Five Things Impacting Client Estate Planning
Estate planning is difficult to do for most people and it’s even for difficult for financial advisors to bring up the subject with their clients. No one is comfortable speaking about their death, most people don’t even want to think about it. But it is a subject that must be tackled.
However, less than 30% of Americans currently have a will. This is something that often leads to a horrifying reality for many families if a loved one passes away without filing one. In addition, less than 50% of people have any estate planning documents laid out at all.
It is important to stress to clients that estate planning isn’t just about giving their family a leg up through emotionally difficult times. Proper estate planning will document client wishes to designate preferred representatives to make medical decisions regarding client’s care in the event they are incapacitated, or allow an executor to access bank accounts to pay bills as well as carrying out any other client wishes.
Getting clients actively engaged in the process early on is crucial to estate planning success. There are several things changing in 2016 that will impact estate planning efforts. Here are the five that clients need to know:
1) Lifetime Gift Tax and the Estate Tax Exclusion increase
These tax laws allow for tax credits allowing clients to make gifts while alive and transfer property in their estates to heirs without incurring taxes. These exclusions increase every year to adjust for inflation and rose $20,000 for 2016, to $5.45 million.
This amount has increased dramatically in recent times. The limit was at $1.5 million as recently as 2005.
2) Annual exclusion amounts unchanged
Clients are allowed to give up to $14,000 a year to as many individuals as they want before they have to tap into their lifetime exclusion amount.
There are some gifts that they can make on top of this amount. For example, gifts to a spouse don’t count against annual limits. Gifts for medical care or educational expenses don’t count either, so long as these funds are paid directly to the medical center or school, not the individual in need.
3) Tax rates for estate and gift taxes remain unchanged
Estate tax code is complex, but the structure of the lifetime exemption makes it a tiny bit easier. The estate tax is 40%, with no tiers. Higher rates were employed previously. So if your client is an executor and the deceased had made taxable gifts before they passed, the executor should take a close look to ensure that the deceased didn’t overpay their final tax liability.
4) Lifetime exclusion amounts are still portable
Estate tax laws were changed in 2011 to begin allowing spouses of deceased individuals to use any remaining lifetime exclusion amount from their deceased spouse’s estate.
This made estate planning exponentially easier and allowed married couples to capitalize on both spouse’s exclusion amounts. In 2016, married couples are allowed to transfer $10.9 million of taxable property to heirs without incurring any estate taxes.
Financial advisors should ensure that couples understand that their estate needs to elect to transfer any of the unused exclusion amounts to the surviving spouse.
5) Double check state estate tax laws
The earlier items in this list referred to federal tax code regarding estates, but it is important to note that states also impose gift and estate taxes. They often have their lifetime exclusion limits that are far lower than the federal exemptions. Several states in the Midwest and the South have repealed their estate tax laws while states in the North East have opted to add additional regulations.
Estate planning isn’t something that most clients spend much time thinking about. Neglecting this process could prove to be costly for heirs, however. Each year, the rules change, both at the federal and state level, but by helping clients stay on top of these changes prudent advisor can help ensure client wishes will be carried out in full.