What a couple of months for Lisa and Bill! They sold the family business and their house, retired and moved to a different state. The timing was perfect, because it let them pay for their daughter’s destination wedding and seed a college education fund for their son’s newborn child. When Great Uncle Ned died at 99, it was definitely sad, but he left them more than enough money to give to their favorite charities.
Taken together (or even on their own), these life events suggest an estate plan review is in order. In Lisa and Bill’s case, the milestones reflect major changes to family and income. Whether you are retired or still working, if you are going through something similar, it’s a good idea to sit down with your estate planning team and make sure your plan is up to snuff and up to date. (If you don’t have such a plan yet, use the steps below to make one.)
Here are some basic things to know about estate planning in 2022—some of which may surprise you.
You Don’t Have to Live on an Estate to Plan Your Estate
The term “estate planning” refers to the transfer of your assets after you die. That’s it. If you own a house, a car, a dented salt shaker or the British Guiana 1c Magenta stamp, you have an asset whose inheritance you might want to plan for. (OK, maybe not the salt shaker.)
If you go the route of a simple will, your planning costs will probably be measured in hundreds of dollars. If you use a trust, legal fees will reflect the increased time involved. But the cost could be worth it for your heirs.
The World of Wills and Trusts
If you don’t have a will in place when you die, your assets will go to your survivors, if you have any, or to your blood relatives if you don’t. Your best friends and the local animal shelter would get nothing.
If you do have a will, you can control who inherits what, but a will still has to pass through a sometimes interminable and uncertain process known as probate, which validates the will in court. In doing so, the process also allows the will to be contested. Wills only become effective after you die, and probate can take time and can cause confusion if your intent isn’t clear.
While a will is vital for establishing guardianship of any minor children, for everyone else, it might make more sense to use a trust. Where probate can cause difficulties for just about everyone involved, a revocable living trust, which can be used for your home, your car or any other assets, bypasses the probate process altogether for the assets placed within it, significantly increasing the odds that your assets will be transferred seamlessly (and that you will be remembered even more fondly).
Unlike a will, a trust becomes operative when you fund it with assets. Generally speaking, a trust beats out a will when it comes to the assignment of assets. In addition to helping the estate avoid probate, a trust offers more privacy than a will, and unlike a will, it offers protection when you are alive if you become incapacitated.
Build an Estate Planning Team
Estate planning is really all about you, but in order to make an ironclad plan, you’ll need some help and guidance. For estates of a certain size and complexity, you’ll want to fill these three roles:
- An estate attorney to draw up legal documents, such as a will and/or a trust.
- A financial advisor to make sure the asset dispensation plan makes sense for your next generation or other heirs.
- An accountant to worry about—and reduce—your tax liabilities, so that you will have more money to distribute as you wish.
Fine-Tune the Fine Print
An estate plan is made up of many discrete elements, and that means a lot of details have to be reassessed in the wake of a life-changing event. In fact, it’s a good idea to review these details every few years whether you’ve experienced a major change or not.
Here’s a look at a few of the items to review:
- • Review and revise your will. A will is the way you legally express who should inherit which of your specific assets, who should manage the disposition process and who will be responsible for minor children after you pass.
- • Review and revise any trusts. Trusts offer you greater control around terms of inheritance; you would use a trust, for example, if you want to wait until an heir is of a certain age before they receive the assets in question. Living trusts are amendable; irrevocable trusts are not but can be used to garner tax advantages.
- • Confirm your beneficiaries. Friends come and friends go (as do family members on occasion), and you may support different charitable causes at different stages of your life. A review allows you to adjust your will or living trust as necessary. Also check your retirement accounts and make sure you are happy with the current primary and secondary beneficiaries there, as beneficiary designations on the retirement accounts themselves take precedence over any in a will.
- • Review your powers of attorney. A document known as “financial power of attorney” conveys the responsibility for your financial decisions onto another person, who presumably is aware of your intentions, if you can no longer make those decisions yourself. The person with financial power of attorney would be able to manage retirement accounts, for example, which aren’t eligible to be placed in a trust. A second document—often called a “durable power of attorney for healthcare” but also known by other, similar names—empowers another person to make medical decisions for you if you no longer can.
- • Revise your living will. A “living will” should not be confused with a will. A living will allows you to state in writing your wishes for care in the most dire medical circumstances, including whether you want doctors to intervene to prolong your life when the odds of a recovery are at their lowest.
Match Your Tax Plan to the Newest Tax Rules
For better or for worse, when it comes to estate planning, it’s necessary to be on top of any changes in the rules and regulations covering federal taxes on gifts and inheritances. Congress isn’t shy about adjusting gift and estate tax exclusion amounts, for example. Sometimes this works for you, other times it doesn’t, so at the very least, bone up on the rules with each estate plan review.
- • What items are considered part of your estate? Your estate would include, among other assets, the fair market value, when you die, of cash, stocks and bonds; homes and other property; insurance; any trusts or annuities; and business interests.
Speaking of stocks, it’s not a bad idea, if you are gifting shares, to gift them at a time the market is struggling, as it has been in 2022. That’s because the investment now has that much more room to rise, which will benefit the recipient down the line. And if you have to pay any gift tax applied to the capital gains on those shares, that tax will be lower than in the past since the capital gains will be smaller.
For estate purposes, it may also be a good time, with home values sky-high, to sell real estate, if, for example, you are thinking of downsizing anyway. But you’ll need to consider where you want to move, of course.
- • How are taxes determined? Once the fair market value of your estate is determined, any lifetime taxable gifts are added to that number. If the total doesn’t exceed the basic exclusion amount, then no estate tax needs to be paid.
The Tax Cuts and Jobs Act, enacted in late 2017, doubled the lifetime basic exclusion amount starting in 2018, to $11.18 million per person. As it happens, that amount is indexed to inflation and stands at $12.06 million in 2022. With inflation what it is, that amount could rise annually for the next few years … until maybe it doesn’t.
- • Could Congress increase taxes on gifts and estates? Most certainly. In fact, for the moment, it plans to effectively do just that, by reverting to the pre-2018 exclusion amount at the end of 2025, adjusted upward for inflation, which should put it at somewhere north of $6 million per person. Congress could push that date forward. Or, after the 2022 and 2024 elections, a new congressional mix could decide on something else altogether. The overarching point is that when it comes to the rules regarding federal gift and estate taxes, take nothing for granted.
What does all of this tax information mean for your estate plan review? Simply put, it means that if you want to make large gifts, you might want to do that now.
Andy Sobel is a freelance writer and editor. He has held senior editing positions in The Wall Street Journal’s New York and Brussels newsrooms and was managing editor of American Banker. A graduate of the University of Missouri and Union College, he now lives in Nashville, TN.
LEARN MORE: How to Discuss Your Estate Plan with Adult Children