Why You Should Review Your Estate Plan During Tax Season

Tax season is a crucial time not only to file your taxes but also to assess your estate plan. Reviewing key documents such as wills, trusts, and beneficiary designations ensures your estate plan is up-to-date, tax-efficient, and aligned with recent changes in tax laws. This can help minimize taxes and prevent potential complications for your loved ones.

1. Examine Your Will for Accuracy

Your will outlines how your assets will be distributed after your death. However, with recent changes in tax laws and potential shifts in your personal life, it’s important to revisit your will to ensure it still reflects your wishes.

What to Look for in Your Will:

  • Inheritance taxes: With changes to federal and state tax laws, check if your will needs to be updated to minimize inheritance taxes for your beneficiaries.
  • Executor and beneficiaries: Review the executor and beneficiaries to make sure they reflect any changes in your life, such as marriage, divorce, or the birth of children.

2. Assess Your Trusts for Tax Efficiency

If you have a revocable living trust or irrevocable trust, tax season is a good time to review its provisions to ensure it’s structured efficiently. Trusts can help minimize taxes and avoid the lengthy probate process, but they must be properly funded and structured to achieve these benefits.

Key Areas to Review:

  • Funding the trust: Ensure that all assets you intend to place in the trust are properly included. If you’ve acquired new assets or sold others, update your trust accordingly.
  • Tax-saving strategies: Check if your trust reflects recent tax law changes and whether adjustments are needed to reduce estate taxes or capitalize on any available deductions.

3. Double-Check Your Beneficiary Designations

Beneficiary designations on life insurance policies, retirement accounts, and bank accounts determine who will receive these assets upon your death. Since these assets bypass probate, it’s important to review your designations regularly.

Tax Considerations for Beneficiaries:

  • Required Minimum Distributions (RMDs): Recent changes in tax laws affect how inherited retirement accounts are taxed. Beneficiaries may need to take RMDs over a 10-year period, which could result in large tax liabilities.
  • Tax on life insurance: If your estate is large enough, your life insurance benefits may be subject to estate taxes. Reviewing your policy and its implications can help prevent a higher tax burden.

4. Stay Updated on Recent Tax Law Changes

Recent tax law updates impact key areas of estate planning, including estate taxes, capital gains taxes, and the inheritance tax rate. Understanding these changes is essential to ensure your estate plan minimizes taxes and provides maximum benefits to your beneficiaries.

What’s New in Tax Laws:

  • Estate tax exemptions: The federal estate tax exemption has increased significantly, allowing individuals to pass on more wealth without incurring estate taxes. If your estate is near or exceeds the exemption threshold, consider strategies like gifting or creating charitable trusts to reduce estate taxes.
  • Capital gains tax: Changes in capital gains taxes may affect inherited assets. With the step-up in basis rule, the value of inherited assets is typically adjusted to its fair market value, but recent updates could influence the taxes owed by your heirs when they sell those assets.

5. Review Powers of Attorney and Healthcare Directives

While these documents don’t directly affect taxes, reviewing your power of attorney for financial and healthcare matters during tax season is an important step. It ensures your wishes are honored in case of incapacitation and avoids legal confusion for your loved ones.

If you have any questions about updating your estate plan or need help with tax-efficient strategies, contact us today. We’re here to help you navigate the complexities of estate planning and make sure your family is protected.