Nearly 2.5 million Americans die each year, and many haven’t prepared the basic documents needed to protect loved ones. But let’s say you took this important step. How often do you need to revisit your estate plan?
Both a will and a living trust can be used to transfer assets, and each has unique uses and features. For example, only a will can name guardians for children who are minors. And unlike a will, a living trust can be effective while you are alive. It can be used to hold assets for your benefit if you become unable to manage them yourself.
Your estate plan should be reviewed at least every five years–more often if there is a change in the law, your finances or personal circumstances. The following important developments may require action on your part.
Changes in the law
Under the current tax law, we can each transfer up to $5.12 million tax-free during life or at death. (That figure will be adjusted for inflation.) If you haven’t revised wills and trusts during the past 5 to 10 years, they may need revisions to reflect and address this change in the law.
Impending good fortune
Whether you have made a promising investment or own a business and are expecting a huge success (such as a sale or initial public offering or the introduction of a revolutionary product), think about shifting some of the upside potential to descendents. Once the appreciation occurs, making transfers could consume your lifetime gift tax exemption and require you to pay gift tax on a larger amount. If you can safely transfer some holdings before they increase in value, that appreciation will be sheltered from both gift tax and estate tax.
The financial maelstrom that began in 2008 created extraordinary estate-planning opportunities. A combination of low asset values and the decline in interest rates used in structuring various wealth-transfer tools drastically reduced the tax cost of making lifetime transfers, whether through gifts or intra-family transactions.
Unfortunately the same economic forces also made people extremely anxious about their own financial security and less inclined to reduce their net worth through lifetime transfers.
Strategies such as the grantor retained annuity trust, or GRAT and installment sales to family members or to trusts for their benefit can create an income stream for the person making the transfer. This may be an attractive feature if you worry that reducing your net worth in order to save estate taxes later will leave you short of funds.
Change in committed relationships
If you get married, divorced or split up, you should not procrastinate about changing your plan. This applies not only to your will or living trust, but also to assets that pass outside of these documents, such as retirement assets, life insurance, as well as jointly titled bank accounts, brokerage accounts and real estate.
In some states, the law provides recourse if you forget to change the paperwork – say for your life insurance or IRA – when you get married. But even where this fallback exists, your spouse may wind up with less than he or she would have received if you had changed the beneficiary designation. Divorce poses special complications.
Becoming a parent
For many people, this is the first occasion for doing an estate plan. Most importantly, be sure to name a guardian for your children and provide for them financially in case something happens to you.
Becoming a grandparent
In the flush of a grandchild’s birth, whether it’s your first or you are lucky enough to have many, “revising an estate plan” might not be the first item on your to-do list. But when the excitement subsides, there are a few items you should check. Perhaps most crucial is that your will and any trusts that are part of your plan cover this new family member if his or her parents died before you (assuming, of course that’s your intent). The same goes for assets that pass through beneficiary designations; in this regard, pay special attention to retirement accounts.
Losing a spouse
This life-altering event can leave you feeling emotionally adrift for a very long time. Keep in mind an important deadline: The estate law in effect allows widows and widowers to add any unused exemptions of their most recently deceased spouse to their own through a divorce known as portability. But this isn’t automatic. The executor of the deceased spouse’s estate must file a federal estate tax return, even if no tax is owed. The return is due nine months after death, with a six-month extension allowed.
Other planning moves, too, should be made soon after a spouse’s death. Revise your will and living trust and name new beneficiaries for any retirement assets you inherited from a spouse—otherwise your heirs could lose income tax benefits associated with these accounts.
Meanwhile, make sure you have a durable power of attorney, appointing a family member, friend or trusted adviser as an agent to act on your behalf in financial and legal matters if you become unable to act due to illness or disability. Also revisit your health-care proxy, a separate document that authorizes an agent to make medical decisions on your behalf. Many spouses give each other these powers. When a spouse passes away, you need to be sure that you have designated someone else to take care of you and your finances.
The diagnosis of a degenerative disease or terminal illness throws families into crisis. During the rare calm moments in the eye of the storm, some people take comfort in getting their estate plans in order. This is the time to have your lawyer review documents and bring them up to date.
If estate taxes are a concern, you can use the annual exclusion that allows you to give up to $14,000 ($28,000 for married couples) each year to as many recipients as you choose without incurring gift tax. Annual exclusion gifts are the most common form of planning.
Often a power of attorney authorizes your agent to make these gifts if you can no longer write the checks. Contact us for more information.