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Estate Planning - A Process, Not an Event
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
Your
estate plan is designed in light of what is known at the time; a
snapshot, if you will, of you, your family, your financial situation and
the tax laws as they existed and were anticipated to change in the
future at the time it was prepared. All of those things do change during
your lifetime, and often in ways that were not anticipated. When the
unanticipated happens, your estate plan will need to change, to adjust.
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
Maintaining
an estate plan has been compared to maintaining an automobile. Both
need periodic attention if you expect them to perform the way you want
when you need them. While a car will have time and mileage checkpoints
for servicing, your estate plan will have event checkpoints and should
be checked periodically, too.
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:
- You marry, separate or divorce;
- Your or your spouse’s health declines;
- Your spouse dies;
- Birth or adoption of a child;
- Marriage or divorce of a beneficiary;
- Family member develops special needs or requires extra care;
- Minor becomes an adult;
- Beneficiary’s attitude toward you changes;
- Beneficiary develops a substance abuse problem;
- Beneficiary displays poor financial management skills;
- Parent’s or other beneficiary’s health declines;
- Family member dies.
Family finances changes:
- Value of your assets changes significantly;
- You anticipate a sale or transfer of a family business;
- You buy real estate in your own or another state;
- Value of a family member’s assets changes dramatically;
- Beneficiary gets into financial difficulties;
- Parent or other relative becomes financially dependent upon you.
Other Changes:
- Federal or state tax laws change;
- You move to a different state;
- Successor trustee, guardian or administrator moves, becomes ill, or changes their mind about serving;
- You change your mind about who you want to be your trustee, guardian or administrator.
Changes Your Estate Plan Might Need
These
will vary according to the circumstances in which you find yourself at
the time. As before, the following can be used as a guide to stir your
thoughts, but it is by no means a complete list:
- When you
begin to have a family, you will need to name a guardian and inheritance
manager for your minor children and plan for their future. (Otherwise,
the court could name who will raise them if you can’t, and it will pay
out each child’s inheritance at age 18.)
- You may want to add or drop a beneficiary.
- Beneficiary
designations, especially for IRAs and other tax-deferred plans, may
need to be updated. (As your tax-deferred plan grows, consider a
“stand-alone retirement trust” to ensure maximum tax-deferred growth for
these assets.)
- You and other family members may want to set up a
special trust to provide for a family member (child, parent,
irresponsible adult) without jeopardizing their eligibility for valuable
government benefits.
- You may want to change a trustee,
successor trustee, guardian or executor, or replace one who is no longer
able or willing to serve.
- Once you own your own home or have
other significant assets, you may want to change from a will-based plan
to a living trust-based plan.
- As your wealth increases, you may
want to establish a gifting program so you can see the results of your
gifts while you are living.
- With more assets to pass on, you may
want to change the way your beneficiaries will inherit from you. In
fact, you may decide to keep their inheritances in a trust to protect
the assets from creditors, predators (including ex-spouses),
irresponsible spending and future estate taxes.
- With more
disposable income and accumulated wealth, you may want to increase the
amount of your life insurance to hedge against estate taxes, create a
dynasty trust for future generations or to fund a private foundation.
- You
may want your estate planning to help you pass on your values
(religion, education, hard work, etc.) in addition to your financial
assets.
- Your health care documents may need to be updated. (You
may want to change who will make decisions if you are unable to make
them; also, some states require the documents be replaced periodically.)
- With
more accumulated wealth, you may want to add a charitable beneficiary,
such as your church or synagogue, hospital, university, or other
favorite cause.
- You may want to plan for a smooth transfer of a family business before your retirement, disability or death.
Tax Law Changes Can Affect Your Estate Plan
Proper
estate planning should always consider estate and gift tax rules. In
recent years, we have seen the federal estate, gift and generation
skipping transfer (GST) tax exemption rise from a stable $1 million to a
very temporary $5 million. As those changes took place, many states
enacted their own estate or inheritance tax, in addition to the federal
tax.
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
The
final months of 2012 are a time of special opportunity. Until December
31, 2012, an individual can give up to $5.12 million ($10.24 million, if
married) in lifetime gifts without paying gift taxes. For most
Americans, that will allow them to transfer as much as they want to
family members without having to worry about gift taxes. For those with
larger estates, combining the $5 million gift and GST tax exemptions
with discounting, installment sales, and other advanced planning
techniques can allow the tax-free transfer of huge amounts of wealth.
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?
The
simple answer is that nobody knows. The exemptions from estate, gift
and GST taxes and tax rates are political issues. What will happen in
2013, therefore, will depend a lot on who controls the House, Senate and
Presidency after the November elections. The old adage, “Make hay while
the sun shines” was never more true. The farmer understands that
today’s sunshine may be followed by a rainy tomorrow and thus the
opportunity to “make hay” irretrievable lost. Trusting that the
President, House of Representatives and Senate will all agree to
continue today’s estate, gift and GST tax regime into 2013 and beyond is
a very risky strategy, especially when compared with the certainty of
today’s extremely favorable tax situation – and especially in light of
continuing record federal deficits.
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
It’s
a good idea to review your estate plan every year. To make that happen,
set aside a specific time each year (such as a birthday, anniversary,
family gathering) as your reminder to review it. Having a plan in place
and then reviewing it regularly will maximize the probability that it
will be current on that unknowable future date when it really will need
to be.
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?
You
need an estate planning lawyer’s advice to make an estate plan and you
need the same kind of lawyer’s advice and assistance to change one.
Trying to make a change yourself by writing on your original plan
documents is a sure-fire recipe for disaster. Maybe your changes won’t
be valid. Maybe they will actually void your plan documents altogether.
Maybe they will lead to confusion that will require a judge and jury to
straighten out. Maybe the change will have tax consequences you didn’t
anticipate.
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.
Conclusion
Estate
planning is an ongoing process. You wouldn’t mark “Done for life” next
to “Buy clothes” on your task list and you can’t so mark “Plan estate.”
Your estate plan needs to be changed, adjusted and adapted as you move
through the events of your life. Keeping your estate plan up to date
will give both you and your family assurance that it will work the way
you want whenever it is needed. And that is one of the most thoughtful
and considerate things you can do for yourself and those you love.
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
estate plan that will carry them all the way to retirement and beyond. T F
3. A change in your personal, family, financial or health situation could result in
the need to change your estate
plan. T F
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
just crossing out the old and writing in the new wording on the plan documents. T F
10. While you do not need to share specific financial information with your
beneficiaries, it can be helpful to inform them of the general provisions of your
estate plan and why you planned it the way you did. T F
Answers: 1, 2, 6, 8 and 9 are false. The rest are true.
To
comply with the U.S. Treasury regulations, we must inform you that (i)
any U.S. federal tax advice contained in this newsletter was not
intended or written to be used, and cannot be used, by any person for
the purpose of avoiding U.S. federal tax penalties that may be imposed
on such person and (ii) each taxpayer should seek advice from their tax
adviser based on the taxpayer's particular circumstances.
Waypoint Estate and Business Planning assists clients in the greater Chicago area including Lincolnshire, Mundelein, Vernon Hills, Lake Bluff, Grayslake, North Chicago, Lake Forest. Gurnee, Libertyville, Long Grove, Lake Zurich, Buffalo Grove, Northbrook, Deerfield, Glenview, Naperville, Wheaton, Yorkville, Algonquin, Huntley, Crystal Lake, Winnetka, Hawthorn Woods, Wilmette, Skokie, Wauconda and Wadsworth in Lake County, Cook County, DuPage County and McHenry County, Illinois.
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