4 Critical Estate Planning Considerations – Keeping Your Plan Current

January 16, 2018

Estate planning documents receive very little attention after they are drafted.  Why?  People find the process emotional and burdensome and that is motivation enough to put off updates until next year – or several years from now!

Family and law changes often make estate plans fall far short of intended goals.  Here are four critical considerations to review with your attorney right now to keep your plan current:

  1. Asset Ownership – Help or Hurt Your Plan?

Assets owned in joint tenancy go to the surviving joint tenant by operation of law, no matter what your will or trust may provide.  You may have added a child’s name to an account to provide “access” if something happens to you.  Powers of attorney take care of that concern and the jointly-owned asset in your child’s name may be kept by that child instead of going according to the plan in your will or trust.

Assets owned under community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) can receive a substantial income tax benefit – a double step up in basis, which is used to calculate capital gains.  Use caution when moving from community property states to non-community property states to preserve income tax benefits.

Beneficiary designations are critical in estate planning.  If your spouse does not survive, do you want your IRA, 401k or similar assets to go directly to your children or according to the terms of your trust, which you spent so much time and money crafting?

  1. Document Format

High estate tax exemptions that are now portable have shifted the planning focus to income taxes.  Wills and trusts can now be drafted with a simpler “disclaimer trust” format that implement estate tax planning, if necessary.  Planning for the step up in income tax basis is now paramount over estate tax planning in the overwhelming number of cases.

  1. Protecting Assets from In-laws

Parents often leave assets to children in trusts when both spouses are gone.  Such trusts are often drafted to provide that a percentage of assets shall be distributed to the child at a certain age and the remainder at a later time.  Consider making your child’s trust a “back door pre-nuptial” agreement.  That is, provide that assets are kept in trust indefinitely and may be distributed at a given age at the child’s request.  In the latter case, the assets remain in the trust as nonmarital assets, but are always available to the child.

  1. Income Tax Planning

Tax reform may raise the current estate tax exemption ($5.49m) or eliminate the estate tax altogether.  Therefore, the focus is on arranging asset transfers that provide income tax benefits.

When a person dies, the basis of an asset used to measure capital gains is “stepped up” to its fair market value on the date of death.  A higher tax basis lessens capital gains.  For example, if a person purchased stock for $100 five years ago and sells it today for $1,000, there is a $900 taxable gain.  If that same person never sold the stock, it receives a new “basis” at death equal to fair market value, or in this example $1,000, which can eliminate taxable capital gains.  Couples should arrange asset ownership and document provisions to maximize income tax basis.

An estate plan drafted even just a few years ago is likely out-of-date.  Remember, income tax planning is now the focus!

See Disclosure

Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning.  Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members.  Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.