When planning for retirement and our financial futures, estate planning is often overlooked. For several years, the lifetime exclusion was large enough that only the truly wealthiest families needed to worry about federal estate taxes. However, that could be changing with the most recent proposal out of Washington to decrease the lifetime exclusion from $11.7M per person to possibly only $3.5M per person. This is a dramatic shift and could cause many more to pay estate taxes. And even if Biden doesn’t get his way, the lifetime exclusion is due to decrease to about $5M when the Tax Cut and Jobs Act sunsets in 2025. In addition, Biden is proposing to do away with the step-up in basis at death and to make death a taxable event. These proposed changes, among many others, are causing taxes — including estate taxes — to come back into focus.
There are also a number of other reasons to pay attention to your estate planning. Some of the most common mistakes include creating a plan and never updating it, or worse, not having one at all. Due to the complexities of estate planning (and state-specific laws), essential planning items are often missed. In many cases, inheritors are not prepared to come into sudden wealth and do not have the financial sophistication to oversee such funds or assets. In these instances, the estate can fall victim to mismanagement or poor investment, create tension between family members, and further complicate the situation.
To help avoid such circumstances, use these seven steps when creating or updating your estate plan:
1. Educate and communicate with the inheritors on managing the estate and how it can (and should) be financially managed to benefit everyone involved.
2. Anticipate possible family conflicts and keep your estate planner in the loop on such issues to help ease issues that could flare-up. It is important to note that estate planners have tools for dealing with these issues, which can provide better cohesion within the family.
3. Consider gifting as it can help the next generation become comfortable with wealth before inheritance. However, make sure to plan gift-giving as gifts must be tax-efficient and ideally help to increase the inherited estate’s after-tax wealth.
4. When meeting with your estate planner, be keen on taking notes to understand the basics and complexities of the plan and retain the information. Always request a “planning letter” or executive summary.
5. Over time, look to further simplify and organize your estate plan. This better prepares the executor and allows her to probate the Will faster and make it easier for everyone involved.
6. For business owners, it is essential to include a succession plan, whether that may be to sell or have the business passed down. Many small business owners spend their lives building a successful business, only for it to decline once they pass due to the absence of a succession plan.
7. Funding a living trust is can be helpful to avoid probate as it creates a process for managing assets. A critical step in this process is to transfer legal ownership of such assets, which is often forgotten about.
Following these steps and being more proactive in your estate planning can help reduce a potential loss of assets and decrease hardship for your surviving family. Our team can help to review your estate plan or connect you to an estate planner based on your needs.
If you have any questions, please reach out.