Ensuring Your Legacy: Comprehensive Estate Planning and Tax-Efficient Strategies

Do you know the true importance of a comprehensive estate plan beyond just writing a will? Rob Wolf guides you through the essential elements of legacy planning. In this episode, we explore why it’s critical to have a durable financial power of attorney and medical directives in place to manage your affairs if you become incapacitated. We'll discuss the necessity of keeping your beneficiary designations up to date to avoid unintended consequences and dive into the complexities of designating beneficiaries, especially when minors are involved. This episode is a must-listen for anyone who wants to ensure their legacy is well-protected and their loved ones are cared for.

Get ready to learn about tax-efficient strategies that can make a significant difference in your estate planning. We'll explore how proper beneficiary designations on pre-tax retirement accounts like IRAs, 401(k)s, and 403(b)s can maximize benefits for your heirs and charitable organizations. We also unpack the implications of the Secure Act 2.0 on inherited IRAs and the potential tax burdens it poses on your children. Balancing lifetime tax efficiency with minimizing the tax impact on your heirs is vital, and we’ll show you how to do it. Plus, we emphasize the value of creating lasting family memories as an irreplaceable part of your legacy. Don't miss this insightful discussion that combines financial wisdom with heartfelt advice on safeguarding your future and your family's well-being.

Learn more about Wolf Financial Advisory:
https://www.wolfadvisoryservices.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Transcript

Legacy Planning

Voiceover 0:00

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member FINRA/ SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.

Voiceover 0:33

Wolf Financial Advisory. When it's important to you, it's important to us. This is the Wolf Financial Podcast. Here's your host, Rob Wolf.

Rob Wolf 0:51

Good day everyone. Rob Wolf here with the Wolf Financial Podcast. Today we're going to be talking about legacy planning.

Rob Wolf 0:55

A lot of people think, oh, legacy planning is going to talk about when I die and all that stuff. Well, there is that and that isn't really the most pleasant things to be talking about, but because we're all adults, we need to have that conversation. But you know a lot of people and it really is surprising to me sometimes it doesn't matter the financial status that someone is in. The vast majority of people don't have a properly planned estate plan. I am shocked when I see millionaires have nothing. They say well, you know, I went to Costa Rica and I decided to write out a will on this brown paper bag here because I needed to have something in place. Well, we don't want a be considering, when building an estate plan for yourself and your family, where we talked to our clients about what does the process look like, what are some of the things they need to be thinking about, and then get them in front of a qualified professional to actually take care of the nuts and bolts of the planning process, such as drawing up the documents.

Rob Wolf 2:38

Okay. So, first of all, estate planning isn't just about when I die, because some people say, well, when I die I don't care. But you know, when I do care is when I'm alive. And when I'm alive, I want to make sure that there are people that are in place that will be able to handle my financial affairs if I'm unable to, for whatever reason, or there are people in place that will be able to make medical decisions for me if I am unable to at that time. That's when I really care. In fact, I would argue that it is better to die without a will or trust than it is to live without a power of attorney document. For that exact same reason, if I'm going to California on vacation and I have some financial business that has to be done in person that came up unexpectedly here in Michigan, wouldn't it be nice to have a trusted person to be my advocate, to take care of that business for me? That's what a durable financial power of attorney is all about Having somebody to act in your place when you can't do so yourself. How about the medical directive? How about the medical directive? Making sure that somebody is going to act in your best interest, based on what you've expressly shared, that it is your wishes, should something happen to you medically. That's part of the estate planning, folks, to make those living documents so that others can take actions on your behalf if you can't.

Rob Wolf 4:52

Power of attorney documents very simple. What's not so simple is who do I choose to be my advocate, to be my fiduciary, to take on those roles? Is it a trusted family member? Is it a trusted friend? That's the hard part when thinking about estate planning. Who's going to be in control? If I can't, maybe it's my spouse, maybe it's one of my kids? I can't, maybe it's my spouse, maybe it's one of my kids, but who's going to be in control? Then, of course, we have the what we call the death documents. Right, the will, the trust. This is who I leave everything to.

