Proposed legislation in Washington DC means the federal tax climate is likely to change sooner rather than later, but that’s not the only reason you should be thinking about your Estate Plan these days. Estate Plans need to be kept up to date to reflect your current situation, whether you’ve experienced tax, financial, or personal/family changes, or are about to.
That said, here are Shoup Legal’s top 10 Estate Planning tips to consider for the remainder of 2021 and beyond:
#1. MAKE AN ESTATE PLAN
If you don’t already have an Estate Plan, you should. Estate plans are not for the elderly or infirm only. If you have a family, you need to plan accordingly for the unexpected accident or health emergency. Having no Estate Plan means that when you pass, or when you become incapacitated, the probate courts settle your estate. This can be very costly for your estate and your heirs. Probate fees are generally based on a percent of estate value, often ranging from 2% to 8%, and if everything goes smoothly, which it rarely does, the process can take 18 to 24 months in California.
#2 TAKE CARE OF BUSINESS WITH A TRUST
Trusts differ from Wills. With a Will, you’re essentially saying, “this is how I want my stuff distributed after my death, and here’s who I want doing it (the executor).” With a Trust, you’re effectively doing the same thing by appointing a Trustee to manage and make decisions, but a properly crafted and executed Trust does NOT need to go through probate. This is vital to minimize delays, avoid taxes, and reduce costs to your estate and heirs. Also, with Wills, all of your property is distributed to heirs once the probate process concludes. Trusts, however, can provide important guidance and direction to the Trustee for how your property is to be distributed and when, which is especially useful depending on the kinds of assets, the age of your beneficiaries, and other considerations.
#3 KEEP YOUR ESTATE PLAN UP TO DATE
Shoup Legal recommends clients revisit their Estate Plans every three years (or sooner if major tax changes are imminent or you are expecting or undergoing a change in your personal situation). Failure to review and update as needed when life events occur—such as births, deaths, marriage or divorce, a move, the aging of your heirs into adulthood, property purchases or sales, or major changes to laws around taxes, property ownership, or inheritance—can affect your Estate Plan. As a result, beneficiaries can be left out (or left in), which can lead to costly court proceedings, especially when families split or join due to divorce or remarriage.
#4 DIY IS EASY, BUT FORMAL IS BETTER
Informal Estate Plans are rarely, if ever, honored by the courts. Taking the approach of “I told my kids what I want to have happen” simply does not work. Similarly, do-it-yourself estate planning through online venues frequently fails to withstand court scrutiny and legal challenges. In our experience, DIY plans provide a false sense of security, but they are too vague or confusing to address specific situations, even you’re your intent is well-known to the family.
#5 GO BEYOND REAL ESTATE
Most Estate Plans focus on how real estate assets get handled. But what about other valuable assets, such as antiques, artwork, precious metals, intellectual property, business interests, and valuable collections (for example, stamps, coins, sports memorabilia, autos, etc.)? Just about any item of value can and probably should be placed in a Trust to minimize taxes and avoid probate court.
#6 DON’T OVERLOOK LIFE INSURANCE
Because life insurance benefits are generally payable to beneficiaries income-tax free upon the insured’s death, paying premiums on cash value life insurance can be a way for you to pass money onto your loved ones tax free after your death. This can provide your heirs some quick cash upon your death that can be used to cover funeral costs and settle your debts and other obligations.
Another life insurance-related strategy is called an Irrevocable Life Insurance Trust (ILIT), which is especially important if you anticipate the size of your estate to exceed the current estate tax exemption when you die. Generally speaking, an ILIT allows you to purchase a life insurance policy for yourself, transfer it to the ILIT so that it is owned by the Trust, and name your heirs as beneficiaries of the Trust. This way, when you die, the insurance policy is not considered part of your estate (it’s owned by the Trust), so it’s not subject to federal taxes and the payout is distributed to your heirs income-tax free.
#7 KEEP AN EYE ON INFLATION
Prices are rising at inflation rates surpassing the years after the great recession of 2007 to 2009, partly due to supply issues related to the COVID-19 pandemic, partly due to businesses trying to recoup some of their 2020 losses, and partly due to changes in federal spending policies. Some economists say it’s temporary; others are not so sure. Whatever the reasons and whatever the outlook, inflation of any kind can erode the value of individual and business savings, and can affect investment strategies, which impacts retirement accounts. It’s something to keep an eye on for Estate Planning purposes, both short-term and long-term.
#8 INCOME & EMPLOYMENT STATUS
While unemployment rates have rebounded since their pandemic highs, not everyone is as gainfully employed as they were pre-pandemic. As a result, many are experiencing lower income levels and less certainty about their next paychecks. Uncertainty around income and fear over job prospects are big drivers that impact investing, the purchase of real property, and retirement savings—all of which can have a major effect on Estate Planning.
#9 INHERITED PROPERTY
Among the many provisions of the hotly-debated American Families Plan Act is a proposal to increase taxes on property left to heirs by eliminating the basis step-up for inherited property (which we covered in detail in our May 2021 blog, With Prop 19 in Effect, Possible Federal Tax Policy Changes Could Also Affect Your Estate Plans). This change would apply to all current homeowners as well as to anyone who will inherit real estate from another family member, resulting in significant increases to capital gains taxes owed.
#10 FEDERAL TAX CHANGES
We expect there will be major new federal tax legislation effective as of 2022, if not sooner. Under current rules, the federal estate tax exemption for individuals is $11.7 million in 2021 for estate, gift, and generation skipping transfers. Married couples can transfer twice that amount. Currently scheduled to revert to $6 million on January 1, 2026, there are proposals in play right now that would lower the number to $3.5 million as soon as 2022.
As for federal income taxes, current proposals would raise taxes significantly for individual incomes over $452,700 and households making over $509,300 by upping the top marginal income tax rate from 37 percent to 39.6 percent.
Another possible change we’re watching would replace the current tax break/deduction for traditional IRAs and 401(k)s with a flat, revenue-neutral credit. Someone at the 37% bracket today who saves $10,000 in an IRA or 401(k) sees their tax bill reduced by $3,700. Presumably, any flat amount would offer substantially less tax savings.
Your Next Step
Estate Plans need to evolve with changing times and circumstances. For those experiencing life events or who expect to be impacted by federal tax changes, we recommend you work with qualified, experienced Estate Planning attorneys like Shoup Legal to explore your options, plan accordingly, and take action.
The attorneys at Shoup Legal can help you answer . . .
- What kind of shape is my Estate Plan in? Will it hold up to anticipated changes?
- What properties and other valuable assets might I protect with a Trust?
- What life events have occurred or will occur that need to be addressed in my Estate Plan?
- When might I expect to see any federal tax changes, and will they be retroactive?
- What actions should I take now to best prepare for coming changes?
We are experts at Estate Planning and helping clients secure their assets and protect their heirs. Solutions, of course, are unique for each family. Contact us at (951) 445-4114 or email us at [email protected] to discuss your situation today.