In this month’s edition of “Money Matters,” Scott talks about the importance of estate planning for everyone and why it’s crucial to have a solid estate plan defined and in writing. Listen to learn more about these key estate planning topics that everyone should have in place early in life.

Money Matters: Key Estate Planning Topics for Everyone Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oath is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. Scott's joining us by phone today to talk about estate planning basics. Welcome, Scott.

0:00:28.1 Scott Oeth: Good morning, CJ.

0:00:29.2 CJ: Nice to have you with us, I'm looking forward to this. This is something that I am very curious about, so what all does estate planning entail?

0:00:37.7 SO: Well, I hope maybe we can scratch just a little bit of the surface here, CJ.

0:00:43.2 CJ: Okay, maybe this is.

0:00:44.7 SO: This important topic. Yeah, maybe just raise some awareness, I think is our goal this morning. First, a disclaimer: everyone's situation's unique, just going to throw out some general concepts, and, of course, nothing should be taken as individual advice. You'll seek your own legal and expert advice in this area. Estate planning it's a really important topic and, CJ, in my experience, having worked with many, many families over the years—even folks who've done really well in terms of building assets and things like that—about half of them have neglected their estate plan when I meet them, and so even just checking and saying, what have you done?

0:01:23.5 SO: Have you thought through how you'd like assets to pass? Have you thought about things like who could manage your affairs in the event of incapacity, if there are minor children, who would take care of them? So, I think people often think of taxes, they think of passing dollars along—that's a big part of it—but there's a whole lot to do with really important issues around decision making, end of life type decisions in terms of care, in terms of who could manage financial affairs on your behalf and these things aren't necessarily fun topics, I get it. It's easy to kind of push them off, it's a lot more fun to talk about a how are we going to compound wealth, but neglecting estate planning can lead to problems, arguments, and fights in families that can lead to lawsuits, it can lead to discord and people not talking to each other and just a lot of extra legal fees on the back end. So, I think it makes sense as in many financial planning type areas to get ahead of it and be thoughtful and take the time to think about how you'd like things to unfold.

0:02:34.2 CJ: Where do we start?

0:02:35.2 SO: Well, I think there are a number of tools you might think of, tools in the toolbox legal and financial type documents. I think very quickly, regardless of wealth level, there's a few things people should look at: One is beneficiary designations, so things like IRA accounts, your retirement savings account with your employer, if it's a 401K or a 403B life insurance policies, those all pass by beneficiary designation and, CJ, I can't tell you how many times we've looked at someone's beneficiary designation or 401k and it's not filled out, or there's an ex-spouse listed on there, or something like that. So, check those things, that's very simple, it's a simple document and you can update them at any time. Sometimes people really get kind of stuck searching for the perfect answer, who really should get this money?

0:03:24.7 SO: Or what should be the proportions? I tell people, "Hey, let's take the first step and you can come back and modify later, especially on things like beneficiary designations." Then, a will is really the sort of basic building block that directs how assets pass for most people there, again, regardless of wealth level. So, things that are not beneficiary designations, your house, your car, a lot of investment accounts or things like that, so that's a good starting point. But then, there are other documents that you think are very important, again, regardless of wealth level, things like healthcare directive and financial power of attorney that could really help spell out care decisions, end of life decisions. I have a client right now who just notified us last week that he's had a stroke and he's incapacitated, so his brother and brother-in-law have financial power of attorney. That document is allowing me to communicate with them regarding the fellow who had a stroke regarding his financial affairs and his accounts. Without that in place, it's a big problem, and without those documents in place, we mentioned the state has a plan and state intestacy, and that very often is not how people would want things to unfold.

0:04:39.5 CJ: All right. Well, I've often heard of estate and tax planning mentioned in the same breath, why is that?

0:04:47.3 SO: Yeah, I think you hear the term estate planning and it seems to conjure up images, the dollar signs and wealthy folks and the rich and famous and shuffling money back and forth to try and save on taxes. They certainly are, or they can be intertwined, and maybe just to comment on that, it is surprising, I mean, it almost seems like every year there's some high-profile person, often celebrity, entertainer, athlete who passes away. Then, being in the industry, you kind of see what happens in the industry news that oftentimes there was not an estate plan of any sort or is outdated or there's major errors in it, and so even people with a lot of money who you'd think would think about this, I think have a tendency to neglect addressing these issues. CJ, to your question of why taxes are mentioned, there are such things as estate taxes.

0:05:40.3 SO: There's federal estate tax, and this has changed over the course of time. Early in my career, there was a limit in the mid $600,000 range, and if you had assets over that amount and you passed away, they're subject to a federal estate tax. It's now up to 13.6 million and change per individual, so as a household, it’s like $27 million. So, probably very few are in a situation where they need to worry about a federal estate tax at this point. That is subject to change in 2026, it's likely to get cut in half, but it's the way the tax law stands now. Minnesota has its own estate tax and that comes in at about $3 million per person and the state would claim 13-16% of assets and so thinking about different type of trust structures, gifting things like that could be important for a lot of people who've achieved that level of wealth.

0:06:32.3 SO: CJ, even below that, there are things, when I mentioned tax deferred accounts like IRAs, like an employer retirement plan, income taxes are due on those accounts, there's what's called income and respect decedent, IRD, and just very quickly, if someone were to pass away, the way the law stands now is their beneficiaries are going to have to take that money out of those accounts within 10 years, and they're going to pay income taxes on those. Other assets that are capital assets can receive what's called a step up in basis, either marked up or down to the fair market value as of the date of death. So, even if you're below those federal or state estate tax limits, thinking through the different types of assets you have, and some folks maybe want to leave something to charity, something to family and friends, thinking about which assets go where can make a big, big difference because charities don't pay estate tax.

0:07:28.4 SO: Sometimes we might say, well, why don't we leave some of your IRA there? So, the income tax is washed out and not due to the charity, but things like life insurance or capital assets are great assets to pass to family and friends because they can come potentially tax-free. So, there's a lot there. I think there’s one other point I'd throw out, CJ, is a good estate planning attorney is very likely needed and people, their toes might crawl a bit thinking, it sounds expensive, I don't know about that, but I'm telling you, the cost on the back end without good planning can far exceed the cost of just sitting down and proactively putting things together with a good attorney. I would also really advocate that a good financial plan as part of this as well because it's not just about the will and power of attorney and healthcare directive, but doing financial planning work. You can think ahead and really think about, do I want to leave a legacy? How much? How much should I spend in retirement if I want to accomplish that or not? At least planning for that instead of sort of walking to the attorney's office and saying, this is what I have, how do we pass this on?

0:08:41.5 CJ: Wow, there's a lot there isn't there, Scott? Can we do another segment on this in the future?

0:08:48.1 SO: We certainly can. I think there's a lot of interesting subtopics here that would apply to listeners and probably a really big one that I didn't really touch on—we talked about it a while ago—is just life insurance and the role that could play for people as they're wanting to make sure their family or loved ones are protected until they have time to build up a large enough of estate.

0:09:11.9 CJ: Scott, thank you so much, and I really do want to pursue this further.

0:09:16.1 SO: Great, thanks, CJ.