Rob Wolf 5:41

Here's the problem, folks, that a lot of people don't understand, especially when it comes to financial planning. Did you know that a beneficiary designation on one of your accounts trumps your estate plan? So, in other words, if I leave everything to my wife and perhaps this is my second marriage, let's say I leave everything to her in my will and trust, but I forget to update the beneficiary designation on my 401k says the primary beneficiary is my former spouse the ex. Guess what happens? The former spouse gets the money. It's contractual, it can't be contested, because my will says everything goes to my new spouse. So proper estate planning also involves making sure that youiary designations are done correctly, the way you want them to.

Rob Wolf 7:15

Probably a lot of people out there are probably thinking oh my gosh, I don't even know who I listed as my beneficiary. Well, for most people, if you're married, it's going to be your spouse, right? That's pretty simple. And then I'll see a lot of times people go ahead and they add what's called a contingent beneficiary on their accounts and they list out their children because they're the ultimate ones that are going to receive the legacy when mom and dad are gone. Well, that makes all the sense in the world.

Rob Wolf 7:49

But what if my kids are minors? They can't inherit any money until they turn of legal age. Some states that's 18. Some states that's 21. So what if me and my wife are traveling, we're going on date night, we got a 16-year-old and a 17-year-old and a 13-year-old. We've listed our three kids as the contingent beneficiaries and were killed in a car accident that night. Well, first of all, none of the kids can inherit the money. They have to wait till they turn of legal age. The second issue is when they do turn of legal age, they get all the money at one time from that account. Now let's say legal age is 18.

Rob Wolf 8:46

How many kids, no matter how responsible and how good they may be, can handle a significant windfall at 18 and do the right thing with it? Significant windfall at 18 and do the right thing with it, I would argue. If you've never had money before, how can I expect you to be able to handle it well, especially with big lump sums? Where could those lump sums come from? 401ks, iras, roth IRAs, annuities? But the big one, life insurance.

Rob Wolf 9:24

How many people out there have whopper of life insurance policies, especially when they're young? Millions and millions of dollars a term life insurance. Your estate doesn't have to be that big during your life for you to leave a massive estate upon your death. That's actually one of the miracles of life insurance. It creates an immediate estate when there was no estate to begin with. But again, when it comes to those beneficiary designations, we got to make sure that if there is going to be a huge immediate estate, if something happens, then we have to think through what's the best way to leave these dollars to. My ultimate beneficiary is my spouse.

Rob Wolf 10:16

If my ultimate beneficiary is my children, if I have minor children, should I be leaving this money in trust for them so they don't inherit it all at 18, but that they get it over a period of years so that it can take care of their support and maintenance as they're growing up. And then they get little chunks at a time. Perhaps they get that first chunk maybe a third of their principal at age 23, right after graduating from college. Well, maybe that third that they get. Maybe they don't handle that too well, but it will be a learning experience one way or another, so that hopefully, if they didn't handle it well the first time of distribution, perhaps five years later, when they're 25, they get 50% of the remaining balance. At that time they have more life experience. Maybe they have kids, maybe their perspective on life has changed a little bit, they're more mature, and then ultimately, sometime in their 30s, maybe they get the last chunk of the money at that time.

Rob Wolf 11:34

I'm a very big proponent, especially with people that have children, minors, in the household, regardless of how well and well-behaved these kids are and how well-adjusted they are. You cannot expect your kids to understand how to handle money if they've never handled it before. You should never put your children in a position where they will most likely fail. Proper estate planning is thinking through your family dynamics. Okay, also, how do I want to leave my money?

Rob Wolf 12:21

I got all sorts of different types of money that I want to leave. Maybe I have IRAs, maybe I have life insurance, maybe I have Roth IRAs. Well, what if I have some beneficiaries that aren't people? What if I have some charitable intent with some of my estate? Maybe I want to give a chunk upon my death to my church or some sort of charitable organization that has meant a lot to me during my lifetime? What's the best money to leave to a charity at death? Have you ever thought about that? Would I want to leave the charity money that my living beneficiaries would otherwise receive income tax-free, or would I want to leave money to that charity that otherwise would be taxable to my living beneficiaries at my death?

