7 Steps to a Fully Up-to-Date Estate Plan

Jay Gershman |

Estate planning is more important than ever, as changes from the new tax act could significantly impact you.

Many people probably don’t want to think about their mortality let alone plan for who gets what when they die. In fact, a study done by CNNMoney found that only 35%–45% of Americans have a will, so it’s quite possible that you may not have begun looking to the future and haven’t prepared your estate plans.

It is important to think about what could happen. You may have a will, but do you have all the other documents that you need to create an up-to-date estate plan?

Estate planning is more important than ever, as the new tax act has changed some rules that could have a lasting impact on you. We’ll review practical ways for you to create or revise an estate plan in light of the changes.

Change to the estate and gift laws

The estate and gift tax exemption is the amount that an individual can gift during their lifetime and after death without owing taxes. The tax act doubled the unified estate and gift tax exemption amounts from their current levels, which raises the scheduled 2018 exemption of $5.6M into an $11.2M individual estate tax exemption and a $22.4M exemption for married couples. This increase is set to sunset after 2025 and is adjusted for inflation.

According to the Tax Policy Center, the number of estates that will owe taxes is expected to drop dramatically as a result of the new act. Approximately 1,700 estates could owe taxes in 2018 out of an estimated 2.7 million U.S. deaths, so the number of estates that will be taxed is a very small percentage (at about .001).

7 key steps for getting up to date

When creating or reviewing an estate plan, you should speak to an estate planning attorney that your financial advisor recommends and trusts. These are the steps you should follow when creating or reviewing their plans:

Step 1: Create or revise your will

It would be beneficial to see an attorney to create a will, especially for those who have children. If you have a spouse with children and no will, generally the state will split those assets between the surviving spouse and children, which may not be in line with your wishes. A will also designates guardianship of any children. If you are to pass away without a will (also referred to as dying “intestate”), the state will decide who receives your assets, which again is most likely not what you may have intended.

If you already have a will, the document should be reviewed at this time and then at least once a year going forward. Because of the new tax act and doubling of the lifetime exemption to $11.2M per person, it’s more important than ever to review all wills and trusts. You may have signed a will many years ago when the exemption amount was much lower and the results under that document will be different today.

For example, if someone created a will in 2003 when the estate tax exemption was $1 million, she may have given the maximum amount to a credit shelter trust (so as to limit estate taxes), and the rest to her husband. The credit shelter trust might have been for the benefit of her children from a prior marriage or children and a spouse. If the estate was valued at $4 million, that meant that $1 million went to the trust and $3 million went to the husband. Because of the new tax act, the entire $4 million estate would go to the trust and nothing to the husband. If the estate was $10 million, the husband would have received $5 million until December 31, 2017, but not in 2018 when the law changed.

Step 2: Review trusts and beneficiaries

Trusts typically have formula clauses tied to the amount of the lifetime exclusion, which could now result in unintended consequences. For example, a revocable trust could fund a credit shelter trust that is equal to the old estate tax exemption amount, which can create unintended consequences as that amount has increased. All estate plans should be reviewed as a result of the tax act. And remember that trusts are important to control the disposition of assets even if estate taxes are not a factor. For people under $22.4M in assets (which is most estates) it is still important that estates are distributed to the right beneficiaries in the right way.

It’s very important for you to visit with an estate planning attorney to discuss various trusts that may be suitable for their situation. For example, an estate planning attorney should be asking if your will protects a spouse and children with a flexible trust. Also, are aging relatives protected with a robust revocable trust? While many people may like simple wills, a simplified document may not cover all of their needs nor have the flexibility to address evolving tax laws.

Step 3: Power of attorney

Any single persom could be in an accident or lose mental clarity at any time. That’s why it’s important to make sure you  have a power of attorney(POA) drafted by an attorney. According to AARP, only a little over half of all Americans have a POA. The most common POA is a durable POA that would go into effect immediately should you lose capacity. In light of the new tax act, it is importamt to note if your POA gives their agents the right to make gifts. Make sure you know who you have appointed as the agent so that any gift-giving is done in accordance with your wishes. Your attorney could update your POA to include a broad gift provision.

Step 4: Create a health care power of attorney (POA)

Another important document for your attorney to draft is the health care POA. A health care POA outlines actions that should be taken on a person’s health treatment if that person is no longer capable of making decisions. This agent should know your wishes when making any health care treatment and be able to understand any medical information.

Step 5: Gift in the most advantageous way

The new law increases the gift exemption amount, but the provision sunsets at the end of 2025, so many people may want to take advantage of the increased exemption before 2026. Some gifting ideas could include prefunding premiums on life insurance policies owned by irrevocable trusts or forgiving existing loans. You could even make gifts of interests in family limited liability companies.

Step 6: Check in with your state

The federal estate tax is not the only reason for estate planning. State estate or inheritance taxes may apply in many situations. Be sure to take into consideration if you want to stay in your current state in retirement as you may be subject to your home state’s estate tax.

Step 7: Check whether you have life insurance

Some estates under the exemption levels may no longer need life insurance policies to pay federal estate taxes. You can add value by doing a thorough review of your insurance policies and exploring alternatives with your financial advisor if life insurance no longer fits into your wealth plan.

It’s always a good idea at your annual meeting to provide your financial advisor with copies of your most recent estate planning documents that they can keep on file. If there is an emergency, your relatives can always contact your financial advisor and obtain these valuable documents. Creating or updating your plans will leave you with some peace of mind.







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