Vanilla

May 03, 2023

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Level setting: How to approach estate planning differently depending on estate size

Many clients (and some financial advisors as well) tend to reduce estate planning to two simple categories: taxable estates and non-taxable estates. While it’s true that there are important differences in these asset levels, estate planning is not binary. It takes a nuanced approach, one that requires understanding a client’s situation and goals deeply. 

However, even with the understanding that a good advisor will always tailor their approach to each individual client’s needs, it can be helpful to think of client needs according to a few different distinct buckets of asset classes – beyond just taxable and non-taxable. We’ve created some rules of thumb for you to consider with clients at different asset levels when it comes to estate planning, especially in light of the impending estate tax sunset at the end of 2025.

Estate planning basics

Regardless of the size of a client’s estate, it’s important for financial advisors to work with their clients to ensure that their estate plan matches their desires in terms of distributing their assets to heirs and beneficiaries. 

It’s important to be sure the basics are in place. Does the client have a will that reflects their current desires? Are their beneficiary designations on IRAs, 401(k)s and other retirement plans, life insurance policies and annuities current? Is their property, such as real estate and other assets, properly titled? Do they have healthcare powers of attorney in place to ensure that there is someone to make proper care decisions for them if they become incapable of doing so? 

It can be very helpful to lay out the client’s estate in a way that is visual and easy to understand. Our tools at Vanilla help advisors be sure they have a complete view of their client’s estate assets and can be helpful in estate planning discussions with them. 

Helping clients understand what they have and what would happen to their estate if they died today can be a powerful way to start the estate planning discussion. An “estate planning fire drill” based on their current estate planning structure in place can be eye opening for many clients and prompt them to take action. 

Some estate planning tools and strategies to consider

The use of these tools will vary a bit depending upon the client’s circumstances, including the size of their estate, marital status, age and other factors.While some strategies may be more specific to the size of a person’s estate, there are some strategies that are fairly universal estate planning tools, including:  

Annual Exclusion Gifts

Each individual can gift up to $17,000 tax-free to as many individuals as he/she would like.  These annual exclusion gifts are an excellent way to start transferring wealth to the next generation to reduce the taxable estate with no tax implications.

Charitable giving

Charitable giving can take several forms including cash donations, creating and funding a charitable trust, creating and funding a donor advised fund and using appreciated securities to make donations. These strategies can help reduce the amount of your estate that is subject to estate taxes upon your death and can offer an income tax benefit in the year of the donation. 

Trusts

Trusts come in many forms. At their simplest they can offer a means to direct the way assets are distributed to trust beneficiaries. Trusts can also be very sophisticated vehicles to remove estates from your estate to minimize estate taxation. 

Clients with estates up to $7 million ($14 million for a married couple)

Clients with an estate of up to approximately $7 million and $14 million for a married couple are not currently subject to estate taxes nor will they likely be once the current lifetime estate and gift tax exemption sunsets back to prior levels on January 1, 2026. 

Clients with estates in this range may not be subject to federal estate taxes, but they still need to do estate planning to ensure that their assets are distributed in accordance with their wishes. The focus for clients in this estate size range should be in areas like ensuring all beneficiary designations on insurance policies, annuities and retirement accounts are up-to-date and that they reflect the client’s desires.

This estate planning might include tactics to help freeze the client’s estate. The best strategies will vary based on the client’s age and other factors. Strategies might include ways to give shares to beneficiaries to avoid capital gains taxes and future growth in the value of their estate. The precise strategies will vary from client to client. 

In some cases a trust might be an appropriate way to distribute assets. And of course be sure the basics like a will are in place and that where appropriate that all accounts and property that are held jointly with a spouse are properly titled. 

Clients with estates from $7 million to $13 million ($26 million for a married couple)

Clients with an estate of up to $13.61 million and $27.22 million for a married couple are not currently subject to estate taxes (in 2024). This lifetime gift and estate tax exemption will continue to increase through inflation adjustments through the end of 2025. That is when the current higher levels for the lifetime gift and estate tax exemption reverts back to their former levels, adjusted for inflation. Estimates vary, but when all is said and done the lifetime exemption will likely be around $7 million, with a combined $14 million for a married couple. 

This sunset provision of the current estate tax limits creates a number of issues for clients whose estates are under the current federal gift and estate tax exemption, but who may not be once the exemption sunsets in 2026. 

Clients with estates in this range should be sure that all of their estate planning basics are in place, as laid out above.  In addition these clients  should consider ways to reduce the level of their estate prior to 2026. This will depend upon like their age, but some steps to consider can include: 

Use up some of their current lifetime exemption. The current level of the lifetime estate and gift tax exemption, plus any increases in 2024 and 2025, are in place until the end of 2025. Clients in this estate size range might consider accelerating some of their gifting prior to the end of 2025 to use up more of the current exemption amount. 

Spend down their estate. Again this may work better for older clients, but all clients should consider spending down part of their estate. Maybe not all the way to the new sunset limits that will be in place, but why not enjoy their money over their lifetime? 

Estates up to $50 million ($100 million for a married couple)

For estates up to $50 million for an individual and up to $100 million for a married couple, everything under the estate planning basics, as well as the items discussed in the two preceding sections above, should be considered as appropriate.  

Clients in this range should consider using up some or all of their  current lifetime gift and estate planning exemption though lifetime gifting, if appropriate to their situation. Lifetime gifts to children, grandchildren and other heirs can be appropriate as long as your client feels these heirs are capable of handling the money responsibly. 

Giving to charity, both directly and through the use of a trust can provide both estate tax benefits as well as current year income tax benefits. Using appreciated securities or other assets can not only serve to reduce the size of their estate, but there can also be current year tax benefits via a possible charitable deduction and the elimination of capital gains taxes on the appreciated security. 

Estates in this range should consider additional “estate freezing” techniques such as a grantor retained annuity trust or “GRAT”. 

And of course, clients in this asset range should spend down a portion of their assets to the extent that is practical, especially if they are older and in or nearing retirement.  

Estates over $50 million ($100 million for a married couple)

For clients with estates of this size, everything mentioned above can apply. It is especially important to use up their lifetime gifting exemption and it certainly can make sense to accelerate this to be sure the gifting is done prior to the end of 2025 under the current rules. 

Charitable gifting, both current year gifts and the establishment of a charitable trust can make sense for these clients. Likewise with a trust like a GRAT or similar irrevocable trust. 

Beyond this, clients with ultra-large estates can consider more sophisticated tax and estate planning techniques such as irrevocable intentionally defective grantor trusts. And of course, these clients should spend down a portion of their estate and enjoy their wealth.  

Regardless of the size of your client’s estate, they will need your help in ensuring their assets are distributed based on their wishes upon their death. Additionally, situations like a second marriage, a blended family and others can factor into your client’s estate planning. Each client is different and each client’s estate planning must be done recognizing the unique needs and wishes of each client. 

Your expertise and a tool like Vanilla can help you serve your client’s estate planning needs.