Wealthy individuals who’ve completed their estate plans may consider the job done. But estate planning is a journey, not a destination. So many factors — personal, financial, and political — can change over time and challenge the effectiveness of even the best-constructed estate plan. That’s why it’s important for high-net-worth individuals to regularly review their plans with financial and estate planning professionals. Here's a guide on when to review estate plans and how to do so efficiently to ensure goals stay on track.
WATCH: Granite Harbor Advisors recently conducted a webinar about estate planning strategies. You can watch a full recording of that presentation below.
When to review estate plans
Professional financial advisors recommend reviewing estate plans at least every one or two years, or whenever there’s a change in:
- Family circumstance, such as marriage, divorce, remarriage, birth, adoption, or death of a beneficiary
- Financial, business, or economic status, including changes in ownership, significant asset appreciation, and incapacity due to illness or accident of the business owner
- State of primary residence, since certain estate planning provisions may not be applicable in another state
- Tax law, particularly changes in gift and estate taxes
What to review and why it’s important
While every estate is different, estate planning review sessions typically involve:
- Reviewing core documents, such as trusts, pour-over will, durable powers of attorney, and living will/health care directives
- Exploring asset valuation and discounting opportunities
- Considering vehicles for moving assets out of the estate
- Reviewing charitable planning
Leveraging tax exemptions and various estate planning tools such as trusts and family limited partnerships can result in several benefits, including:
- Fulfilling the family’s wishes regarding asset distribution.
- Meeting charitable goals in a tax-efficient manner.
- Removing assets from the estate, thus reducing or eliminating estate tax liability.
- Providing liquidity to the estate.
Keep estate planning simple: Where, how, who
Despite the apparent complexity of many estate planning tools and strategies, the goals are often quite simple and are typically based on three questions: where, how, and who.
- The first question high-net-worth individuals need to ask themselves is where assets should go? To family, to charity, or to the IRS? Most people would prefer to maximize the first two and minimize the third.
- The second question involves deciding how the assets will pass? Should they be left outright or in a trust? Outright seems like a simple solution, but it could lead to outcomes inconsistent with the decedent’s wishes or result in excess taxes due. Properly executed trusts, however, may offer benefits such as control over how, why, and when assets are distributed as well as creditor protection, protection in divorce proceedings, and estate tax minimization.
- The third question is about identifying who is in charge? Should the estate plan be administered by an individual or institution, or some combination? Does it make sense to divide the duties in a trust? For example, there could be an administrative function assigned to a person or entity to file tax returns and notices to beneficiaries. A separate investment function could involve decisions on how assets are invested. There could be a business trustee appointed for closely held business interests. Finally, there could be a distribution function, where the trustee considers and makes distributions to the beneficiaries based on the terms of the trust. For example, the trust may allow the trustee full discretion over distributions, or distributions could be limited to certain milestones or HEMS (health, education, maintenance, and support) issues. Building in these types of limitations can help ensure a trust is administered to support the beneficiary over the long term and not deplete assets frivolously or prematurely.
Current transfer taxes and exclusions
Every year the IRS collects significant revenue through transfer taxes applied as gift taxes during life, or estate taxes at death. The current federal estate tax rate is as high as 40% for certain situations. Few individuals who’ve spent a lifetime building wealth want to see nearly half of it lost to taxes due to inadequate estate planning.
Fortunately, there are several basic ways to minimize transfer tax exposure, including:
Anyone can give up to $16,000 ($32,000 for a married couple) to as many people as they wish each year without filing a gift tax return. Plus, this limit does not apply if an individual pays eligible tuition or medical expenses on behalf of another, as long as the payment goes directly to the institution on behalf of a beneficiary.
Unlimited marital deduction
Individuals can transfer unlimited funds to their spouse during their lifetime or at death.
Gift and Estate tax exemption
In 2022, individuals can transfer up to $12,060,000 without triggering estate taxes. Gifts made during life over the annual exemption or special exclusions for education and medical expense payments will reduce this amount. However, any unused exemption by the first spouse to die can be added to the surviving spouse’s exemption amount, to a potential total of $24,120,000. It is important to note that an estate tax return may be required to allow the deceased spouse’s exemption to be portable.
Although current gift and estate tax exclusions are relatively high, nothing is written in stone. The current administration has proposed lowering the lifetime exclusion amount through new legislation. Although that hasn’t gone anywhere yet, current exclusion rates are scheduled to sunset at the end of 2025 under existing legislation and reset to $5 million, indexed for inflation.
Reviewing for the future
High-net-worth individuals should work with financial advisors to ensure they are taking maximum advantage of today’s favorable estate tax provisions as well as building flexibility into plans to address future changes. By taking time now to look back on plans previously laid, high-net-worth individuals can ensure a future that reflects their values and goals for future generations.
Thinking about making a change to your estate plans? Connect with the professionals at Granite Harbor Advisors and we can work with you to help ensure your estate plan is up-to-date and properly designed to meet your goals.