Don’t Be Afraid, Be Proactive — Plan Your Estate Today!

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Proactive Estate Planning Strategies

Estate planning is a financial process that can protect you and your family and is a very important component of your overall financial planning. If you don’t have an up-to-date estate plan and you happen to get hurt or sick and cannot manage your financial affairs, the courts will have to appoint someone to manage them for you Without an estate plan, when you pass away, your affairs will be settled by default through a complex legal system called probate.

Crafting of a good estate plan starts with planning, followed by the proper drafting and signing of appropriate legal documents such as wills, trusts, advanced health-care directives or health-care powers of attorney among others. Establishing these documents saves you and your family a lot of money and time at a very difficult and emotional time.

Estate planning is important for everyone, regardless of your net worth. Complex strategies may be used by wealthy people to reduce death taxes and costs. Others may only require a simple will and/or trust to pass on property to their heirs and provide for minor children. The time to address or update your estate plan is now.

Here are some estate planning moves to consider:

1. START WITH THE BASICS: The Tax Cuts and Jobs Act (TCJA) made favorable changes to the federal estate and gift tax regime. For 2021, the unified federal estate and gift tax exemption is $11.7 million, or $23.4 million for married couples. For 2022, the exemption is scheduled to increase to $12.06 million or $24.12 million for married couples. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments.

2. NAME YOUR BENEFICIARIES: It’s important to periodically review your beneficiary designations, especially if you’ve experienced a major life event (such as marriage, divorce, or the birth or adoption of a child). This may seem like common sense, but failure to update beneficiary designations is a common oversight. A will or living trust document does not override beneficiary designations for life insurance policies, retirement accounts and so forth. Your estate planning professional can provide a checklist of assets that need beneficiary designations.

3. UPDATE REAL PROPERTY OWNERSHIP: If you’re married and own property that names you and your spouse named as joint tenants with right of survivorship (JTWROS), the surviving spouse will automatically take over sole ownership of the property when the other spouse dies. The same is true if you own property with a nonspouse as JTWROS. Now is the time to set up JTWROS ownership, consult your legal advisor as soon as possible to get this done. Perhaps the biggest advantage of JTWROS ownership is that it avoids probate. Instead, the property automatically goes to the surviving joint tenant.

4. DRAFT OR UPDATE YOUR WILL:  If you die intestate (without a will), the laws of your state will determine the fate of your minor children and assets. You need a written will to make your wishes known. The main purposes of the will are to name guardian to care for your minor children (if any) until they reach adulthood, and an executor, who will pay the estate’s taxes and any other bills and then deliver what’s left to your intended heirs and charitable beneficiaries.

5. CREATE OR UPDATE A LIVING TRUST: For those with significant assets, a living trust can be an effective tool to help avoid probate. You establish the living trust and transfer legal ownership of assets for which you wish to avoid probate, such as your main home and your vacation property, etc. You should also have a pour-over will drafted. This is a document that stipulates that assets which aren’t officially owned by the trust, transfer to the trust at death. Examples might include vehicles, valuable Persian rugs, coin collections and jewelry.

If you set up a living trust, you must transfer legal ownership of the most important assets for which you wish to avoid probate (typically homes and other real property) to the trust in order to successfully avoid probate. Many people set up living trusts and then fail to follow through by transferring ownership.

6. MAKE AN IRREVOCABLE LIFE INSURANCE TRUST: Life insurance death benefits are generally free from federal income tax. However, the death benefit from any policy on your own life is included in your estate for federal estate tax purposes if you have incidents of ownership in the policy. You can set up incidents of ownership easily. For example, you have incidents of ownership if you have the power to change beneficiaries, borrow against the policy, cancel the policy, or select benefit payment options. This unfavorable life insurance ownership rule can cause unsuspecting individuals to be exposed to the federal estate tax.

Estate Planning is an ongoing process. Major life events could require changes in your estate plan. Additionally, the federal estate and gift tax rules, along with state estate and gift tax rules, have proven to be unpredictable. For these reasons, we encourage you to review your estate plan. If you wait, your current estate plan with any flaws, or your missing estate plan, will be locked in and could create major headaches for your family.