Why Estate Planning Should Be a Top Financial Planning Priority

According to a survey by Caring.com, only 32% of American adults have a will or another type of estate planning document in place.¹ The study also confirmed that procrastination is the main reason, with 42% of people saying they simply haven’t gotten around to it. Disturbingly, it also finds that the wealthiest and highest-educated Americans are the most likely to neglect estate planning due to procrastination.

The study also found, however, that 1 out of 4 Americans say inflation has caused them to see a greater need for estate planning. Whatever the reasons for delaying action, there are some easy steps that can be taken to get on the right track.

Estate Planning Basics

At DBR & CO, estate planning is an essential aspect of our financial planning process. It can help you control and protect your assets, avoid probate, provide peace of mind, and minimize taxes. Here are some of the key benefits and essential components of a comprehensive estate plan.

Benefits of estate planning

1. Asset Control: Estate planning gives you control over who inherits your property, money, and other assets and allows you to dictate the distribution of those assets. Sean Link, JD, Estate Planning Specialist at Underwriters Brokerage Service in Pittsburgh, PA, notes that this benefit of estate planning gives rise to a common misconception. According to Link, “Many people think about asset control and estate planning narrowly as, ‘Who gets my stuff?’ They don’t think about the possibility of it being a multidimensional process that can include how and when assets are passed on to beneficiaries. When you involve trust planning and other pieces, it can go beyond the singular event of someone’s passing, and that is where we’re really talking about legacy planning.”

2. Avoid Probate: Probate is the legal process followed to distribute assets and property following a person’s death. It is a costly and time-consuming. According to Trust & Will, probate costs can range from 2% to 7% of an estate’s total value. By naming beneficiaries or establishing trusts, you can avoid the probate process.

3. Asset Protection: Beyond aiding in avoiding the time and costs associated with probate, trusts can help you protect and shield your assets from creditors, lawsuits, and other legal claims, ensuring that they are passed on effectively to your beneficiaries. As Link points out, asset protection can benefit not only the current asset owner, but also extend to the next generation or other beneficiaries.

4. Reduce Taxes: By using tax-saving strategies like gifting and trusts, you can minimize the tax liability of your estate.

5. Peace of Mind: Most importantly, proper estate planning gives you and your loved ones peace of mind and reduces stress during difficult times, as it facilitates distribution of assets according to your wishes. Failure to plan effectively can have significant emotional consequences. “When you either don’t have a plan or you have one with assets or beneficiaries that weren’t contemplated, you could leave the survivors wondering what to do,” says Link. “You put them in a position where they have to think hard and make assumptions about what the deceased would have wanted—estate planning provides an opportunity for you to decide exactly what you want to happen, instead of putting your loved ones in a difficult position at a time when they should be mourning, not figuring out asset distribution.”

Essential components make up a comprehensive estate plan:

1. Will/Revocable Living Trust
2. Financial Power of Attorney
3. Health Care Proxy and living will
4. Beneficiary designation forms (e.g., IRA, life insurance, 401(k))
5. Real estate title documents
6. Trusts you created and funded during life (e.g., Irrevocable Life Insurance Trust (ILIT))

Important estate planning tax strategies

In addition to facilitating control and protection of your assets, allowing you to avoid probate, and affording peace of mind, certain estate planning tools can also provide compelling tax benefits. Specifically, by taking advantage of tax-saving strategies like gifting, trusts, and other estate planning tools, you can significantly reduce the tax liability of your estate.

1. Gift Tax Exemption: In 2023, the gift tax exemption is $17,000 per recipient per year. This means you can gift up to $17,000 or an equivalent value in property without owing federal taxes on the gift. For married couples, the gift tax exemption is $34,000 per recipient per year. By gifting assets during your lifetime, you can reduce the value of your estate and lower the amount of estate tax that will be owed.

