Dust Off Your Estate Plan
Last quarter, we talked about establishing an estate plan. If you have one set up, it’s important to review it every three years to help ensure alignment with the law and your wishes. There are ten common pitfalls of an outdated estate plan.
1. Listing Wrong Person
There are two types of fiduciaries in estate plans. Executors are typically appointed in wills and are given control of assets in court until they’re distributed to beneficiaries. Trustees control the assets within trusts and make distributions to a beneficiary. An outdated estate plan may name fiduciaries not suited to handle it any longer. They could be retired, too elderly or no longer practicing. Children might also be of age to take on the role of a fiduciary. It’s very important to name people you trust and always consider the age, maturity and level of financial knowledge of the fiduciary.
2. Aging Children
New considerations arise as children grow into adults. Things to consider are whether to take a guardian off the account or add a spouse and children. Are the assets equally distributed to siblings or should they be changed? Outdated estate plans are not always consistent with current circumstances. It’s important to review all the ways assets are being left to children, given their age and maturity. Once children become adults, they should consider having a health care power of attorney, living will or advance health care directives. This way, parents or others can be named as agents and make health care decisions if the need should arise.
3. HIPAA Rights
A power of attorney, living will and advance health care directives should contain provisions waiving a person’s HIPAA rights with respect to their health care representatives. Without HIPAA authorizations, medical providers may be unwilling to share medical information which could affect a decision regarding a patient’s care and end-of-live wishes.
4. Wealth Accumulation
Accumulating more money not only increases annual income taxes, it can also bring about estate and gift taxes. Federal law allows you to transfer a certain amount of assets free of federal estate and gift taxes. It’s called the “applicable exclusion amount.” Every person is allowed to transfer a total of $5.45 million during their lifetime or at death without any federal estate and gift tax. Estates worth more at the time of death will be subject to federal estate taxes.
5. State Residency Changes
Each state has its own estate and income tax laws. Some are common law property states and others are community property states. It’s best to review your estate plan with a qualified estate planning professional in the state of your residence to re-evaluate and update your plan if you move out of state. There are 15 states that currently have an estate tax and six states that have an inheritance tax. Each state has different exemption amounts, so it’s important to evaluate wealth and estate planning needs.
Portability rules allow a surviving spouse to take advantage of any unused portion of a spouse’s applicable exclusion amount, pro-vided a federal estate tax return is filed. Prior to portability, many estate plans included credit shelter trusts (CSTs). CSTs are sometimes referred to as bypass, family, or exemption trusts and are typically funded with assets having a value equal to the applicable exclusion amount ($5.45 million in 2016) of the first spouse to die. Assets placed in a CST can be excluded from the estate of the surviving spouse if the applicable exclusion amount of the first spouse to die is properly allocated to it. Although there may still be other reasons to use a CST, you might consider reviewing your estate planning documents with your attorney to determine whether allowing more flexibility in the funding of a CST, or the use of portability, is appropriate in your current situation.
7. Community Giving
People often forget to include charitable causes in their estate plans. Just like when we give to charity during our lives, there are many of the same benefits available when charitable giving is included in our wills. This can include direct gifts to charities, charitable trusts, donor advised funds or family foundations. There are various ways to help you achieve your charitable goals while potentially reducing your estate taxes and increasing the amount you leave to your heirs.
8. Income Tax Rates & Estate Tax Rates
Changes in in the federal tax law make it vital to focus on the income tax consequences of estate planning in addition to the estate tax consequences. Fidelity says for estates still subject to federal estate tax, the federal estate tax rate is 40%, much lower than in prior years. These rates must be compared to the top federal income tax rates of 39.6% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax. Trust income tax rates must be taken into consideration. Trusts are taxed at the highest federal income tax bracket at as low as $12,400 of income. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in lower tax brackets.
9. Life Insurance Policies
It’s always a good time to review your life insurance policy to make sure it makes sense from an estate planning and a financial planning perspective. Many people buy life insurance and continue paying the premiums for many years even though their financial picture has changed. You want to make sure the policy is still competitive with what is available in the marketplace today.
10. The Next Generation
Have you discussed your estate plan with your loved-ones? Do they know who to contact when something happens? You may consider drafting a letter of instruction to your children and fiduciaries and keeping it updated. The letter should include an inventory of assets and list names and numbers of your estate planning team. This can help reduce the likelihood of litigation down the road. Also remember to give your fiduciaries the appropriate power to handle your assets.