As an executive, you may be feeling the pressure when it comes to putting together an estate plan. Although this financial “to do” is on everyone’s checklist, you’re in a unique situation because of the unique way many executives are compensated. Your wealth may be tied up in equity – whether that means a stock option compensation plan, RSUs, RSAs, etc. This form of wealth can be tricky to transfer to your beneficiaries when you die without being forced to pay 40%+ in taxes to the IRS.
Additionally, you may have accumulated a variety of other assets, such as multiple pieces of real estate, private equity, or various taxable investment accounts. Creating an estate plan that makes a conscious effort to disperse your wealth to the next generation in a way that maximizes all that you’ve saved can be complicated, but it’s worth it.
What is Estate Planning?
Let’s start with the basics – what is estate planning? An estate plan offers a clearly defined roadmap for both your wealth and your physical care should die, or become incapacitated. As an executive, it’s especially important that you have an estate plan in place to direct the wealth you’ve accumulated over the years in a tax-efficient way. This helps to ensure that you’re able to give your wealth to people in a way that maximizes that amount they end up receiving, and minimizes the amount that’s taken out of your estate by the IRS.
The Basics: 5 Things to Get In Order
Before we dive into tax-efficient estate planning strategies that executives should consider implementing, let’s go over the basics. Every good estate plan for those with wealth should include the following items:
Power of Attorney for Property
Power of Attorney for Healthcare
Guardianship Designations (if applicable)
Some people choose to DIY most of these items using a service like LegalZoom, but it’s probably in your best interest to work with an estate planning attorney. They’ll be able to help you check these basic estate planning to-do’s off of your list and help you organize some of the more complicated tax strategies in your plan. (Need an estate planning attorney recommendation? Reach out! I’d be happy to point you to a few qualified individuals).
Gifting Your Stock Options During Your Lifetime
One option you have is to gift your stock options to future beneficiaries before you enter the estate planning process. That’s right – if you give away your wealth while you’re still living, you can control what tax bracket the option proceeds fall into versus a forced bracket when you pass away. Usually, as an executive, your stock options have accumulated significantly over the course of your career. If your options are transferrable, and you’re planning to gift them to immediate family (per your compensation plan’s stipulations), and the stock options are fully vested, gifting your stock options now may be in your best interest.
To do this, you’ll need to keep the gift tax in mind. Currently, you can give away $15,000 per person each year without incurring the gift tax. However, keep in mind that you’ll have to pay income tax when your gift recipients choose to exercise their newly gifted stock options. Working with a financial planner can help you to organize this timeline to minimize the total amount of tax paid. For example, transferring your vested stock options when their value is low to family members can help save both you (and them) money in the long run while still giving your wealth to the people who you want to have it.
Focus on Your Taxes
Don’t forget that there are a lot of different taxes that you’ll need to watch for when creating your estate plan. One of the most common is the generation-skipping transfer tax (GST). This tax is applied in addition to either gift tax (if you’re still living) or estate tax (when you pass away). It’s applied when you gift funds to a future generation (like grandchildren). This tax was originally instituted in 1976 to stop families from circumventing the estate tax for multiple generations by giving funds to grandchildren or even great-grandchildren. It applies to any recipient who is two or more generations younger than you (the benefactor).
One way around GST is to use 529 plans for family members. If you are wanting to gift money to grandchildren for education purposes, you can fund a 529 for each child and use a five-year multiple of the current gift tax exemption to make a lump-sum contribution. In 2018, the gift tax exemption is $15,000, so if you are married, both you and your spouse could contribute $150,000 ($15,000 x 5 x 2) to each grandchild’s 529 plan and not incur any extra tax. Depending on the plan you use, this can also provide a state income tax deduction for you at the time on the contribution.
Have life insurance? Make sure that it’s not made payable to your estate. If the funds from your life insurance go to your estate, they’ll be subject to any estate tax your other accumulated wealth is going to be subject to. Instead, make sure you have updated beneficiaries on all forms of insurance to get those proceeds directly to the people you love and want to take care of in the event of your death.
Don’t Go It Alone
Estate planning as an executive isn’t easy. It requires a lot of conversations between family members, and financial professionals. Even if your intentions are good, and you just want to ensure that your spouse, kids, and grandkids get the most out of your hard-earned wealth, it’s possible to slip up and have a large portion of your estate taxed at high rates. Working with a financial planner to develop a plan of action for your estate after you die and while you’re still alive can be a huge benefit.