Most peoplearen’t currently exposed to the federal estate tax – thanks to the generous unified federal estate and gift tax exemptions. However, there are still good reasons to review your estate plan and possibly update it to reflect the current federal estate and gift tax regime as well as life events. Plus, there’s always uncertainty about the future direction of the federal estate and gift tax rules.
As year-end approaches, here are some estate planning moves to consider.
1. Review the Basics
The Tax Cuts and Jobs Act (TCJA) made favorable changes to the federal estate and gift tax regime. For 2020, the unified federal estate and gift tax exemption is $11.58 million, or effectively $23.16 million for married couples.
For 2021, the exemption is scheduled to increase to $11.7 million, or effectively $23.4 million for married couples. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments — unless Congress changes the law sooner.
2. Designate Your Beneficiaries
It’s important to periodically review your beneficiary designations, especially if you’ve experienced a major life event (such as marriage, divorce, or the birth or adoption of a child). This may seem like common sense, but failure to update beneficiary designations is a common oversight.
Remember: A will or living trust document does not override beneficiary designations for life insurance policies, retirement accounts and so forth. Your estate planning pro can provide a checklist of assets that need beneficiary designations.
3. Update Real Property Ownership
If you’re married and own property with you and your spouse named as joint tenants with right of survivorship (JTWROS), the surviving spouse will automatically take over sole ownership of the property when the other spouse dies.
On the other hand, if you own property with a nonspouse as JTWROS, the surviving joint tenant will automatically take over sole ownership when the other joint tenant dies. That’s great if it’s your intention and you’ve already set up JTWROS ownership. But if that’s what you intend, and you’ve not yet established JTWROS ownership, consult your legal advisor as soon as possible to get this done.
Important: Perhaps the biggest advantage of JTWROS ownership is that it avoids probate. Instead, the property automatically goes to the surviving joint tenant.
4. Establish (or Update) Your Will
If you die intestate (without a will), the laws of your state will determine the fate of your minor children and assets. Unless you like being at the mercy of your state, you need a written will to make your wishes known. The main purposes of the will are to name:
- A guardian to care for your minor children (if any) until they reach adulthood, and
- An executor, who will pay the estate’s taxes and any other bills and then deliver what’s left to your intended heirs and charitable beneficiaries.
5. Create (or Update) a Living Trust
or those with significant assets, a living trust can be an effective tool to help avoid probate. Here’s how it works: You establish the living trust and transfer legal ownership of assets for which you wish to avoid probate, such as your main home and your vacation property.
You should also have a so-called “pour-over will” drafted. That document stipulates that assets, which aren’t officially owned by the trust, still belong under its umbrella. Examples might include vehicles, valuable Persian rugs, coin collections and jewelry.
Important: If you set up a living trust, you must transfer legal ownership of the most important assets for which you wish to avoid probate (typically homes and other real property) to the trust in order to successfully avoid probate. Many people set up living trusts and then fail to follow through by transferring ownership. If so, the probate-avoidance advantage is lost unless your estate’s executor can argue that the problem is cured by your pour-over will.
6 . Set Up an Irrevocable Life Insurance Trust
Life insurance death benefits are generally free from federal income tax. However, the death benefit from any policy on your own life is included in your estate for federal estate tax purposes if you have so-called “incidents of ownership” in the policy. It makes no difference if all the insurance money goes straight to your designated beneficiaries.
It doesn’t take much to have incidents of ownership. For example, you have incidents of ownership if you have the power to:
- Change beneficiaries,
- Borrow against the policy,
- Cancel the policy, or
- Select benefit payment options.
This unfavorable life insurance ownership rule can cause unsuspecting individuals to be exposed to the federal estate tax.
Other Tax-Smart Planning Moves
Wealthy individuals with estates above the unified federal estate
and gift tax exemption should consider other options to lower their exposure to federal estate and gift taxes, including:
- Annual gifts. The current annual federal gift tax exclusion is $15,000. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption.
- College tuition or medical expense payments. You can pay unlimited amounts of college tuition and medical expenses (but not room-and-board expenses) without reducing your unified federal estate and gift tax exemption.
- Gifts of appreciating assets. In 2020, you can give away up to $11.58 million worth of appreciating assets, such as stocks and real estate, without triggering federal gift tax (assuming you have never tapped into your unified federal estate and gift tax exemption in prior years).
Moving Target
Things change. Major life events could require changes in your estate plan. Plus, the federal and estate and gift tax rules, along with state death tax rules, have proven to be unpredictable. For these reasons, we encourage you to review your estate plan. If you wait, your current estate plan with all its flaws, or your completely missing estate plan, will be locked in when you die.
Contact Eric Miller, R+R’s tax and estate advisor, to help create a financial security plan to meet your goals, and provide tools and resources to build an estate plan that makes an impact well into the future.
About Reynolds + Rowella
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.
Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
