The election of Donald Trump to the presidency and Republican control of both houses of Congress make estate tax reform extremely probable in the next two years. Before any new tax rules are signed into law, address these ten estate planning issues to safeguard your family's financial safety.
Editors' pick: Originally published June 8.
"The first thing I would say that Americans should do is get a will," says Peter Huminski, president of Thorium Wealth Management, in Kernersville, N.C. "According to recent surveys between 50% and 65% of Americans do not have a will and that number seems to be getting bigger, not smaller."
Even if you're not subject to estate taxes upon your death, a will provides the instructions for how your assets will be disposed of. "If you don't have a will, your assets will be left to the laws of disposition of your state of residence," Huminski adds. He advises Americans crafting an estate plan to get a will no matter what Congress does or does not do in the next year or two. "Congress won't do away with the estate tax," he says, but there should be changes to address for people planning their estates.
One big unknown with Congress is what happens with Americans' charitable planning, with the possibilities of charitable deductions going away, says Adam Vega, a financial planner with United Capital in Ft. Lauderdale, Fla. "If you intend to donate to a charity, consider working with your financial or estate planning team to develop a 'giving' plan now," he says. "There's plenty of uncertainty in regards to what happens if the charitable deduction goes away." That's where donor-advised funds can help out. "Donor-advised funds are a great way to take advantage during one tax year and maximize any deductions while planning for any future charitable planning or philanthropic goals," Vega says.
All families with assets should focus on bloodline and disability planning, no matter what Congress does, says Harold A. Bollaci, Esq., elder law estate planning attorney based in New York City. "This is best accomplished through the use of Revocable Living Trust," Bollaci says. "The trust helps guarantee that in the event of disability or death, the continuity of a family's financial affairs is maintained." Trust planning also helps to maintain that a family's hard-earned money stays in the family, and it also serves as a creditor protection for beneficiaries and as a protection against future divorce, Bollaci says.
Updating or reviewing your life insurance policy is highly advisable, says Yaron Ben-Zvi, CEO at Haven Life, in New York City. "While changes in economic policy and tax reform are often unpredictable, there are fool-proof ways to help ensure financial security for your family," Ben-Zvi states. "Buying life insurance is one of those ways." Ben-Zvi advises purchasing coverage that's at least five to ten times your annual salary. "That's one of the simplest and most affordable ways to financially protect your family from the unexpected," he says. "A healthy 35-year-old woman can buy a 20-year, $500,000 policy for less than $20 per month - less than most people spend on their TV streaming services per month."
When you're addressing any big changes to your estate plan, bring a financial advisor or another estate specialist on board first, says Scot Kirkpatrick, leader of the Trust and Estates practice at Chamberlain Hrdlicka, in Atlanta, Ga. "Individuals typically put off estate planning because they are extremely busy in other aspects of their lives," Kirkpatrick says. "For them, it isn't the cost of estate planning that causes them to overlook it, it is the time, attention and focus it requires." That's where a good financial advisor can help, he says. "It's important to remember that financial advisors are essential to a good estate plan," he adds. "They point their clients in the right direction, and educate and advise them on important estate-related financial decisions. A good financial advisor will educate his or her clients on the positive outcomes of a decision as well as the negative outcomes."
As you're getting specific estate planning advice from a financial advisor, make sure you address two key power of attorney issues. "These are estate planning tools that every American should have regardless of what happens with the tax law," says Matthew Underwood, an estate planning attorney at Wilson Law Group, LLC, in Madison, Wis. The first is a Health Care Power of Attorney, Underwood says. "This allows you to name someone you trust to make health care decisions for you if you are ever incapacitated," he says. Second is a Financial Power of Attorney. "Name someone you trust to manage your finances if you ever become disabled," he adds. "Again, it doesn't matter what the tax law looks like, everyone over 18 should have a disability plan in place."
If your tax rate were to be lowered, that's an opportunity to examine contributing to a Roth IRA or a Roth 401(k) and/or executing a Roth IRA conversion, says Mindy Rosenthal, senior wealth strategist at PNC Wealth Management. "There is no way to predict future tax rates, so two key considerations would be if you expect tax rates to be increased in the future or if you expect to be in a higher income bracket in retirement," she explains. A good IRA plan can help minimize taxes under those scenarios.
On the charitable giving front, consider direct gifting as a way to lower income, and save on taxes, Rosenthal explains. Direct gifting is a charitable donation provided directly from an individual to an IRS-approved non-profit or charitable group. In exchange, the donor gets a full tax deduction based on the fair market financial value of the donation. "It would be worthwhile to review how much you are directly gifting and if maximizing your deduction fits with your charitable gifting strategy," she says.
While tax laws change, it will always be possible for someone to pass away when their children are minors, says Lorni Sharrow, an estate and trusts attorney at Moye White in Denver. "Minors cannot own property," Sharrow says. "If your minor children inherit any money, your loved ones will need to go to court to appoint someone to manage their financial affairs. This court-appointment ends when the minor becomes an adult at age 18 or 21 depending on the state." All monies will be immediately accessible and the child can go buy a Lamborghini, Sharrow adds. "Even small amounts of money can be a disservice to a young adult," she says. "With the help of an attorney, you can decide the best way your child/young adult can inherit. Part of the solution is to appoint a trustee who not only manages the money, but they can coach the child/young adult in financial literacy."
Congress has threatened to eliminate discounted gifts within families who create and transfer family partnership interests for years, notes Terrance M. LaBant, J.D., a senior wealth strategist at Calamos Wealth Management in Naperville, Ill. "Families who create one now may get ahead of that proposed change in the law," LaBant explains. "The White House Tax Reform Plan also intends to lower the income tax rate for pass-through entities to 15% across the board, and a Family Partnership currently is taxed as a pass-through entity at individual rates (as high as 39.6%). So, families may transfer assets at a discount and then pay income tax on future growth at much lower rates. That's a double benefit for those estate planners who act now."