In the juggle of daily life, many have a running list of To-Do’s that they steadily chip away at. Some agenda items take priority, like grocery shopping or paying the bills, and inadvertently, some are pushed to the bottom of the totem pole to achieve “tomorrow.” Unfortunately, estate planning is often in the latter category due to what we perceive as too complex or not urgent. However, these are simple tips that can make estate planning effective and ensure that your kids, not the IRS are your biggest beneficiary after you pass away.
Review your living will and trust regularly
Time flies by in the blink of an eye. We recommend that you meet with your attorney at least every 5 years (max 10) to ensure that your trustees, executors, guardians, beneficiaries, and healthcare agents are all up-to-date. Equally as important, you should ensure that your trust takes advantage of the most recent tax rules, which seem to be changing rapidly these days. In the year 2000, the estate tax exclusion was $675,000[i]. Today, the estate tax exclusion is $5.49M[ii] per person, and under the Trump Tax Proposal, the gift tax exclusion may double to nearly $11M[iii] per person or nearly $22M per couple. Meeting with your attorney regularly will ensure that your trust is taking advantage of the current tax code and structured to pass assets to your beneficiaries in the most efficient manner.
A revocable trust provides privacy over a will
Sometimes people feel that their finances are too simple to require a trust and their wishes can be captured in a will alone. What many don’t realize is a will does not protect your privacy. When you pass away, your estate transfer is a public record that anybody can have access to. That can lead creditors to tie up your estate in probate if they claim rights to your assets. On the other hand, a revocable trust will provide you privacy and pass assets to your heirs upon your passing, escaping probate.
Fund your trust
Often people go through all the steps to create a thorough and well thought-out trust but then fail to actually retitle assets into the trust name. Consult with your attorney regarding which assets should be transferred into the trust title for protection if you pass away.
Provide titling consistency
Review the beneficiary designations on accounts such as retirement accounts, life insurance policies and annuities. Your beneficiary designation will take precedence over your will or trust if there is a discrepancy. For example, if the beneficiary of your life insurance policy is your ex-spouse, proceeds will go to that person, no matter what the will or trust dictates.
Pre-tax or qualified assets such as IRAs typically have individuals listed as beneficiaries instead of your trust. That is because IRA assets afford better tax benefits to the beneficiaries if they are inherited directly, rather than being inherited through the trust. For example, if a parent lists a child as the primary beneficiary of their IRA, when he/she passes away, the child can receive the money in an Inherited IRA and continue to benefit from the same tax deferral treatment. If the trust is the primary beneficiary instead, the IRS can take income taxes from the account which has grown tax deferred all these years and only the net proceeds may be disseminated per the trust language.
Utilize the annual gift tax exemption
Under the current tax code, you can gift up to $14,000 per year, per person, gift-tax free. For a couple, that means you could gift a total of $28,000 to each person annually without triggering gift taxes. For a family of four, that could amount to a total gift of $112,000, tax free, every year! This annual gifting strategy does not tap into your lifetime gift tax exemption (currently $5.49M per person).
Future tax law changes
Tax laws are currently in limbo and could change within the next year. However, delaying your estate planning for future tax changes could leave you or your loved ones in financial disarray if no planning is completed and something unexpected happens. Even if the estate tax exemption is repealed in full, there’s no telling if the next administration will put estate taxes back in effect. When drafting a living will and trust, you can draft a durable power of attorney over health and finances to designate someone to act on your behalf if you become incapacitated. In addition to wills and trusts, there are many estate planning tools available that provide protection of assets against lawsuits and claims.
If you don’t have a will and trust in place, ask an attorney if creating one would be appropriate for you. If you have a will or trust already, look at the last time it was updated and make an appointment with your estate planning attorney if it’s time to revisit the good planning you’ve already done. Often, you can update your trust with an amendment rather than recreating the entire trust from scratch.
Once the new tax laws are finalized, consult with your attorney, CPA and Financial Advisor to ensure you are taking full advantage of opportunities available. When you have a network of professionals working together to provide you sound recommendations, you will create an estate plan that provides you and your family peace of mind.