The recently passed “Tax Cuts and Jobs Act” (TCJA) contains a major change to the Federal estate tax laws – the doubling of the individual estate gift and GST tax exemptions to approximately $11.2 million.
This will greatly reduce the number of people who will be subject to the estate tax. So even if one is unlikely to be subject to Federal estate taxes (note: many states do not follow Federal estate law), there still are many sound nontax reasons to revisit estate planning and possibly update your prior documents.
1. Disposition of assets: Even if you use a revocable trust as part of your planning, a will often serves as a primary vehicle for communicating your intentions.
More specifically, the provisions of one’s will can designate how assets will be transferred – outright to beneficiaries; to an existing trust; or, into a new trust that will be created under the provisions of the will. Testamentary trust provisions in the will also may specify ages of beneficiaries, or other provisions, that determine when beneficiaries will receive assets.
Wills also contain specific bequests of financial and nonfinancial assets (family heirlooms). Frequently, charities are named as recipients of bequests.
2. Administration and financial management of your affairs:Upon one’s passing an estate is created. The person or institution managing the affairs of the estate is the executor or personal representative. Very briefly, the executor is tasked with the marshalling and accounting of your assets and liabilities, working with the courts (probate) and disposing of your assets in accordance with your wishes.
There also are related tax and administrative filings. If trusts are created under your will, another fiduciary, your trustee(s), will administer them.
3. Guardianship for children: If you have minor or disabled children, your will is the document that specifies your choice of a guardian, and a successor guardian. Of course the surviving spouse is the obvious choice, but simultaneous deaths do occur. Also, depending on circumstances, you might want to consider a monetary stipend for your guardian.
4. Use of Trusts: Thoughtful estate planning often suggests the use of trusts. Trusts allow for an element of control over assets and their use through distributions.
This control may be particularly important when leaving assets to children (both minor and adult), someone who has disabilities, addiction or spendthrift issues, and often, for a financially unsophisticated spouse.
Trusts can offer various degrees of protection from divorce and the claims of creditors and predators.
There are many types of trusts.
As mentioned above, trusts are either set up during your lifetime or upon the grantor’s passing (testamentary), and are controlled by state law.
5. Ancillary Documents: Along with the will, there are other documents that are important to the estate planning process, such as the health care proxy, health care directives (living will) and a general durable power of attorney over financial matters.
I also like to add another, less formal document as a follow-up to the estate planning process – your letter of intentions.
6. Tax Efficiency: For many years, estate planners heavily focused on the titling of assets for married couples to assure that the first to pass would be able to fully utilize their lifetime credit.
Several years ago, tax law introduced the concept of “portability,” which, in effect, allows any unused credit from the first to pass to inure to the benefit of a surviving spouse.
Some older wills required any unused lifetime credit to go into a bypass trust.
Such provisions likely did not anticipate the doubling of the exemption.
Many states have estate tax provisions that do not follow the Federal tax.
Accordingly, one may have a federally exempt estate that still carries a significant state tax. There are other tax provisions that require a review of existing estate documents.
7. Gifting: Along with the doubling of the individual estate tax exemption, the ability to make lifetime gifts has also doubled. In absolute dollars, never has there been such a large increase in the lifetime exemption. Gifting is complicated. Just because one can increase lifetime gifts, doesn’t mean they should.
Gifting has many tax savings opportunities, but can also create complications from the impact of the gifts on the recipient. When there is both the ability and intention to gift, careful consideration should be made as to timing and whether gifts are made outright or in trust.
Although for many, the TCJA has greatly reduced or eliminated the potential estate tax liability by the doubling of the lifetime estate and gift tax exemption, it has not reduced the need for thoughtful and proactive estate planning.
