Helping clients’ estate plans catch up to tax reform

Your clients may need to update estate-planning documents they last inspected before the Tax Cuts and Jobs Act. 

Reform more than doubled the exemption from federal estate taxes in 2020. This change marks a great chance to help clients take advantage of the new exemptions.

Latest numbers are huge

The 2020 estate and gift tax exemption amounts are $11.58 million per individual, up from $11.4 million in 2019. A married couple can shield $23.16 million in estate value from tax. That’s up from pre-reform levels of $5.49 million per person (which will kick in again, adjusted for inflation, in 2026 – if not sooner, depending on political winds).

Without revamping, your clients’ documents may account for dispersing only some $5 million of an estate tax-free, not the greater amount now allowed.

(Individual states often have their own estate taxes and rules – a key part of planning, as more clients move to supposedly lower-tax states. Note, too, that the IRS has also extended many federal filing deadlines for gift and generation-skipping transfer [GST] tax return filings to July 15.)

Clients’ wrong ideas

Not only will clients possibly be unaware that potential exemptions have doubled, but they also probably have other misconceptions about estate planning. Often, clients think they’re not wealthy enough to need an estate plan, for instance, or they want to put off thinking about death or major financial decisions.

Changes in personal circumstances can necessitate re-examining estate plans: a death, a birth, a marriage or divorce, a move, a windfall or a financial loss, or a change in someone’s health. Clients often fail to remember that changes in the life circumstances of their beneficiaries can impact estate plans.

Among other misconceptions:

  • Clients could think that estate planning will require spending a lot of their net worth before they’re ready. Annual exclusion gifts can head this off, as can direct payments for tuition and medical expenses.
  • Documents needed for estate planning can take a long time to assemble and prepare if they haven’t been examined for a while – a lengthy process that surprises many clients. (Advisors can help clients by maintaining copies of records in a secure virtual safe.)
  • Clients might not realize that their will only controls assets subject to probate – generally assets titled in the individual name of the deceased individual. Some assets, such as 401(k)s, IRAs, and insurance policies, have designated beneficiaries, while other assets flow to a joint owner, according to the title.

And, you should bear in mind that families fight in the easiest of times. Added pressure of talking out big financial matters often only brings to the surface long-held emotions. You might have to help your clients deal with these.

Have a plan for updating

Beyond trustees or beneficiaries named years ago and since forgotten (and maybe no longer appropriate, such as ex-spouses), the first thing you might have to help clients tackle is their plan’s language.

Outdated percentages in funding formulas, combined with new exemptions and personal wealth after years of a bull market, can create inheritances that are at odds with original wishes: too much in restrictive trusts, for example, or too little going to certain beneficiaries. Many wills also fail to contain such language as “maximum exemption available at the time of death,” a potential problem after exemptions have significantly increased.

Clients need a team – an accountant, an advisor, and a trust and estate attorney, at minimum – to create a written draft plan. This plan should include a numbers analysis of tentative decisions and tax projections, as well as an annually updated list of various assets, their approximate values, and how each is titled. Flow charts and bullet-point summaries can help show clients how inheritances will be dispensed.

Plans should be completely reviewed at least every three to five years.

What else you should consider

Many other details go into proper estate planning these days. Among them:

  • Generally, the more provisions in a plan, the greater the plan’s flexibility amid future changes.
  • Lifetime trusts work well for some plans, rather than having distributions made at certain beneficiaries’ ages. Lifetime trusts can also be set up so beneficiaries over a predetermined age can manage assets in the trust.
  • Watch for mandatory funding of credit shelter trusts – a common vehicle in older, outdated plans, and one that could trigger state estate taxes, if used incorrectly. Also, watch for marital trusts, which are often based on lower, previous exemption amounts.
  • Make best use of portability of a spouse’s unused exclusion amount. When one spouse dies and does not make full use of their federal estate tax exclusion, for instance, the surviving spouse can make an election to add unused federal exclusion to their exclusion amount. This can be important if one spouse dies in 2025.

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