Why Clients are Reviewing Their Estate Plans Now

Last updated April 24, 2020

The impact of the novel coronavirus (COVID-19) has caused a major disruption to our everyday lives. The current environment has caused many individuals to address the “what if” scenarios which may lead to nervousness and anxiety. In general, an individual should review his or her estate planning documents upon a major life change (such as a birth, death, marriage or divorce), an overall change in financial circumstances (such as a purchase or sale of real estate or a business or the receipt of a gift or an inheritance), as well as changes to Federal and/or State tax laws.

Review your Fiduciaries and Beneficiaries

It is important to review the fiduciaries and decision makers in your estate planning documents, such as executors, trustees, guardians of minor children, agents under your power of attorney and health care directive to ensure those named are suitable, able, and willing to serve. In addition, the dispositive provisions of your Will and, if applicable, your Revocable Trust should be reviewed to confirm that your Will and/or Revocable Trust distribute your assets to the individuals and/or charities you wish to benefit. Finally, the beneficiary designations for your retirement accounts and life insurance policies should be reviewed to ensure they are consistent with your overall estate plan.

Recent Changes to Federal and State Tax Laws

There have been significant changes in recent years to the Federal and State estate and/or gift tax laws which may impact your estate plan. Your estate planning documents should be reviewed to determine whether any updates are needed to your plan to address these changes, particularly if your documents were drafted prior to 2018. The following is a summary of a few of those changes:

  • The Federal estate and gift tax exemption (“Federal Exemption”) is the amount that an individual can transfer during his or her lifetime and/or upon his or her death without paying a Federal estate or gift tax. The Tax Cuts and Jobs Act of 2017 doubled the Federal Exemption. As of January 1, 2020, the Federal Exemption is $11.58 million per individual. This means that a married couple can transfer assets in excess of $23 million without incurring a Federal gift or estate tax. The Federal Exemption is indexed for inflation each year until December 31, 2025. On January 1, 2026, the Federal Exemption will return to approximately $6.2 million per individual, as adjusted for inflation. The increase in the Federal Exemption may require an adjustment to some estate plans to ensure that assets are passing to the intended beneficiaries in the most tax efficient manner. In addition, some individuals may wish to utilize the increase in the Federal Exemption to make lifetime gifts to take advantage of this increase while it is available.
  • New York imposes an estate tax on estates in excess of approximately $5,850,000 as of January 1, 2020. This amount is also indexed for inflation. Because the exemption in New York is not equal to the Federal Exemption, the significant increase in the Federal Exemption may create a New York estate tax for some plans which could have otherwise been avoided or deferred with proper planning.
  • New Jersey repealed its estate tax effective as of January 1, 2018. New Jersey had an exemption for the estate tax equal to $2 million in the year 2017 and $675,000 for years prior to 2017. Some estate plans may have been written to take advantage of the New Jersey exemption. As a result of the repeal of the New Jersey estate tax, some plans may need to be adjusted to ensure that assets are passing to the intended beneficiaries in the most tax efficient manner.
  • The SECURE Act, which took effect on January 1, 2020, made significant changes to individual retirement accounts and qualified plans (collectively “retirement accounts”).  Prior to January 1, 2020, a beneficiary (other than the account owner’s spouse) who inherited a retirement account had the ability to stretch withdrawals from the account over his or her lifetime. For younger beneficiaries, this meant slowly withdrawing the money over multiple decades, which allowed the assets to compound on a tax-deferred basis. Now, however, most non-spouse beneficiaries will be required to withdraw assets from an inherited retirement account within ten years of the owner’s death. This change affects many estate plans which established trusts to hold retirement assets. There are still a few options available for a spousal beneficiary which will allow for a deferral period in excess of ten years.

Lifetime Wealth Transfers

We are currently experiencing market volatility, historically low interest rates, and a high Federal Exemption. This combination creates an excellent opportunity for lifetime wealth transfers such as gifts and sales to dynasty trusts and/or grantor retained annuity trusts. By making a transfer at this time, a significant amount of the growth and appreciation of the assets can be transferred for the benefit of your beneficiaries free of any gift or future estate tax. The Federal Exemption is scheduled to be decreased on January 1, 2026 so now may be the perfect time to utilize the Federal Exemption to take advantage of these tax savings.

We are here to assist you and your families during these uncertain times. If you would like to discuss your personal situation, please contact one of the attorneys in the CSG Law Trusts & Estates Group.

This publication contains general information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Attorney Advertising. Prior results do not guarantee a similar outcome.

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