Where Do Your Assets Go When You’re Gone?

The final step in CovingtonAlsina’s Hierarchy of Financial Priorities concerns two goals many of us have: passing on a large inheritance and giving back to causes that matter to us.  

We started our hierarchy with a basic will and other legal documents. Estate planning takes things to the next level. The federal estate tax exemption is currently $12.92 million, which means the vast majority of us do not have to worry about paying federal estate taxes. That law does sunset in 2026, at which time the exemption will be cut in half. Still not something that will affect most of us.  

But just because you probably won’t be paying federal estate taxes when you die does not mean you won’t need a more complex estate plan. Some people may want to consider a Revocable Living Trust (RLT). An RLT is like a box you carry around. While you’re alive, you can put things into the box, move them around in the box, and take them out of the box. The RLT is not a separate entity: it doesn’t file taxes, and it does not provide asset protection in case of a lawsuit or bankruptcy. When you get older or experience diminishing mental capacity, you can hand the box to one of your children or another trusted individual. They continue to manage the box on your behalf. When you pass away, the box gets closed, and everything in it is distributed according to the terms of the trust. There’s no probate, and the process is private. This does not mean that everyone needs an RLT.   

There are many other trusts to discuss with your estate attorney. Some attorneys recommend asset protection or legacy trusts, where assets are left in permanent trust for children or grandchildren. If you have a child who is receiving assistance from the government due to disabilities, you may want a special needs trust. We always recommend you use an attorney who specializes in trusts and estates when you get to this level of planning.  

And if you’re fortunate enough to worry about the estate tax, you can discuss Charitable Lead and Charitable Remainder Trusts with that attorney. These are also great vehicles when you are selling a business or have another large taxable event.  

There are other ways to give to charity. The most common is giving cash or goods, like when you donate old clothes or household items. A more tax-efficient way to donate is to give appreciated securities. For example, maybe you bought a mutual fund or stock many years ago, and it is just sitting there. If you sell it, you will pay taxes on the gain. If you donate it, you receive a tax donation for the full amount of the gift and don’t pay taxes on the gain.  

You may also consider a Donor Advised Fund (DAF). You open an account, or DAF, with a non-profit and fund it with cash or securities, as discussed above. Then, when you are ready, you direct the non-profit organization to donate the money to the charities of your choice. A DAF is a great tool when you have a large taxable event but aren’t sure where or when you want to donate all the money. 

And once you turn 70 ½, the IRS gives you another tool, the Qualified Charitable Distribution (QCD). A QCD occurs when you give money directly from your IRA to a charity. It’s not considered income to you, and it counts towards your Required Minimum Distributions.  

None of these things may apply to you now, but starting with the basics at the bottom of our Hierarchy of Financial Priorities and applying them consistently over time lets you move in this direction.  

You can find great resources and register for our educational events on our website at www.covingtonalsina.com. If you have questions, email us at info@covingtonalsina.com.  

CovingtonAlsina is a Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax or legal professional before implementing any strategy discussed herein. CovingtonAlsina does not provide tax or legal advice. Past performance is not indicative of future performance.