Estate planning: 7 steps to protect your legacy

Morgan Stanley Wealth Management


Summary: Creating an estate plan can help protect your wealth and prevent hardship for your heirs.

Discussing what happens to your assets after you pass away is never an easy conversation to have. But this type of planning is essential in easing what can be a difficult time for the people you love.

Here are seven steps you may take to simplify the process and ensure that your wishes are respected.

1. Draft a list of your assets

One place to start is compiling an overview of all of your assets. This will help you take stock of exactly what you have to pass on to beneficiaries and document key information, so your family has a record of accounts and property.

Specify which assets such as a home, car, or financial accounts are held in your name and which may be jointly owned. As you go through this process, touch base with your partner, if you have one, and discuss how you want to divide up your assets.

2. Create a will

A last will and testament is a typewritten document in which you name an executor who will carry out your wishes when you pass away. Generally, a will includes instructions around the management and distribution of your assets, including real estate, jewelry, cars, artwork, and bank accounts.

If you die without a will, you’ll be considered as dying intestate. In this case, your estate will be distributed based on your state’s intestacy laws—which may not align with your expectations or wishes. For example, most states’ intestacy law give your property to your relatives, including your spouse, children, parents, and then other more distant relatives based on who survives you.

3. Choose beneficiaries

Selecting the beneficiaries of your estate and recording in your last will and testament how you want your estate to be distributed among them can help prevent any legal battle among your beneficiaries. In your will, you name or designate multiple beneficiaries. Some people may name the loved ones and family who depend on them financially. Others who may not have close family, may name a more distant relative, friend, or charitable organization as the beneficiaries of their estate.1

4. Name a guardian for young children

Consider naming a guardian for minor children in your will in the event both parents pass away before them and think about who among the people in your life is a trusted individual that can care for your minor children.

Also, consider if the same person you want as guardian or conservator of your children should also be the guardian of the child’s property. If your minor children come into possession of assets, a property guardian can manage those assets until they reach adulthood. Important considerations when choosing a guardian include their age, health, and location. If you pass away and your child does not have another living parent, or if you haven’t named a guardian, then a court proceeding could be required.

5. Plan for medical and financial decisions

Select an agent or agents to help make medical and financial decisions for you in the event you cannot make those decisions. This can be accomplished through a healthcare power of attorney (also known as Healthcare Proxy) and a financial power of attorney.

You might also consider preparing a living will, which gives specific guidance to a healthcare agent, doctors, and other caregivers, about your intentions and wishes regarding medical treatment, or withholding any treatment, based on your preferred quality of life or religious beliefs. In some states, a living will is combined with a healthcare power of attorney into a single document known as an advanced directive for healthcare.

6. Consider setting up a trust

A trust may accomplish some of the same goals of a will but often offers a more flexible way to manage and distribute your assets even while you are still living.

For example, in a trust you can control when, in what amount, and under what conditions a beneficiary may receive assets provided to them. A trust may also include provisions regarding the level of your incapacity and the rules for managing and distributing your assets in that type of situation. This can help avoid a potential court action to determine whether you are incapacitated.

A trust can be revocable or irrevocable:

  • A revocable living trust may be readily amended or changed during the grantor or settlor’s lifetime. One limitation to this type of trust is that is it would not offer tax or asset protection advantages during your lifetime.
  • An irrevocable trust created during your lifetime may allow for the possible reduction in certain transfer tax liabilities, the protection of assets from future creditors, and leave assets in further trusts for a surviving beneficiary. Irrevocable trusts cannot easily be amended or changed.

A trust may accomplish some of the same goals of a will but often offers a more flexible way to manage and distribute your assets even while you are still living.

7. Plan for estate taxes

Depending on the value of your estate assets, your estate may be subject to federal or state estate taxes upon your death. Each individual has a federal estate and gift tax exemption that allows the individual to give that amount of assets during life or at death free of federal gift or estate tax. In 2023, the federal estate tax exemption is $12.92 million for an individual and $25.84 million for a married couple.2

To help lessen the estate tax burden, you may want to consider the following strategies:

  • Gifting: Gifting assets while you’re alive may reduce the size of your eventual estate and reduce potential estate taxes at death.
  • Philanthropy: Donating assets to charities or foundations, either during life or after death pursuant to your will or trust, allows you to contribute to organizations that you care about while also reducing the size of your estate thereby reducing any future estate tax. Any donations made during your lifetime may also lessen your income tax burden. Consider contributing to a donor advised fund (DAF), such as the Morgan Stanley Global Impact Fund (MS GIFT). DAFs can be an efficient way to donate assets you own without liquidating them and allow you to claim a federal income tax deduction, subject to certain limitations.2

The bottom line

After working hard to build your wealth, it’s important to protect your legacy and plan for what happens to your assets should you die. Consider speaking to a Financial Advisor about investment strategies consistent with your plans for your loved ones.

1. Note: Most states require that your spouse be a beneficiary of your estate, but requirements may vary.

2. Clients must itemize their deductions in order to claim a federal charitable tax deduction. The federal income tax deductibility of contributions to a donor-advised fund are subject to certain limitations. These may include but may not be limited to: Donating long-term appreciated securities may be eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of adjusted gross income (AGI). Donating cash may be eligible for a maximum federal income tax deduction of 60% of AGI. For long-term appreciated gifts of artwork, antiques, books and other tangible personal property, the deductibility rules depend on how the qualifying charity uses the gift. There are additional asset classes and types of contributions which may have additional and/or different limitations. Clients should consult with their tax advisor on the income tax implications and tax planning around gifting activity.

The source of this article, Estate Planning Essentials: 7 Key Steps, was originally published on April 12, 2023.

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