What to do while Congress reflects on changes to estates and gift taxes
Landowners dodged some bullets in 2021. Significant increases in inheritance and gift taxes were proposed earlier this year, but they were put on hold. They are expected to be revised in 2022. Even if they are not, the 2017 changes are expected to expire after 2025. That would halve the lifetime exemption from inheritance and gift taxes, among other tax increases.
While waiting to see what will happen to inheritance tax and gift tax, action should be taken now. Here’s what you need to do while Congress talks about your future.
Update and assess your financial situation. You don’t need an estate planner to complete the first step of a good estate plan.
Compile the details of all your assets. In addition to the names and account numbers or descriptions of the assets, list the current values ââand how the assets are held (for example separately, jointly or in trust). Don’t forget about assets that are not included in the probate estate, such as retirement accounts, annuities, life insurance, and those held in trust.
Also list the details of any liabilities.
Then update your retirement plan or at least create a baseline projection of expected income and expense cash flows. You want to know how much wealth you need to keep to maintain your financial security for the rest of your life. Any wealth greater than this can potentially be transferred to reduce inheritance and gift taxes before the effective dates of any changes in the law.
The more you do this work now, the cheaper and more comprehensive a revised estate plan will be.
Review your current plan. You will do this again during your meeting with the estate planner. But reviewing the plan now on your own and with your spouse will jog your memory and perhaps spark ideas for changes or improvements.
Set your goals. Some of your goals may have changed since you developed your last plan. Your family composition may have changed. Or the potential changes in the law could affect your goals.
Review advance directives and powers of attorney. Often when these documents were developed, choosing who to make decisions for you seemed automatic. These agents might not be the best at the moment. As part of this review, you may find that your financial and medical providers have changed and new providers need copies of updated documents.
Consider the end-of-life and end-of-life choices. Advance directives and other documents usually contain your preferences for receiving medical care in certain situations. You may also have expressed preferences regarding home care rather than moving to an assisted living facility or other facilities.
Your perspective on these issues may have changed, especially as technology, healthcare, and other factors have changed. Review the choices you have expressed in the current documents and decide if you want to make any changes. Be prepared to discuss this with your estate planner.
It’s also a good time to consider or reconsider a payment plan for any long-term care that might be needed in the future.
Chat with the family. Counselors disagree on when family members should be involved in the planning process, but they agree that family members should not be in the dark. Surprises in the estate plan often trigger estate disputes and family disagreements.
It’s a good idea to have early discussions with family members about the basics of a plan. Talking with your children about their financial situation and their goals can lead to changes in your plan. Some parents are surprised to learn, for example, that their children really don’t want to inherit the vacation home and would sell it right away. There is no point in planning how to divide the ownership of the vacation home among the children when they don’t want it.
Some parents decide it is best to give gifts for life after learning about their children’s financial situation and goals.
In addition, heirs should have a good idea of ââhow much they are likely to inherit or not. This information is likely to influence their own planning.
Be prepared to implement. Many estate plans fail because they haven’t been fully implemented. Often, beneficiary designation forms are not updated for retirement accounts, life insurance and annuities. Many estate owners fail to transfer ownership of assets to living trusts or other vehicles.
Communicate and disseminate. Some documents need to be distributed to key people. Other people need to know what their roles are in your estate plan and how they can get the documents when they are needed.
After the powers of attorney have been executed, you should distribute them to financial service providers and ensure that they are acceptable to the providers. Health care providers should know and likely have copies of your advance directive. Some states now provide for online registration of advance directives so that medical providers can search for them when needed.
Do not overreact to legislative proposals. Some people have already revised their estate plans in response to congressional proposals, and some real estate planners have recommended swift action. But most people shouldn’t take irrevocable steps before they are enacted, because the proposals might not become law or the details might change.