The Wealth Advisor
You have signed all of your estate planning documents and, if your plan includes trusts, completed their funding. You sit back, relax, and enjoy the peace of mind that comes with completing that task. But don’t bask in that feeling for too long—estate planning is an ongoing process, not a one-time event.
In this edition of The Wealth Advisor, we will explain why your estate plan will need to evolve to keep pace with your life, family, and finances as they change, events that should prompt you to consider making changes, and planning opportunities that can arise along the way.
Why Your Estate Plan Will Need to Evolve
It is unreasonable to expect that a basic will-based plan created when you were a newlywed living in an apartment would still be all you need when you have children, a home, and a business. Life’s curve balls – such as a divorce, a loved one who has special needs, or changes in the tax laws can also make plan adjustments advisable.
Events that Trigger Changes to Your Estate Plan
Generally, any significant change in your personal, family, financial or health situation, or a change in the tax laws should prompt an estate plan review. The following list can be used as a guide, but is by no means all-inclusive:
Personal and family changes:
Family finances changes:
Changes Your Estate Plan Might Need
Tax Law Changes Can Affect Your Estate Plan
If your estate plan does not keep up with these and other changes in the tax laws, it may not work the way you intended when it was established. That could cause your estate to pay too much in taxes and leave less to your beneficiaries than you had planned or have your estate distributed in ways you did not anticipate.
Special Planning Opportunities During the Rest of 2012 Only
However, unless the President, House of Representatives and Senate all agree otherwise, on January 1, 2013, the federal estate, gift, and GST tax exemptions will drop from $5.12 million to about $1.4 million and the tax rate on everything over $1.4 million will increase from a flat 35% to a sliding scale starting at 45% and topping out at 55%. At the same time, unless the President, House of Representatives and Senate all agree otherwise, income tax rates will also increase, the tax on long-term capital gains will increase from 15% to 20% and the favorable tax treatment of dividends will end.
Planning Tip: If you transfer assets to a family limited partnership or limited liability company, an outside buyer would pay substantially less than the underlying asset value for an interest that cannot be sold without the approval of the other owners. Discounting values through planning strategies like this can leverage the $5.12 million gift and GST tax exemption available this year only and further increase its exceptional value as a wealth transfer tool.
Planning Tip: A very large amount of life insurance can be purchased with $5.12 million or $10.24 million. Giving the money to a trust that buys the insurance can allow the insurance policy proceeds to pass to younger generations free of probate, income taxes and estate and GST taxes or be available to meet liquidity requirements at death.
What Can We Expect in 2013?
Planning Tip: The current administration has targeted for elimination long-used wealth transfer strategies like discounting (mentioned above) and even unlimited charitable deductions. Nobody yet knows what the tax laws will be in 2013. However, we do know what we have now…an exceptional planning opportunity that we may never see again.
When Should You Review Your Estate Plan
When you do your annual plan review, take time also to update and organize your financial records. That way, when the unexpected happens, your family members will not be doubly stressed by having to search for insurance policies, bank records, etc., like so many are forced to do, following a death or disability event. Instead, your family or trustee will have the comfort of knowing that you planned for this event when they find everything they need organized and in one place.
Planning Tip: Depending on your relationship with your beneficiaries, it can be a good idea to let them know the general provisions of your estate plan. You don’t have to give them specific amounts of their inheritance or of your financial accounts. But it can be very helpful for them to understand what your plan contains and why you have planned it this way.
What if Your Estate Plan Needs Changes?
Your estate planning lawyer will be able to provide critical guidance you need to make the appropriate changes to your plan, thus giving you peace of mind that everything has been done correctly. And that will put you back where you were when we started this conversation: sitting back, relaxing and basking in that peace of mind that comes with knowing that you have just the planning you need…at least until the next change comes along.
Visit EstatePlanning.com for more information and for up-to-date news about estate planning and related topics.
TEST YOUR KNOWLEDGE
1. Most people only need to do their estate planning one time. T F
2. Every young family should start with an expensive, comprehensive
3. A change in your personal, family, financial or health situation could result in
4. Proper estate planning should consider estate and gift tax rules. T F
5. Estate planning can help provide a smooth transfer of a family business. T F
6. Estate and gift tax laws are stable – they haven’t changed in years. T F
7. There are exceptional estate planning opportunities in 2012 that may not last. T F
8. There’s no need to review your estate plan more often than every 10 years or so. T F
9. If you want to change your estate plan, you can make the change yourself by
10. While you do not need to share specific financial information with your
Answers: 1, 2, 6, 8 and 9 are false. The rest are true.