Congress is considering some far-reaching legislation on estate and gift taxes. There are actions you should be taking while our elected officials negotiate the details.
You know from media reports the proposed legislation would slash the estate tax exemption, eliminate a number of estate planning strategies that have been used for a long time and eliminate some strategies involving IRAs and other retirement accounts, among other things. I won’t discuss the details here. They’re readily available, and the proposals are likely to differ from any final legislation. It also is possible the members of Congress won’t be able to agree, and nothing will be enacted this year. But you need to be prepared.
There are actions that should be taking now. If you wait until we know the details of final legislation, you’ll likely find estate plan-ners have their calendars filled through the end of the year, and there isn’t enough time to do everything you need to before the end of 2021.
Here’s what you need to do while Congress talks about your future.
Update and evaluate your financial position.
You don’t need an estate planner to complete the first step in any good estate plan. Compile details of all your assets. In addition to the names and account numbers or descriptions of assets, list the current values and how the assets are owned (such as separately, jointly, or in trust). Don’t forget assets that aren’t included in the probate estate, such as retirement accounts, annuities, life insurance and those held in trusts. Also, list the details of any liabilities.
Then, update your retirement plan or create at least a basic cash flow projection of expected income and expenses. You want to know how much wealth you need to retain to maintain financial security for the rest of your life. Any wealth above that potentially can be given away to reduce estate and gift taxes in advance of the effective dates of any changes in the law. The more of this work you do now, the less expensive and the more complete a revised estate plan will be.
Review your current plan.
You’ll do this again when meeting with the estate planner. But reviewing the plan now yourself and with your spouse will refresh your memory and perhaps stimulate ideas for changes or improvements. You might develop questions to ask the estate planner. The review also might remind you of circumstances that changed and need to be reflected in the plan.
Set your goals.
Some of your goals might have changed since your latest plan was developed. Your family’s make-up might have changed.
Or the potential changes in the law could affect your goals. For example, the current high lifetime estate and gift tax exemption might have made you less inclined to make lifetime gifts to the next generation. But a lower tax exemption and the prospect that part of your estate might be taxed might encourage you to give some wealth now at little or no tax cost.
You might change or modify goals in the course of talking to an estate planner. But the more thought you give to goals now, the more fruitful the discussions with your estate planner will be. Review advance directives and powers of attorney.
Often, when these documents were developed, the choices of people to make decisions for you seemed automatic. Those agents might not seem the best fit now.
As part of this review, you might realize that your financial and medical providers have changed, and the new providers need copies of the documents after they’re updated. Consider late-in-life and end-of-life choices.
Advance directives and other documents usually contain your preferences for receiving medical care in certain situations. You also might have expressed preferences about receiving at-home care versus moving into assist- ed living or other facilities. Your views on these issues might have changed, especially since technology, medical care and other factors have changed.
Review the choices you expressed in the current documents and decide if you want to make any changes. Be prepared to discuss these with your estate planner. This also is a good time to consider or reconsider a plan to pay for any long- term care that might be needed in the future.
Discuss with the family. Advisors don’t agree on when family members should be brought into the planning process, but they agree family members shouldn’t be in the dark. Surprises in the estate plan often trigger estate disputes and family disharmony.
It is a good idea to have early discussions with family members about the basics of a plan. Talking with your children about their financial situations and goals might lead you to make changes in your plan. Some parents are surprised to learn, for example, that their children really don’t want to inherit the vacation house and would sell it right away.
There’s no point in planning how to have ownership of the vacation house shared among the children when they don’t want it. Some parents decide that it’s better to make some lifetime gifts after learning of their children’s financial situations and goals. Also, heirs should be given a good idea how much they’re likely to inherit or not inherit. That information is likely to influence their own planning.
Of course, you need to have discussions with any family members who will be your estate executor or agents under advance directives and powers of attorney. They should know your goals and expectations and any details you can provide them. Be ready to implement. Many estate plans fail because they weren’t fully implemented. Often beneficiary designation forms aren’t updated for retirement accounts, life insurance and annuities.
As I’ve said before, many estate owners fail to transfer ownership of assets to living trusts or other vehicles. It’s important to realize that signing the documents after the estate planner prepares them isn’t likely to be the final step.
You might need to take other actions and should be ready to do so.
Communicate and distribute.
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 obtain the documents when they are needed. Once powers of attorney are executed, you should distribute them to financial service providers and be sure they’re acceptable to the providers.
Medical providers should know about and probably have copies of your advance directive. Some states now provide for online registration of advance directives so medical providers can search for them when the need arises. Most estate planners say it’s not a good idea to distribute physical copies of a will, because the will is likely to change over time.
Distributing copies increases the likelihood of disputes over which is the final valid will and what you really intended. Instead, tell the affected people generally what’s in the will, and let the executor know where to obtain copies when needed.
Don’t overreact to legislative proposals.
Some people have been revising their estate plans already in response to the proposals in Congress, and some estate planners have been recommending early action. But most people shouldn’t take irrevocable steps before enactment, because the proposals might not become law, or the details might change.
Because it looks like any action Congress takes will be late in 2021, there will be limited time to respond once the details are known. Do your preparatory work now, get on your estate planner’s schedule and be ready to act once the details are known.