The Benefits of Choosing a Fee-Only Advisor for Estate Planning

As Benjamin Franklin once said, “The only thing certain in life is death and taxes.” While that may sound a bit harsh, it’s reality that makes planning for both the expected and unexpected a high priority as we get older, have more responsibilities, and our financial pictures become clearer. In particular, this is true for high achievers who have accumulated substantial wealth that will be even greater in the future.  

This makes having a comprehensive estate plan in place based on your unique circumstances and intent a real necessity. There are plenty of estate planners who can assist you in developing a basic plan that addresses your financial concerns, needs, and desires. However, you may be better served working with a fee-only financial advisor who is also a fiduciary who has intimate knowledge of your dreams, goals, and challenges. The question for this article is why?

A fee-only fiduciary financial advisor in Chicago brings objectivity, transparency, and a commitment to your best interests, which are crucial when dealing with issues that impact your future financial well-being. A financial fiduciary advisor should focus on growing and protecting wealth while helping create a lasting legacy that will be passed down to multiple generations within your family or to the interests and causes who mean the most to you. 

In our blog, we’ll look at some of the significant benefits of selecting a fee-only fiduciary financial advisor in Chicago to assist you in developing and monitoring your estate plan.

Think about how hard you’ve worked to get where you are, professionally and personally. That’s why who you select to oversee your finances can be one of the most important decisions ever, especially when ensuring your wealth will outlive you and continue to benefit the people and causes you care about after you and your spouse have passed. Here are a few benefits when you partner with a fee-only advisor for estate planning: 

  • Fee-only advisors are compensated solely for their advice and services with a fee like the other types of professionals (CPA, attorney) you rely on for specialized knowledge and services. In other words, other non-fiduciary advisors are paid commissions to sell the investment products or policies of third parties like mutual fund families or insurance companies. Fe-only advisor’s compensation structure minimizes conflicts of interest, ensuring the advisor’s recommendations are based on your best interests and your need for income. 
  • Fiduciary advisors are legally obligated to act in your best interests. Fiduciary is the highest ethical standard in the financial service industry. This creates a layer of trust and integrity in the relationship, which is crucial for sensitive matters like long-term estate planning. It is important to note not all financial advisors are fiduciaries. Many are held to lower standards, so you have to ask.
  • Fee-only advisors in Chicago typically possess a broad knowledge base in financial planning, including estate planning services. Their expertise is focused on providing holistic advice that considers all aspects of your financial situation.
  • You should know exactly what you are paying for with a fee-only structure. This transparency helps you build a trustworthy, functional advisor-client relationship.
  • Since fee-only advisors aren’t paid to sell investment products, their advice is more likely to be unbiased and tailored to your specific needs and goals, which is especially important in the complex area of accumulating, preserving, and distributing wealth.
  • Estate planning is highly personal and requires a customized approach. There is no one-size-fits-all solution. A fiduciary financial advisor is more likely to spend time understanding your unique circumstances and developing a plan that aligns with your specific goals and family dynamics.

Not sure what questions to ask a financial advisor? Watch our short video.

Estate Planning Tactics for the Affluent

Fee-only financial advisors often employ several sophisticated tactics to pursue client goals. These tactics are designed to grow assets while minimizing tax liabilities and ensure a smooth, tax-efficient transfer of wealth to future generations.

  1. Trusts are a cornerstone of advanced estate planning. By placing assets in various types of trusts, such as revocable living trusts, irrevocable life insurance trusts, or charitable remainder trusts, you may reduce your estate taxes and have greater control over the distribution of your wealth. These trusts can also provide valuable benefits during your lifetime.

For example, a charitable remainder trust (CRT) allows you to donate assets to a charity while retaining some benefits. Here’s how it works:

  • You can transfer appreciated assets like stocks, real estate, collectibles, or other high-value assets into the trust. The trust can sell the asset tax-free because there is a charitable beneficiary. Then, the trust distributes an income stream for a fixed period or the lives of both spouses. This payment can be a fixed amount (Charitable Remainder Annuity Trust) or a variable amount based on the distribution rate.
  • After a specified payment period (often the beneficiaries’ lifetime), the trust’s remaining assets are donated to the chosen charity.
  • As the donor, you receive a tax deduction in the year the trust is funded based on the present value of the amount expected to go to charity. Additionally, the trust can sell assets and reinvest the proceeds without immediate capital gains tax.

