Many of your clients probably don’t want to think about their mortality let alone plan for who gets what when they die. In fact, a study done by CNNMoney found that only 35%–45% of Americans have a will, so it’s quite possible that many of your clients are not looking to the future and haven’t prepared their estate plans.
Your job as an advisor is to make them think about what could happen. Sure, some of your clients may have a will, but do they have all the other documents they need to create an up-to-date estate plan?
Estate planning is more important than ever, as the new tax act has changed some rules that could have a lasting impact on your clients. We’ll review practical ways for your clients to create or revise an estate plan in light of the changes.
Change to the estate and gift laws
The estate and gift tax exemption is the amount that an individual can gift during their lifetime and after death without owing taxes. The tax act doubled the unified estate and gift tax exemption amounts from their current levels, which raised the scheduled 2018 exemption of $5.6M into an $11.2M individual estate tax exemption and a $22.4M exemption for married couples. This increase is set to sunset after 2025 and is adjusted for inflation.
According to the Tax Policy Center, the number of estates that will owe taxes is expected to drop dramatically as a result of the new act. Approximately 1,700 estates owed taxes in 2018 out of an estimated 2.7 million U.S. deaths, so the number of estates that will be taxed is a very small percentage (at about .001).
7 key steps for getting up to date
When creating or reviewing an estate plan, refer your clients to an estate planning attorney that you have tested and trust with your most valued clients. Your clients should follow the below steps when creating or reviewing their plans:
Step 1: Create or revise your will
Be sure to encourage your clients to see an attorney to create a will, especially those clients who have children. If you have a client that has a spouse with children and no will, generally the state will split those assets between the surviving spouse and children, which may not be in line with your client’s wishes. A will also designates guardianship of any children. Remind your clients that if they die without a will (also referred to as dying “intestate”), the state will decide who receives their assets, which again is most likely not what your clients may have intended.
If your client already has a will, the document should be reviewed at this time and then at least once a year going forward. At your next meeting with your client, include this topic on your agenda. For example, on our agenda we ask a client if their estate planning documents, including their will, is current. Because of the new tax act and doubling of the lifetime exemption to $11.2M per person, it’s more important than ever to review all wills and trusts. Your clients may have signed a will many years ago when the exemption amount was much lower and the results under that document will be different today.
For example, if a client created a will in 2003 when the estate tax exemption was $1 million, she may have given the maximum amount to a credit shelter trust (so as to limit estate taxes), and the rest to her husband. The credit shelter trust might have been for the benefit of her children from a prior marriage or children and a spouse. If the estate was valued at $4 million, that meant that $1 million went to the trust and $3 million went to the husband. Because of the new tax act, the entire $4 million estate would go to the trust and nothing to the husband. If the client’s estate was $10 million, the husband would have received $5 million until December 31, 2017, but not in 2018 when the law changed.
Step 2: Review trusts and beneficiaries
Trusts typically have formula clauses tied to the amount of the lifetime exclusion, which could now result in unintended consequences. For example, a revocable trust could fund a credit shelter trust that is equal to the old estate tax exemption amount, which can create unintended consequences as that amount has increased. All estate plans should be reviewed as a result of the tax act. And remember that trusts are important to control the disposition of assets even if estate taxes are not a factor. For people under $22.4M in assets (which is most estates) it is still important that estates are distributed to the right beneficiaries in the right way.
It’s very important for your clients to visit with an estate planning attorney to discuss various trusts that may be suitable for their situation. For example, an estate planning attorney should be asking if your client’s will protects a spouse and children with a flexible trust. Also, are aging relatives protected with a robust revocable trust? While many of your clients may like simple wills, a simplified document may not cover all of their needs nor have the flexibility to address evolving tax laws.
Step 3: Power of attorney
Any one of your clients could be in an accident or lose mental clarity at any time. That’s why it’s important to make sure your clients have a power of attorney (POA) drafted by an attorney. According to AARP, only a little over half of all Americans have a POA. The most common POA is a durable POA that would go into effect immediately should your client lose capacity. In light of the new tax act, review with your clients if their POA gives their agents the right to make gifts. Make sure you review who your client has appointed as the agent so that any gift-giving is done in accordance with their wishes. Your client’s attorney could update their POA to include a broad gift provision.
Step 4: Create a health care power of attorney (POA)
Another important document for your client’s attorney to draft is the health care POA. A health care POA outlines actions that should be taken on a person’s health treatment if that person is no longer capable of making decisions. This agent should know your client’s wishes when making any health care treatment and be able to understand any medical information.
Step 5: Gift in the most advantageous way
The new law increases the gift exemption amount, but the provision sunsets at the end of 2025, so many of your clients may want to take advantage of the increased exemption before 2026. Some gifting ideas could include prefunding premiums on life insurance policies owned by irrevocable trusts or forgiving existing loans. Your clients could even make gifts of interests in family limited liability companies.
Step 6: Check in with your state
The federal estate tax is not the only reason for estate planning. State estate or inheritance taxes may apply in many situations. Be sure to review with your clients if they want to stay in their current state in retirement as they may be subject to their home state’s estate tax.
Step 7: Check whether your client has life insurance
Some estates under the exemption levels may no longer need life insurance policies to pay federal estate taxes. You can add value to your client by doing a thorough review of their insurance policies and providing alternatives to them if life insurance no longer fits into their wealth plan.
It’s always a good idea at your annual meeting to ask your clients to provide you with copies of their most recent estate planning documents. Keep on file their will, durable POA, and health care POA. If a client has an emergency, their relatives can always contact you and obtain these valuable documents. With all the recent tax law changes, every advisor should be assisting their clients in this area. Giving your clients a gentle nudge to create or update their plans will leave them with some peace of mind.