Yearly Checkups: Physical and Financial Wellbeing

Hopefully you go to your doctor at least once a year to get a physical.

This visit helps detect and treat problems before an illness or health condition becomes a major problem. It’s called preventative health. But have you ever considered preventative health for your finances?

Just like it’s important to see your doctor annually, it’s also important for your estate plan to have a regular checkup to address changes in your life circumstances or in the law so that your plans continue to provide for you and your family’s future needs – before bigger issues arise. Like an undetected medical condition, an out-of-date estate plan can have devastating, unintended consequences.

No estate plan? An ounce of prevention is worth a pound of cure.

None of us knows what the future holds, so it’s important to make plans that provide for yourself and your family should something unexpected happen. Although people often find it difficult to think about being too ill to care for their family or themselves or passing away, this discomfort is minor compared to what your family may have to endure if you do not have an estate plan in place.

If you become sick or are unconscious and unable to make your own health care decisions and you have not named a medical power of attorney to make decisions on  your behalf, a court may have to appoint someone for you. This may or may not be the person you would prefer to have making these important decisions for and about you. In addition, if you have minor children, a court will have to decide who will care for them if you have not named someone as their legal caregiver. In the absence of a will or trust specifying who you would like to receive your money and property when you die, state law will decide who receives it—and those recipients may not be the beneficiaries you would have chosen. Further, if you do not have an estate plan, or if you only have a simple will, your assets will have to go through an expensive, time consuming and public probate proceeding before being transferred to your beneficiaries. Moreover, the lack of an estate plan could have negative tax consequences, and money or property you wanted to benefit your family could be used instead to benefit Uncle Sam.

Make sure your estate plan has a clean bill of health.

Life is always changing and let’s face it – so is the law. So even if you already have an estate plan in place, it’s important to meet with your estate attorney regularly to review it and make any necessary modifications needed to ensure your plan still achieves your goals.

The following are some of the changes that could trigger a need for modifications to your estate plan:

Changes in life circumstances

If your children are no longer minors or if there have been deaths, births, marriages or divorces in your family, it is prudent to update your estate plan to reflect those changes. If you fail to do so, the people you want to receive your money and property may not receive the benefits you intend. You should also review the people you have named as your executor, trustee, guardian for your children, or agent under a power of attorney to ensure that they are still willing and able to fulfill those roles—and that you still have confidence in their ability to do so. Further, if you have experienced financial changes, such as a substantial increase or decrease in the value or composition of your estate (what you own), buying or selling a home or other property, changing jobs, buying or selling a business, or receiving an inheritance, there may be tax or other consequences associated with those changes that could impact your estate plan. If you have a trust and have recently acquired property, it needs to be properly titled to ensure that it will not have to go through the probate process when you pass away. Moving to a new state is another event that should trigger a review of your plan. It’s possible your new state has different tax or estate laws and therefore your plans may need to be modified to ensure they are still valid and beneficial under that state’s tax, property and probate laws.

Changes in the law

The past couple of years provide a case in point for why everyone should regularly update their estate plans. Since the beginning of 2018, there have been massive changes in federal tax law affecting millions of Americans.

The most recent change is the enactment of the Setting Every Community Up For Retirement Enhancement Act (the “SECURE Act”), which became effective January 1, 2020. It benefits retirees by eliminating the maximum age for contributions to certain retirement accounts and increasing the age (from 70 ½ to 72) at which they are required to start taking distributions. However, it also eliminates the tax advantage previously available to many beneficiaries, who were able to take distributions from those accounts over their individual life expectancy. Now, many beneficiaries (with exceptions for spouses and several other special categories of beneficiaries) must withdraw the entire balance within ten years of the account holder’s death, accelerating the income tax due and possibly shifting them into a higher tax bracket. It may be necessary to create a new trust, amend an existing one, or employ other planning strategies to achieve your goals post-SECURE Act.

In addition, the Tax Cuts and Jobs Act of 2017 significantly increased the exemption for federal estate taxes, gift taxes, and generation-skipping transfer taxes ($11.58 for an individual in 2020)—at least until the end of 2025 and possibly longer if Congress extends it.  Another federal law, the Tax Relief Act of 2010, allows the “portability” of the federal estate tax exemption between married couples, i.e., when one spouse dies, his or her estate can elect to add the unused portion of the deceased spouse’s federal estate exclusion amount to the surviving spouse’s exclusion amount. Although many people have a net worth below the current exemption amount, those who are above or close to the much lower exemption that will apply if the current law sunsets (reducing the exemption back to $5 million adjusted for inflation) as scheduled at the end of 2025 may now want to consider making lifetime transfers of money or property to their heirs to reduce future federal estate taxes.

Finally, regular reviews are needed to ensure that your estate plan is modified to reflect any recent amendments to state laws governing wills, trusts, health care directives, powers of attorney, and state estate or inheritance taxes.

Don’t worry, this won’t hurt a bit

In all seriousness, the consequences of failing to review your estate plan could be much worse than spending a little time making sure you have an estate plan in place that will achieve your goals, providing for your own care if you become disabled and for your family once you pass away. Any of the experienced estate attorneys here at DLG can sit down with you to help ensure your estate plan is in the best of health. Give us a call today.