October is recognized as Estate Planning Awareness Month, a reminder to reflect on the importance of organizing your affairs for the benefit of your loved ones.
As we approach 2025, at the end of which the current estate tax exemption is set to expire to around half of what it is now, it’s important to revisit your estate plan and explore options like life insurance and trusts designed to safeguard your legacy, especially with significant tax changes on the horizon.
Why Estate Planning Matters
Estate planning involves organizing your financial affairs so that your assets and responsibilities are managed according to your wishes upon your death or in the event you become incapacitated. Ultimately, an effectively written and legally executed estate plan aims to provide comfort for you and your loved ones during a stressful time of loss or medical crisis, and can pave the way for an easy, tax-advantaged transfer of assets and decision-making authority to your chosen beneficiaries.
With estate tax changes looming, everyone should make it a priority to work with their financial advisor, tax professional, and estate attorney to help make sure they have a proper, up-to-date estate plan in place.
Key Legal Documents to Consider
Effective estate planning often relies on several essential documents:
- Will: This legal document specifies how your assets should be distributed after your death and who you choose as guardians for your children. It is crucial for specifying which items go to whom—like furniture or artwork—even if your estate isn’t large, or even if you also have a trust, when it is known as a pour-over will. Dying without a will (intestate) can complicate matters, as state laws and probate court might dictate asset distribution and make decisions about guardianship for dependents.
- Trust: There are many types of trusts, but in general, a trust can allow you to designate a trustee to manage your assets for beneficiaries. This can expedite asset distribution and potentially bypass probate court, as well as keep matters private.
- Power of Attorney (POA): This grants someone the authority to make financial or medical decisions on your behalf if you become incapacitated.
- Living Will: This document outlines your preferences for medical treatment and end-of-life care, so your wishes are honored.
The Importance of Life Insurance and Trusts
As the estate tax exemption is set to change, it’s a good time to consider life insurance and trusts that might confer tax advantages depending on your situation. Life insurance can provide liquidity to your family to help pay for expenses, usually tax-free, easing the financial burden on beneficiaries, while trusts can help protect assets from estate taxes and streamline distribution, potentially avoiding lengthy and costly probate court.
When planning your estate, your team of advisors might consider strategies like a Credit Shelter Trust (CST), also called a Bypass or AB Trust, which can allow assets to pass to beneficiaries tax-free upon the surviving spouse’s death. Spousal Lifetime Access Trusts (SLATs) also provide creditor protection and can reduce estate value, potentially lowering estate tax liability.
There are many types of trusts to help manage different situations, and it is important to seek legal help to ensure they are properly set up and executed.
Revisiting Your Estate Plan: Key Considerations
For the 2026 tax year, the current lifetime estate and gift tax exemption is set to be cut to almost half and adjusted for inflation. For 2024, the exemption stands at $13.61 million per person and $27.22 million for married couples; however, if the Tax Cuts and Jobs Act (TCJA) provisions sunset as planned, this exemption could drop to approximately $7.5 million for individuals and $14.5 million for married couples.
Families who may face estate tax liability in 2026 should proactively consider transferring assets out of their estate sooner rather than later. Engaging with your attorney or financial professional can help identify the best strategies tailored to your unique needs. With the provisions of the TCJA set to expire, it’s essential to reassess your estate plan to avoid potential tax burdens and seize opportunities for tax savings before it’s too late.
Common Estate Planning Mistakes
The most significant mistake is not having a plan at all. Other pitfalls include failing to communicate your wishes, naming only one beneficiary, and neglecting to update your plan after major life changes like marriage, divorce, or the birth of children. Regularly reviewing your estate plan—ideally every three to five years—can help ensure your documents remain aligned with your current situation. Without a clear estate plan, your assets could end up in probate court, leading to delays and potential family disputes, as a probate judge will determine distribution based on state laws that may not reflect your intentions.
Conclusion
Procrastination is the enemy of effective estate planning, especially as we approach significant changes in estate tax laws. Take this opportunity during Estate Planning Awareness Month to organize your affairs and make certain your wishes are honored. Remember Benjamin Franklin’s words: “By failing to prepare, you are preparing to fail.” Acting now may help protect your loved ones and facilitate efficient management of your estate.
Your Estate Planning Checklist
To help ensure a comprehensive estate plan, consider following this streamlined checklist:
- Inventory Assets: List valuable items, property, and sentimental possessions.
- Document Finances: Include bank accounts, retirement plans, and insurance policies.
- List Debts: Record all obligations, like credit cards and mortgages.
- Choose Beneficiaries: Make sure accounts have designated beneficiaries.
- Transfer on Death Designations: Set up TOD designations for bank and brokerage accounts, or alternatively, you may transfer assets into a trust.
- Select an Estate Administrator: Pick someone responsible for managing your estate.
- Draft Your Will: Prepare a legal will with professional assistance.
- Create Important Documents: Develop and execute legal powers of attorney and living wills, as well as trusts depending on your situation.
- Review Regularly: Reassess your plan after major life events.
- Consult Professionals: Work with an estate attorney, financial advisor and tax professional to help ensure you get the right advice. Each discipline has a different perspective and may bring issues to the table that only they fully understand.
If you would like us to meet with your estate attorney and tax professional to create or review your estate plan, we would be happy to do so. We can also bring these disciplines to the table if you don’t have them in place. Call us! You can set up a wealth alignment call with Wealth Sync Partners by clicking here.
Sources:
- https://www.investopedia.com/articles/retirement/10/estate-planning-checklist.asp
- https://www.ncoa.org/adviser/estate-planning/estate-planning-guide-checklist/
- https://arizonastatelawjournal.org/2024/01/23/the-future-of-estate-planning-preparing-for-a-new-wave-of-laws-and-regulations/#:~:text=The%20Tax%20Cuts%20and%20Jobs,%E2%80%9Csunset%E2%80%9D%20to%20approximately%20%245%2C490%2C000.
- https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies
- https://www.texasbar.com/AM/Template.cfm?Section=articles&ContentID=62534&Template=/CM/HTMLDisplay.cfm
- https://www.genworth.com/aging-and-you/finances/cost-of-care
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