An estate plan is like a car or a house: It needs regular maintenance to function as intended. Yet unlike your car or home, external events can create the need for adjustments. Among such events is legislation like the tax bill Congress passed in late December.
So this is an important time to schedule a meeting with your estate planner and be certain your plan is up-to-date.
Even if your estate plan won’t be affected by the new tax law, it’s smart to confer with your estate planner periodically to be certain your current wishes are reflected in your estate planning documents.
During this checkup, you may find that your plan no longer meets all of your needs because of changes in your life and the lives of your heirs.
Or you may find that your plan didn’t cover your needs from the get-go. In my experience, many clients leave their estate planner’s office with a thick folder of documents and fail to read them carefully or discuss them in detail with their planner before signing.
When you meet with a professional for a thorough evaluation and possible updating, you might ask some key question to assure your plan documents fully support your interests and those of your heirs, including these five
1. Will the new federal law affect my estate tax picture?
Estate tax is the tax that estates pay governments upon death; when it applies, there’s less left for your heirs.
The federal government exempts a certain amount of an estate’s value from this tax and Congress just doubled that amount, known as the exemption. The new law eliminated tax on estates for many wealthy families.
There will no longer be any federal tax on estates valued between $5.6 million and $11.2 million.
Previously, the limit was $5.6 million.
By exempting estates between $5.6 million and $11.2 million, Congress gave substantial relief to all but the wealthiest families, since only about 5,000 estates per year are estimated to be above the new limit. So unless you’re rich (but not ultra-rich), the doubling of the exemption shouldn’t affect your estate plan.
2. What does the new tax law mean by the exemption limit for married couples?
This can be confusing, since couples general die one spouse at a time. The exemption limit for couples refers to portability — the ability of a spouse to avoid estate tax on amounts inherited from the other spouse that were within the exemption limits.
The new law preserves portability, which was introduced in a revision of tax rules by Congress in 2012.
To assure that exemption limits from the estate of a deceased spouse are portable, estate planning documents of the surviving spouse must correctly invoke portability, using the right language.
Otherwise, the estates of these spouses might be forced to create something known as a bypass trust — a costly, time-consuming route that can have the effect of reducing the amounts that heirs ultimately receive.
3. Will the new federal law affect my state estate tax?
There are 15 states that still have some form of estate tax: Minnesota, Iowa, Nebraska, Washington, Oregon, Kentucky, Tennessee, Pennsylvania, New Jersey, Massachusetts, Rhode Island, Connecticut, Delaware, Maryland and the District of Columbia.
Some of these states yoke their exemption limits to the federal limits, so the federal increase will automatically trigger the same increase in those states.
But some of these states have no such linkage, so their exemption limits will remain the same, assuming their legislatures don’t act to change them.
Detailed, state-by-state information on estate tax can be found on the Tax Foundation website.
4. Are my estate documents customized to fulfill my wishes and avoid unintended consequences?
Outcomes directly contrary to your intentions can result when documents aren’t specific enough because boilerplate, off-the-shelf documents were used without being customized to your situation.
It’s not uncommon for this to happen with financial powers of attorney (POA), which direct how your finances are to be managed if you’re incapacitated and unable to make decisions.
Without specific provisions to assure your wishes are carried out, vague or overly general POAs — which don’t include specific provisions of wishes, limits and prohibitions — might allow the agent managing these finances (often, the person’s spouse) to:
- Legally make gifts to whomever they wish and change beneficiaries on financial accounts — 401(k)s, IRAs, life insurance policies and annuities In some cases, agent spouses have made gifts to themselves or their grown children from their first marriages or have designated these grown children as account beneficiaries without express permission.
- Discontinue existing financial support for an aging parent or a disabled child
- Manage the incapacitated individual’s assets in ways that person never would, such as taking risks that jeopardize the inheritance of heirs listed in the incapacitated person’s will
To prevent such negative outcomes, ask your estate planner to assure that your POA is specific enough.
5. How soon should I come in for another review of my estate plan?
Many experts advise doing a review every three years, and/or after major life changes, including: your divorce or the divorce of a grown child; the birth of a grandchild; your receipt of a significant inheritance; the sale of your business; your retirement; newly developed disabilities or chronic illnesses or a death in your family.
An estate plan should change with changing circumstances. By attending to this, you can show your loved ones that you cared about outcomes affecting them after you’re gone.