Lloyd A. Sacks, CFP®, NSSA®

Why You Should Revisit Your Estate Plan

Estate planning is an important, but often times overlooked, aspect of financial planning. Estate plans are used to make sure that an individual’s final property and health care wishes are honored, and loved ones are taken care of in the event of incapacity or after their passing. Estate plans are typically comprised of a variety of legal documents and financial strategies including a will, power of attorney (POA) and health directives, trusts, insurance policies, beneficiary designations, gifting strategies, and projected estate tax liability.

What happens to your estate after you’re gone is not a subject that most people like to breach, but if you’ve been working with a responsible wealth manager, most likely you already have a plan in place. And in the same fashion as your retirement plans and long-term goals, your estate plan may change over time. It’s a good idea to periodically sit down with your wealth manager or attorney to discuss your estate plan. Here are items to think about ahead of your next meeting.

Taxes

Estate tax is a transfer tax levied on the total value of a deceased person’s money and property, and is paid out of the deceased’s assets before any distribution to beneficiaries. The Tax Cuts and Jobs Act passed in 2017 more than doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions from $5.5 million to $11.18 million per taxpayer. Now, only about 2,000 individuals in the United States (or 0.0006% of the population) are currently liable for these federal taxes until they revert back to the pre-2018 exemption levels in 2026. Additionally, the portability of the federal estate tax exemption between spouses increases the exemption to approximately $22,360,000 if one spouse dies and the value of the estate does not require the use of the deceased spouse’s federal exemption from estate taxes. For example, if all of a couple’s assets are jointly owned (it is considered that each own 50% of the property’s value), the share of the deceased automatically transfers to the spouse by right of survivorship but may be subject to tax if the estate’s value is greater than the exclusion amount.

This means that going forward, the federal estate tax will play less of a role for many Americans in their estate plans. The biggest impact here is on high net worth individuals, as it creates a window of opportunity for gifting due to the significant expansion of federal gift and GST tax exemptions. Now would be a good time to meet with your wealth manager and see if it’s worth making changes to your current financial plan, such as any tax diminishing gifting strategies you currently have in place or the ownership of certain financial assets that can impact the size of your gross estate.

It’s also important that you keep any eye on the estate tax policy in the state of your primary residence. Currently, fifteen states and the District of Columbia impose an estate tax, and many states impose these taxes at a lower exemption rate than the federal government. Six states also have an inheritance tax, in which individual beneficiaries of the property are responsible for paying after the estate has been divided. Laws can differ drastically by state and have been changing in recent years, so it’s important to talk to a tax professional with questions regarding your individual situation.

Family Trusts

One aspect of estate planning is understanding your family’s needs after you’re no longer able to provide for them, and these can change over time. Setting up a trust for certain family members is a great way to make sure they have some long-term financial stability. A trust is a legal arrangement, whereby a person transfers control of assets to a third party, who holds and manages them for the benefit of others. Advantages of a trust include:

Avoidance of the probate process
Avoidance of legal challenges of asset dispersal
Limitation of exposure to estate taxes, as part of a proper estate planning process
Control over what will be done with your assets

A situation where I typically advise setting up a trust is if you have a son or daughter with special needs. A special needs trust can ensure security for your child if anything happens to you and can help pay for things such as personal effects, medical expenses and even vacations or a car without interfering with an individual’s Supplemental Security Income (SSI) and Medicaid benefits. Another situation where I often recommend a trust is if a family member is under the age of 18.

Another type of trust that I will sometimes recommend is a revocable living trust since it allows an estate and beneficiaries to avoid probate. Probate is the formal legal process that gives recognition to a will and appoints the executor who will administer the estate and distribute assets to the intended beneficiaries. Probate laws vary state by state (and many states have simplified their process over the years), but they require a court hearing and the executor to give heirs, beneficiaries, and creditors public notice of the hearing. When setting up a trust, a grantor no longer owns property in their individual name, but instead property is owned by the trust and probate is no longer required. This can not only save a family time when distributing a loved one’s estate, but it also allows families to keep personal affairs private since a public notice is no longer required.

Beneficiary Designation

If you have a 401(k), IRA, life insurance policy or an annuity contract, it would be a good idea to check to make sure that you’ve first designated beneficiaries, and if you need to make any changes to those designations. A beneficiary is a person or organization named to receive the proceeds of an account after the owner passes away. If a beneficiary has not been named on an account, assets will transfer according to the contract’s default beneficiary provision, which may not be where you’d ultimately like them to end up.

I always advise that my clients occasionally check on their designated beneficiaries. For an example, if you’ve been with the same employer for a good portion of your career, there’s a chance that you may have named the beneficiaries to your employer sponsored retirement account prior to getting married (and maybe divorced) or having children. As you get older, it’s also good practice to name secondary beneficiaries to your accounts. Secondary beneficiaries receive the assets if your primary beneficiaries die before you or if they refuse to accept the inheritance.

I believe that estate planning is, and always will be, an important aspect of a sound financial plan. If you already have an estate plan in place, be sure to check in with your wealth advisor or attorney from time-to-time to see if it’s in your and your family’s best interest to make any changes. If you do not have an estate plan, you can contact me at [email protected], and I would be more than happy to help you get started.