Estate planning constitutes an essential aspect of any personal finance journey. It’s important to be proactive in determining how your assets will be distributed and managed after your passing. Planning also offers an opportunity to specify the care arrangements for minor children.

Whether you realize it or not, everyone has an estate plan. It’s either prepared by you ahead of time or dictated by state laws if no plan is in place. Additionally, it’s vital to designate individuals to make financial and medical decisions on your behalf in the event you become incapacitated.

In my introductory meetings with clients, I often draw a visual aid to provide an illustration of the essence of estate planning. A circle at the top represents the client’s estate with the overall value noted inside. Three circles below represent heirs, charities and the U.S. Internal Revenue Service, demonstrating that assets will go to these entities or a combination of them upon passing.

Although this column briefly addresses estate taxes — the IRS circle — estate taxes aren’t a worry for most U.S. citizens because they apply only to very large estates.
For 99 percent of us, estate planning is important because we want to make sure we provide for those we love after our death, to make sure our charitable interests are taken care of and our estate is distributed according to our wishes.

The fundamental components of most estate plans include a will, a trust, powers of attorney for medical and financial decisions and a living will. Given the uniqueness of individual circumstances, such qualified professionals as a trust and estate lawyer, Certified Public Accountant and investment advisor play key roles in guiding the estate planning process. Depending on one’s stage in life, the focus could vary. A young individual might prioritize powers of attorney and a living will, while a family with assets and dependents could require a comprehensive plan for unforeseen events.

As you engage with your estate planning team, consider these questions to define your goals and objectives:

Are there concerns about heirs managing or protecting your wealth?

Do your adult children have poor habits and behaviors with managing money?

Do any family members have special needs?

To whom do you want to leave your financial assets?

Are there specific assets earmarked for particular individuals?

Are there unique needs of potential beneficiaries?

Do you want to plan for college expenses for children and grandchildren?

Are you concerned about asset protection from divorce or a beneficiary’s future creditors?

Are there charitable causes you’d like to benefit from your estate?

Do you need succession planning to ensure your company will continue for future generations?

Finally, let’s talk a bit about taxes. Estate taxes become a planning matter only for the largest estates. As of 2024, a single decedent’s estate is exempt up to $13,610,000. For married couples who plan and synchronize their estate plans, the total exemption is $27,220,000. Despite potential reductions in exemptions by 2026, many estates can avoid the 40 percent federal estate tax rate.

What about state-enforced estate taxes? Some states, like Massachusetts and New York, impose estate taxes. Other states, like Nebraska and New Jersey, impose taxes on individuals receiving inheritances. Colorado imposes no estate or inheritance tax.

Federal and state income taxes often constitute more of a concern. Careful asset transfer planning can significantly affect the tax picture for your loved ones. For example, a family residence transferred to the next generation while mom and dad are still alive could potentially create a severe income tax impact compared to transferring the residence to the next generation upon the second death of either mom or dad.

While this article is intended to offer a broad overview, estate planning involves intricate details beyond its scope. Nevertheless, it underscores the importance of having an intentional plan to ensure assets accumulated throughout life are distributed according to your wishes. Seek the support of experienced professionals to navigate this complex process, and secure peace of mind for you and your loved ones.