2. Estate Tax Exemption: In 2023, the lifetime estate tax exemption is $12.92 million per individual. This means you can gift a total of $12.92 million in money or property during your lifetime without owing federal taxes on the gifts. The lifetime estate tax exemption is doubled for married couples, meaning you and your spouse can gift $25.84 million over your lifetimes before owing taxes on the gifts. By structuring your estate plan to take advantage of the estate tax exemption, you can reduce the amount of estate tax that will be owed. Funding certain trusts (ILIT, Spousal Lifetime Access Trust (SLAT)) can help prevent assets from being taxed at up to 40%. The donor's transfer of assets to the SLAT is considered a taxable gift, but gift tax may not be owed if the donor utilizes their federal gift and estate tax exclusion. If structured properly, the assets and any future appreciation is removed from the donor's taxable estate.

3. Irrevocable Trusts: Assets transferred to an irrevocable trust are removed from your estate, which can help reduce estate taxes. Additionally, income generated by the assets in an irrevocable trust can be distributed to beneficiaries, potentially reducing income taxes.

4. Charitable Giving: By donating assets to a charity or creating a charitable trust, you can remove those assets from your estate and receive a tax deduction for the donation.

5. Life Insurance: By purchasing a life insurance policy and naming your beneficiaries, you can provide your loved ones with a tax-free source of income after your death.

“Sunsetting” estate tax exemption creates urgency

The $12.92 million lifetime estate tax exemption quoted above is high by historical standards. Elevated exclusion limits were introduced in 2018 as part of The Tax Cuts and Jobs Act of 2017 and will expire at the end of 2025. On January 1, 2026, the lifetime estate tax exemption will “sunset” and be reduced to the $5.49 million limit (adjusted for inflation) that was in place in 2017 before the Act became effective.

While there is still time to capitalize on the high exemption limit, and although the limit might increase again in 2024 after adjusting for inflation, the sunset creates an additional cause for urgency around estate planning. This is especially the case for those that anticipate making significant gifts, as the prospect of a 50% or greater reduction in exclusion limits could have meaningful tax implications for large gifts made after 2025. The following tables illustrate the tax implications of gifting before and after the current lifetime exclusions sunset at the end of 2025:

Individual Lifetime Gift Value	Taxes Owed-Before 1/1/2026	Taxes owed-After 1/1/2026	Tax Savings If Gifted Before 1/1/2026
$5,000,000	$0	$0	$0
$7,500,000	$0	$600,000	$600,000
$10,000,000	$0	$1,600,000	$1,600,000
$12,500,000	$0	$2,600,000	$2,600,000
$15,000,000	$832,000	$3,600,000	$2,768,000
$17,500,000	$1,832,000	$4,600,000	$2,768,000
$20,000,000	$2,832,000	$5,600,000	$2,768,000

Married Couple Lifetime Gift Value	Taxes Owed-Before 1/1/2026	Taxes owed-After 1/1/2026	Tax Savings If Gifted Before 1/1/2026
$10,000,000	$0	$0	$0
$15,000,000	$0	$1,200,000	$1.200,000
$20,000,000	$0	$3,200,000	$3,200,000
$25,000,000	$0	$5,200,000	$5,200,000
$30,000,000	$1,664,000	$7,200,000	$5,536,000
$35,000,000	$3,664,000	$9,200,000	$5,536,000
$40,000,000	$5,664,000	$11,200,000	$5,536,000

Note: Assumes $6 million exclusion beginning on 1/1/2026 and a 40% tax rate on gift values in excess of the lifetime exclusion limits in all scenarios.

Given the substantial tax savings that could be realized by making large gifts before the current lifetime estate tax exemption sunsets, it is prudent to discuss the change in regulation and how you can plan for it with your financial and tax advisory teams.

Conclusion

Estate planning strategies can help reduce the amount of taxes paid on your estate, ensure that more of your assets are properly passed on to your beneficiaries, and lessen the burden shouldered by your loved ones. If you haven’t already done so, work with your financial advisor to discuss a customized estate plan that meets your unique needs and goals as part of your financial plan. It would be wise to do so in the near-term before the presently high estate tax exemption sunsets in 2025 to minimize your potential tax liabilities.

Additional issues that your advisor may help you with include tax strategies regarding the changing of beneficiaries, how to avoid overfunding your 529 account, and the tax and asset protection benefits of a dynasty trust.

¹ Caring.com’s 2023 Wills Survey
https://www.caring.com/caregivers/estate-planning/wills-survey/