For example, let’s consider Janice, who owns highly appreciated stocks worth $500,000. She sets up a CRT and transfers these stocks into the trust. The CRT sells the stocks, avoiding the capital gains tax. Janice chooses to receive a 5% annual income from the trust. She receives $25,000 yearly, which can fluctuate based on the trust’s performance and valuation. After her passing, the remaining trust assets go to her chosen charity.

  1. Family Limited Partnerships (FLPs) allow you to transfer business interests to family members at a reduced tax cost. This method can lower the value of an estate for tax purposes while maintaining control over the business.
  1. Using an annual gifting strategy is another way to reduce estate taxes. In 2024, the IRS lets you give up to $18,000 yearly to anyone without incurring a gift tax. For example, let’s say you have ten grandchildren. You could gift each of them $18,000, and it wouldn’t trigger any gift taxes to you or them. If you’re married, your spouse can also gift $18,000 to each grandchild. You can also make payments directly to educational institutions or medical providers on behalf of someone else, which are not considered taxable gifts and, thus, not included in the $18,000 annual limit. 

These strategies are just some of the methods you can use to reduce the size of your estate, potentially lowering the taxes paid by heirs.

There are other sophisticated strategies that allow you to utilize each of your lifetime gifting exemption limits. In 2024, each of you is allowed $13,610,000 per individual. Our dedicated team of experienced advisors, leveraging decades of experience, can meticulously craft bespoke estate and legacy planning strategies tailored to your unique needs and financial goals to optimize your use of the lifetime exemption.

Do you have clarity that you are on track financially? Watch our founder, Michael Evans, discuss the importance of a comprehensive financial plan. 

Why Consider Cogent Strategic Wealth for Your Estate Planning Needs?

Our specialty is understanding the importance of protecting wealth and leaving a lasting legacy. Our team, with years and years of experience, crafts personalized estate and legacy planning strategies designed just for you, considering what you want and need financially.

Think of preparing your future estate as more than deciding who gets what after you’re gone. Effective estate planning means you plan the distribution of your assets while you’re still here. It’s also about preparing your heirs for their future responsibilities.

We bring together smart tax planning, ways to safeguard your assets, and strategies for fulfilling your charitable interests. With a plan in place, your wealth does more than just sit there – it supports your loved ones and the causes you care about long after you are gone. At the same time, we’re here to help you manage your wealth and provide a clear path for heirs.   
Connect with us to learn more about our sophisticated estate planning services for high-achieving families.

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Estate Planning for the Wealthy: Build a Multi-Generational Legacy

Estate Planning for the Wealthy: Build a Multi-Generational Legacy

Estate planning is an important element of your wealth management strategy. As a successful, affluent individual, you may seek ways to create a meaningful and lasting legacy for yourself and to share with future generations. This process involves more than just wealth accumulation and preservation; it involves strategically positioning your assets to benefit your loved ones, now and in the future, and sharing your abundance with the community and causes you care most about.

You have worked hard to capture your stellar earnings. You have built durable wealth. Shouldn’t your legacy be carried out in a manner that is easy and effective, based on your intent?

Our Quick Guide will examine four estate planning strategies that blend goals-based financial planning with tax-saving strategies. As a fee-only financial planner in Chicago, we help high achievers develop robust estate and legacy plans.

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Chapter 1

Utilizing Trusts for Asset Protection and Tax Benefits

Trusts are a versatile asset management tool. In basic terms, a trust can offer you the opportunity to define how your assets are administered while you are alive, if you become incapacitated, and after you pass away. Some trusts offer asset protection and potential tax advantages. Remember, a trust's benefits and suitability depend on your circumstances, objectives, and current tax laws, which are subject to change over time. 

  • Trusts can be customized according to specific goals and circumstances. Grantors can set terms for how and when assets are distributed, offering a high degree of control over the part of their wealth inside the trusts.
  • Assets in a trust typically bypass the probate process, which can be lengthy and costly. This ensures a quicker and more private distribution of assets to designated beneficiaries.
  • Trusts can be structured to preserve wealth across generations, setting conditions for asset distribution that align with the grantor's long-term wishes.
  • Certain trusts can provide a legal structure to protect assets from creditors, lawsuits, or bankruptcies. By placing assets in a certain trust, they are legally owned by the trust, not the individual, which can shield them from personal financial risks.

