.
Even a basic estate plan helps provide your family and loved ones peace of mind. It can alleviate unnecessary stress in otherwise extremely stressful situations, like medical emergencies, incapacitation, ongoing medical treatment, or even routine procedures.
Get Started Today
Planning an estate involves many intricate details and time-consuming tasks, but don’t let that prevent you from getting your affairs in order. At Black Walnut Wealth Management, we have the tools and experience to help. Don’t leave your loved ones and beneficiaries struggling to figure out the next steps after you’re gone. Schedule a 15-minute introductory meeting by calling us at (231) 421-7711 or using our online calendar.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
Braund is a Northern Michigan native who truly enjoys all that the area offers, including hiking, biking, swimming, skiing, volleyball, and boating. He loves spending time with his family — his wife, Jodi, and his two children — and maintaining a balanced life. To learn more about Eric Braund, connect with him on LinkedIn.
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