The End of Summer Guide to Estate Planning

The end of summer may be the best time to get your estate and financial plan into shape!

The federal estate tax exemption as of January 1, 2022, is $12.06 million (or $24.12 million per married couple).  The current lifetime exemptions will continue to increase with cost-of-living adjustments until 2026, when they will be halved by operation of law on January 1, 2026, unless some new legislation makes the exemptions permanent.  The prospect of a divided government for the indefinite future makes it quite unlikely that the federal government will have the political will to make the current lifetime exemptions permanent.  If the law does not change, the exemptions in 2026 will be about $6 million per taxpayer or $12 million per married couple.

We recognize that it may be easy to put off estate planning with summer barbecues, beach outings, and baseball season in full swing, so we’ve put together a quick list of items to consider:

  1. Review and update your current estate plan

If you have a trust that’s even five years old, you may need a more modern trust which can be drafted to be more powerful, robust, tailored, and flexible.  Flexibility is key!  The world keeps changing, and you should be sure that the plan that you have currently in place still meets your objectives and achieves the goals you have for your family.

Trusts that were set up more than a few years ago may not provide the robust terms that modern trusts provide, such as a modification provision, having trust protectors who can monitor trustees and make mid-course changes, and more.

  1. Consider making gifts to take advantage of the high federal estate tax exemption

Estate planning generally involves making gifts of assets in order to reduce the size of your taxable estate and remove assets that are likely to appreciate from your taxable estate so that, as a matter of current law, the appreciation can be transferred to your heirs without a transfer tax.  The current economic downturn means that asset values may be artificially depressed.  As a result, you may be able to make gifts of assets that will appreciate more rapidly when the market bounces back using fewer of your precious gift tax dollars.

  1. Consider including asset protection as part of your plan

You should likely consider incorporating provisions in your planning documents that would protect the assets from future creditors and predators of your heirs.  This may be done whether or not you embark on a significant gifting plan by using testamentary trusts that are funded on death.  A trust should be structured with maximum flexibility so that the trustee could hold back distributions in order to prevent seizure by creditors or treatment as a marital asset in a divorce proceeding.

  1. Confirm cash flow and liquidity requirements

Prior to undertaking any substantial gifting plan, we should confirm your sources of income and ensure that planning does not disrupt your current lifestyle or future comfort.  This is perhaps more important than determining the structures that will protect your wealth for future generations of your family.  Strategic planning can be done to facilitate a steady stream of income to enhance retirement benefits.

  1. State income tax issues

Now that federal tax reform has reduced state and local tax deductions, it may be time to consider moving that trust from a high-tax jurisdiction to a state which has reduced or eliminated state income taxes for trusts.  Several states like Nevada, South Dakota and Alaska have enhanced the benefits by moving to their states by increasing asset protection.

  1. Strategic charitable giving

You may be able to achieve an estate tax benefit and possibly income tax reductions through charitable trusts.  Tax reform improved these opportunities by allowing more of your charitable dollars to be deductible in the year of giving.

  1. Check designated beneficiary clauses on retirement accounts

Qualified retirement accounts are subject to special withdrawal requirements under the SECURE Act.  You should confirm that your designated beneficiary clauses on your retirement accounts are up to date and address your planning objectives.  For most of those inheriting an IRA or qualified retirement plan after 2019, the SECURE Act will require all IRA or plan assets to be distributed by the end of the tenth calendar year following the IRA plan participant.  This requirement is intended to enhance tax revenues to the tax authorities as contrasted with the long stretch periods that had previously been available.

In general, if you had originally planned for the retirement accounts to be left to your beneficiaries through a trust, you may wish to revisit this planning to determine whether you need to create specialized trusts that will still achieve your goals.

  1. Life insurance review

If you have any life insurance policies insuring your own life, it’s important to review your policies regularly to confirm that the cost of the policy is appropriate.  Additionally, you should evaluate whether you still need the policy you have and whether it will provide sufficient liquidity and resources to meet your family’s needs.  Several insurance companies have recently created combined life and long-term care policies which can cover the costs associated with a disability.

If you need assistance getting your estate and financial plan in shape, feel free to reach out to Sax to help you seize opportunities and position you for future success.

About the Author

Joy Matak, JD, LLM is a Partner at Sax and Leader of the firm’s Trusts and Estates Practice. She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multi-generational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning.  She can be reached at [email protected].

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