Rob Wolf 13:22

If you have charitable interest during your lifetime to leave some nonprofit, some money at your death, you may want to consider manipulation of your beneficiary designations, especially on your taxable IRAs, 401ks, 403bs, where a portion of those distributions would go directly to the charity Because when they're a nonprofit, they'll inherit those dollars that would normally be taxable to living people. They'll inherit those dollars without any tax. All we're doing is cutting out Uncle Sam out of the equation. All the after-tax money, all the Roth money, all the life insurance proceeds a lot of that should go to living people, or should be at least considered to go living people. Why? Roth IRA received income tax-free After-tax money or after-tax assets, house anything that's appreciated over the years, step up in cost basis at death. No tax, life insurance One of the biggest underused financial assets out there. All income tax free upon death. Those are the types of assets that we should consider leaving to people.

Rob Wolf 14:55

Okay, if you want charity in your estate plan, consider incorporating that via beneficiary designation on your traditional IRA 401k, 403b, so forth, okay, forth, okay. All we want to do is give more to the people that we care for tax-free and to our charities, tax-free. There's nothing wrong with cutting the government out because they allow this. We're not. We're not skirting any tax issues here. This is perfectly legal and it should be something that you should be considered when building out your estate plan.

Rob Wolf 15:41

The other thing to be thinking about when you're thinking about the overall construction of your portfolio and your legacy. Well, maybe I don't have any charitable interest I'm going to leave it all to the kids but the vast majority of my wealth is in pre-tax dollars IRAs, 401ks, 403b, so forth and I'm just taking out my required minimum distribution, and maybe it's a lot. Maybe it's 30, 40, 50. Some people have required minimum distributions well in excess of a hundred thousand dollars per year. Okay, if you have that much in pre-tax assets and and you already got an idea of how much tax you're paying on that imagine what's going to happen when that money passes down to the next generation, most likely your children, if you have children Based on the Secure Act 2.0, your children, if they are your ultimate beneficiaries, will only be able to stretch those taxable dollars up to 10 years.

Rob Wolf 16:57

So if I leave a million dollars of IRA money to my two children and they do the right thing, they roll it into an inherited IRA, which reduces the tax liability up front, but then they got to distribute it all over 10 years. Okay, we got to think about not only taxes on our side of the ledger, but taxes on their side of the ledger too. Do you want to be more tax efficient while you're alive, or would you rather be a little less tax efficient while you're alive, building more tax-free dollars? So ultimately, when those dollars transfer to your ultimate beneficiaries, they'll receive them on a tax-favored basis. That is a strategic decision that every client needs to make. Do I be tax efficient now and let the kids pay more, or do I take a little bit more of a tax hit now, especially while the tax code's good, and try to leave them some more money now? There's no right or wrong answer, but what I would say is this and this is sort of my thought process when thinking through this you may have been one of the fortunate people to have worked for a company where a pension was provided for you.

Rob Wolf 18:38

You you certainly are one of the fortunate people if you're in your mid-60s, on where you're getting social security now. You had guaranteed safety nets built in for you during your work career. What kind of guaranteed safety nets do you think your kids have moving forward? Are they going to have pensions like you did? Are they even going to have social security in the same format that you're receiving now? Now, I think most people would agree that our children's generation is actually in a worse position than the parents' generation because of a lot of uncertainty, a lot of mismanagement and just the fact that many companies are choosing not to go with the pension route like they used to.

Rob Wolf 19:42

If you're going to be leaving money to your kids, you need to ask the question do I want to leave the vast majority of this money where they're going to have to pay taxes on it in a very uncertain future tax environment, or would I rather leave them more money on a tax favored or perhaps tax free situation, situation where at least, if they don't have the social security, if they don't have the pensions, at least they're not going to lose a third or more of their legacy to income taxes?

Rob Wolf 20:26

That's part of the legacy planning too. It's not just about the documents, but what your philosophy is as far as how you leave your assets. The other thing that I like to stress is your legacy isn't just the money that you leave. It's the memories that you create along the way, and I many times am encouraging my clients that family is a big part of who they are. To be doing those family trips, creating those family memories, because, when everything's said and done. Money's great, but it's the memories that you created along the way that is going to be the things that are going to stay with them for the rest of the life of their life and also create the people that you hope to model after. This is Rob Wolf with the Wolf Financial Podcast.

Voiceover 21:42

Thank you for listening to the Wolf Financial Podcast. For additional information about our firm, please visit our website wolfadvisoryservices. com. Wolf Financial Advisory. The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities Member, FINRA/ SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.