While changes to the income tax code from the Tax Cuts and Jobs Act of 2017 have garnered most of the press, included in the act were changes to federal estate taxes as well.  One of the bigger changes was the almost doubling of the federal estate tax exemption to $11,180,000 per individual.  When taking into account the portability of the exemption between spouses, a married couple can now leave over $22 million to their heirs before having to worry about planning around federal estate tax.  Estimates are that the federal estate tax now impacts less than .5% of the US population.  With so few people being subject to federal estate taxes, there may be a tendency for people to feel that they don’t need to worry about their estate plans causing them to ignore this important component of their financial plans.

While having to plan around a $22 million estate may seem to be a good problem to have, there are plenty of other estate planning issues that impact many more people. 

Beneficiary Designations

Beneficiary designations are used on retirement accounts (IRAs, Roth IRAs, 401(k)s, etc.) to indicate who should inherit an account if the account owner dies.  Far too often beneficiaries are not even named on these accounts, so it is important to periodically review all accounts to confirm that the desired person, or persons, are named.  A contingent beneficiary should also be listed for each account.  The contingent beneficiary is next in line to receive the account should the first person named (primary beneficiary) pre-decease the account holder.  A common occurrence is when spouses name each other as beneficiaries, but then fail to name anyone else as a contingent beneficiary. 

While each situation is unique, it is often best to name individuals as beneficiaries.  By naming individuals as the beneficiaries they are often able to continue much of the deferred taxation that retirement accounts provide while still making the accounts accessible.  This is often referred to as a stretch IRA.  In some circumstances a trust will be named as a beneficiary rather than an individual.  This is often the case when minor children are involved or if the account is to go to several individuals or organizations such as charities.  When naming a trust it is critical that the trust document contains specific language allowing the IRAs to continue as stretch IRAs for the beneficiaries.  If an improperly drafted trust is the beneficiary of a retirement account, the trust may force the account to be distributed earlier than the account owner had hoped and/or create adverse taxation of the account.  Care must also be taken if non-person entities such as charities are named in the trust in order to avoid other adverse tax consequences. 

Planning for Incapacity

Estate planning for the vast majority of individuals and families has little to do with tax minimization, but rather is focused on making sure one’s wishes are carried out in the event of incapacity or death.  Having up-to-date powers of attorney (POAs) are something almost every adult should have in place.  Typically one should have a POA for both health care and property/financial matters.  A POA directs who can legally make decisions regarding either health or financial matters should it be determined that the individual lacks the capacity to do so themselves.  If POAs are not available and an individual is incapacitated the court will decide who is now responsible for making decisions. 

Is regular gifting to family or charities common?  If so, including verbiage in the power of attorney that allows the person acting as the POA to continue to make gifts could make sense.  On the other hand, now that the lifetime estate exemption is $22 million few people need to gift in order to reduce estate taxes so allowing a POA to freely gift on someone’s behalf (typically an older adult) may be an invitation for elder abuse.  If this is a concern it may make more sense to remove the gifting ability for POAs as the tax benefit no longer exists.  This would remove the opportunity for the POA to transfer money to individuals that the estate holder may not have wanted.

Reassess Old Planning 

Estate plans that were created several years ago may contain planning that is no longer needed or outdated.  Irrevocable trusts, family partnership, life insurance trusts, or other planning techniques that were implemented when the tax rules were different may no longer be beneficial.  For example, if an irrevocable life insurance trust (ILIT) was created and funded with permanent life insurance in order to pay estate taxes based on a much lower exemption amount, the trust and accompanying life insurance may no longer be needed.  The insurance should be reviewed to see how it is performing and if it is still appropriate even if it’s not needed to pay taxes.  If possible, perhaps it makes sense to remove the policy from the ILIT but still keep the policy in force rather than having it cancelled. 

Often when money is to be left in a trust for children the documents were created when the children were minors and the trusts limited the payouts or access to funds to the heirs based on attaining certain ages – for example, 1/3 when the child reaches age 25, 1/3 when the child reaches 30 and full payout at 35.  If the children are now grown the parents may have a better sense of the child’s financial responsibility making these limitations unnecessary, or perhaps stricter limitations are needed. 

State Estate Taxes

There are still tax issues that will impact a much larger portion of the population, one of which being state specific estate taxes.  For example, Illinois has a state estate tax exemption of $4 million.  In addition to having a significantly lower exemption amount, the exemption is not portable between spouses like the federal exemption.  On the federal level, a deceased spouse’s individual exemption of $11 million passes on to the surviving spouse, creating a total exemption amount of $22 million for the survivor.  For Illinois, this is not the case.  This means that married couples still may need to include language in their estate documents in order for each spouse to utilize their individual exemption.  This is often accomplished by specific “disclaimer” language or creation of tax planning trusts in their estate documents.  While $4 million is still a significant exemption, once all investment accounts, home value(s), insurance policies, etc. are tallied up for a couple, state estate taxes may come into play more often than people expect.

While having to plan around a $22 million estate may not be something that impacts the vast majority of the population, there are still plenty of other issues that should be periodically reviewed in estate planning.  If questions do arise or changes seem warranted, working with a qualified estate planning attorney to make sure one’s goals and desires are efficiently carried out is a key component to a good financial plan.