The recent surge in the coronavirus pandemic across the country has reminded all of us that a return to “normal” is far from imminent. The public health and economic crises caused by the pandemic have had many secondary effects, one of which is that we have all been reminded of our own mortality. For many people, this has sparked a renewed and urgent interest in estate planning, including creating, updating and/or finalizing estate planning documents.
For those who have been holding off on estate planning, the uncertainty of the current moment should serve as motivation to act. Without an estate plan in place, an incapacitated individual will be faced with the unpleasant prospect of having state law and probate courts determine who will be responsible for their financial affairs and healthcare decisions. A thoughtful, up-to-date estate plan, on the other hand, provides peace of mind for you and your loved ones and allows you to control where your assets go at your death.
At any time, but especially during times like these, there are several key estate planning issues that you should review with an estate planning attorney.
Is Your Will or Living Trust Up to Date?
The first step in estate planning is making sure that you have at minimum the following documents: a will, durable power of attorney, and patient advocate designation. For many, a living trust (revocable grantor trust) will be the centerpiece of their estate plan, allowing for an orderly management of assets during times of incapacity, the avoidance of probate, and the orderly distribution of assets at death. Even after these documents are in place, they should be reviewed and updated, as appropriate, every few years. Periodic review with an estate planning attorney allows you to ensure that choices you previously made, such as the beneficiaries of assets upon your death and the appointment of financial and healthcare representatives during your life, are consistent with your current preferences, and appropriate based on current law. Over time, as assets grow and additional assets are added to your portfolio, trust funding and estate planning goals need to be revisited.
Is Your Trust Funded?
A revocable grantor trust (commonly called a “living trust”) protects spouses, children and those with special needs; a properly drafted and funded trust can also help reduce or eliminate federal estate taxes. The terms of a trust may include who will control your assets upon your disability or death and may provide for gifts to charity, family, and friends. One of the most important benefits of a trust is that it allows an estate to be administered outside of probate court. However, for a trust to serve this purpose, it must be fully funded.
Funding a trust involves retitling assets, such as a home and financial assets, into the name of the trust, and designating the trust as the beneficiary of certain assets, such as life insurance and retirement accounts. Failure to fund assets into a trust means that such assets may not go to intended beneficiaries. In my experience, many clients fail to follow through with funding after establishing a trust. Every time a trust is reviewed and updated is a good time to review funding issues.
Given the recent passage into law of the SECURE Act and the CARES Act, special care must be given to how beneficiaries are designated for qualified retirement accounts such as IRAs and 401(k)s. Based on your circumstances and estate planning goals, these accounts are sometimes designated for specific beneficiaries and other times the trust is more appropriately designated as the beneficiary.
Are Any Changes Required to Your Durable Powers of Attorney and Patient Advocate Designations?
A durable power of attorney is a legal document that empowers a representative of your choosing, called an agent, to have authority to manage your financial affairs. A patient advocate designation is a legal document that names another individual as a patient advocate to make medical decisions on your behalf, in accordance with your wishes, once two doctors certify that you are unable to communicate decisions regarding your medical or mental health treatment. Having a durable power of attorney and a patient advocate designation in place is critically important, particularly in a time of a global pandemic.
At the time of your inability to act, if you have not designated an agent and a patient advocate, no one will be legally authorized to act on your behalf. Family members will be forced to go to probate court, expending time and incurring expenses, to request appointment of a conservator and a guardian to handle these responsibilities.
Are There Tax Planning Strategies You Should be Considering?
Federal estate, gift and generation skipping transfer tax exemptions are generous under federal tax law but may not always be. Currently, the federal estate tax exemption is $11.58 million per person, reduced by lifetime taxable gifts. For deaths after December 31, 2025, the exemption is set to drop to a $5 million base instead of the current $10 million base, as adjusted by a cost of living allowance. However, it is possible, depending on the outcome of the upcoming 2020 election that the unusually high exemption amounts may be reduced even sooner than the end of 2025. Many high net worth individuals are making large gifts of their remaining federal estate tax exemptions in order to fully use them. The saying, “if you don’t use it, you’ll lose it,” applies fully to the federal estate tax exemption.
Given the current low interest rate environment, and the massive national debt (nearly $27 trillion as of the time of this writing), it’s unlikely that we will see more favorable exemptions in the years to come. Now is a good time to consider which estate tax planning strategies would be beneficial for you and your family. Options include gifts of assets outright or in trust, making intrafamily loans, creating spousal lifetime access trusts, creating grantor retained annuity trusts, and making non-taxable gifts directly to educational institutions to fund education for grandchildren, and other charitable donations.
While the Department of Treasury has made clear that if you fully utilize your current federal estate tax exemption now, but at death the applicable exclusion amount is lower, there will be no claw-back of assets into your estate of amounts over the then-applicable exclusion amount. However, if you fail to use your full federal estate tax exemption before it is reduced, you will forever lose the option to do so.
For example, under current law, if you currently have $11.58 million, you cannot give away assets now of $5.58 million and expect that in 2026 you will still have $5 million in assets to give tax free at death. Instead, if you give $5.58 million away now and die in 2026, the full $5 million remaining at your death will be subject to federal estate tax. Conversely, if you give away $11.58 million now and die in 2026 with no other assets, you will not have a taxable estate at death and no federal estate tax will be due.
Do You—and Do Your Designated Fiduciaries—Know Where Your Estate Planning Documents Are?
One important goal of estate planning is to create peace of mind for yourself and your loved ones. For all of us, getting our affairs in order is the responsible thing to do so that when we die or become incapacitated, our loved ones aren’t left to clean up a mess.
The simple act of making sure that you and your designated fiduciaries know where your estate planning documents are located is often overlooked but can prevent unnecessary confusion and frustration. I advise my clients to store their documents in a safe and secure location, and to inform fiduciaries of how to access them. In most instances, it’s advisable to inform designated fiduciaries where to find your important estate planning documents, and in some instances, to provide fiduciaries with a copy. It is helpful to also inform your fiduciaries of the name and contact information of the estate planning attorney who created the documents.