Example: An irrevocable life insurance trust (ILIT) can be used to exclude the proceeds of life insurance products from the taxable estate. When a person passes, the life insurance proceeds go into the trust and are not usually counted in their estate.

Chapter 2

Living Trust

A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it’s meant to function while you’re alive. You control the property in the trust, and whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.

Not everyone needs a living trust, but there are few high-achieving families we have met who do not. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate.

Why would you need a revocable living trust? I know what you’re thinking: What’s the point of placing my own assets in a trust I control? Why not just hold onto them directly or with my spouse and pass them on to my heirs in a will? That’s a great question. Here’s the quick answer: estate taxes. 

The state you live in has laws about estate taxes. If you live in a state with estate taxes, you have an estate planning challenge if your wealth exceeds the state’s threshold hold. As mentioned above, Illinois has set the limit at $4 million per person, even though the federal exemption for estate taxes is $13.61 million. If you live in Illinois and pass away with more than $4 million, your estate (and your loved ones) will get slapped with taxes—unless it has been planned for in a trust. 

Whether or not estate taxes are an issue, there are still a number of reasons that estate planning in general and an RLT in particular may make sense for you and your family. 

  • Efficiency. Compared to executing an RLT, traditional probate can be considerably more time-consuming and potentially far more costly. You don’t want your loved ones to be caught up in that mess. And, while it is possible to avoid probate without establishing an RLT, the arrangements may not cover key decisions that need to be made should you become incapacitated.
  • Costs. We know $2,000–$4,000 set-up costs for a typical RLT is not chump change, but that expense pales in comparison to what it can cost to settle your estate after the fact. It’s not uncommon for those costs to run as high as 5 percent of your assets. If your intended beneficiaries must resort to litigation to get the job done, the sky can become the limit. And that’s not even considering the time and emotional toll involved.
  • Privacy. Unlike probate, which is a very public proceeding with public records maintained, your RLT decisions are kept private, keeping others out of your business—and your family’s business as well. Everyone deserves their privacy.
  • Effectiveness. An RLT helps ensure that your assets are distributed based on your documented intents instead of by a judge assigned to rule on your probate proceedings. You can specify exactly how you want every part of your estate handled.
  • Flexibility. Because an RLT is revocable, you can do the following: change its terms, add newly acquired assets, add, change, or remove special provisions for particular assets, and cover scenarios where you may become temporarily or permanently incapable of handling your affairs. You can designate secondary trustees, asset management preferences, and competency ruling procedures. This protects a loved one from being left to anguish over what you would have preferred, or worse yet, from getting left out of the decision-making entirely.

Compared to wills, the bottom line is that revocable trusts provide increased privacy and more control and flexibility over asset distribution. With a revocable living trust, you do most of the work upfront, making the disposition of your estate easier and faster. But they also require substantially more effort and higher costs. 

Chapter 3

Family Limited Partnerships for Wealth Transfer

Family Limited Partnerships (FLPs) are another estate and tax planning tool families with significant assets use. They function by allowing family members to pool their assets into a single family-controlled partnership. 

  • An FLP is created when family members establish a partnership according to state laws. Typically, parents contribute assets to the partnership and retain the role of general partners, while children or other family members are designated as limited partners.
  • General partners manage the FLP, making decisions about investments and distributions. Limited partners, although they are interested in the FLP, have limited rights in management and decision-making.
  • Assets within an FLP can be protected from individual creditors of the partners, offering a degree of security against personal liabilities.

Tax Benefits:

  • One significant advantage of an FLP is in estate planning. By gifting limited partnership interests to family members, the size of the estate of the general partners can be reduced, potentially lowering estate taxes upon their passing. Transferring assets to an FLP and gifting limited partnership interests can be more tax-efficient than directly gifting assets. This is because the value of limited partnership interests can be discounted due to a lack of control and marketability, reducing the gift tax value.
  • The FLP structure allows for the flow-through of income and deductions to partners, which can be advantageous for tax purposes. Income or losses are reported on each partner's tax returns.

For example, consider a scenario where parents transfer $2 million of investment property into an FLP. They maintain control as general partners but gift 50% of the partnership interests to their children as limited partners. The value might be appraised at a 30% discount, reducing the taxable value of the gift from $1 million to $700,000. This strategy lowers the potential estate tax and gift tax liabilities significantly.

Chapter 4

Using Trusts for Charitable Giving Strategies

Charitable giving is not just a noble endeavor; it's also a smart tax strategy. Charitable Remainder Trusts (CRTs) and Donor-Advised Funds (DAFs) are popular vehicles for you to support charitable causes while receiving significant tax benefits.

You may be wondering why charitable giving produces so many tax benefits. If you didn’t make donations to worthy organizations, the government would have to fund them with higher taxes. The benefits are your incentives for giving so governments don’t have to provide their funding. 

Chapter 5

Charitable Remainder Trusts (CRTs):

A CRT is a trust that can sell appreciated property tax-free and provide an income stream to the donor or other beneficiaries for a set period, including the life of the surviving spouse, after which the trust terminates. The remaining assets go to one or more designated charities.

Tax Benefits:

As the donor, you receive an immediate income tax deduction for the charitable portion of the trust, calculated based on the present value of the remainder interest that will eventually go to the charity.

Suppose appreciated assets are donated to the CRT. In that case, the trust can sell these assets without incurring capital gains tax, allowing the full value of the assets to be reinvested for income generation.

For example, you contribute stock worth $1 million, with an original purchase price of $200,000, to a CRT. In that case, you avoid immediate capital gains taxes on the $800,000 appreciation and receive a current income tax deduction based on the beneficiary's age and the trust's anticipated term.

governments don’t have to provide their funding.

Chapter 6

Donor-Advised Funds (DAFs):

A DAF is a philanthropic vehicle administered by a public charity. Donors contribute to the fund and recommend grants to charitable organizations over time.

Tax Benefits:

You receive an immediate tax deduction in the year you contribute to the DAF.

Like CRTs, contributing appreciated assets to a DAF can avoid capital gains taxes on their sale inside the trust.

For example, you contribute $50,000 in appreciated securities to a DAF. You receive an immediate tax deduction for the market value of the securities and avoid capital gains taxes on the appreciation, enhancing the amount available for charitable giving.

Chapter 7

Annual Gifting Strategies

Regular gifting can significantly reduce the taxable estate while benefiting your loved ones during your lifetime. Utilizing the annual gift tax exclusion, a fee-only fiduciary advisor in Chicago can guide you in making tax-free gifts to family members. 

These could be direct cash gifts or contributions for educational and medical expenses, effectively reducing the size of the estate and the accompanying tax burden.

  • Annual Exclusion: An annual exclusion limit for gifts allows individuals to give a certain amount each year to as many people as they wish without incurring any gift taxes. For 2024, this amount is $18,000 per recipient.
  • Lifetime Exemption: Beyond the annual exclusion, there's a lifetime exemption of $13,610,000. Gifts above the annual exclusion count towards this lifetime limit. Once this limit is exceeded, the excess amounts are subject to gift tax.

Tax Benefits: 

  • You reduce your taxable estate by utilizing the annual exclusion and lifetime exemption. This can lower estate taxes when you pass away, leaving more assets for your heirs.

For example, suppose you have an estate worth $3 million. You decide to gift $18,000 annually to each of your three children. Over ten years, you would reduce your estate by $540,000 ($18,000 x 3 children x 10 years), potentially lowering your estate’s tax burden.

About Cogent Strategic Wealth

As fee-only financial advisors in Chicago, our estate planning and charitable giving strategies help you to:

  • Give more – By making the most of your donations, you ensure your chosen causes receive more.
  • Pay less – You could reduce capital gains taxes on assets that have grown significantly.
  • Live better – Turn to give into a special, lasting tradition with your family.

Understanding that your wealth and legacy matter greatly to you, we recognize the importance of protecting what you’ve built for future generations. 

Thinking about your estate isn’t just about deciding who gets what after you’re gone. It’s about managing your affairs smoothly while you’re here and preparing your family for future responsibilities.

Our approach includes innovative tax strategies, safeguarding your assets, and thoughtful planning for charitable giving. 

We’re here to guide you through the complex world of wealth management, aiming to secure a bright future for you and your family.

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