End-of-year estate planning is an important practice under ordinary circumstances. Add the tumult of the COVID-19 pandemic coupled with a contentious presidential election, and it’s no surprise that attorneys have seen a substantial uptick in client prioritization of financial and estate-planning. Concerns over mortality and changing tax laws are among the strongest incentives to revisit estate plans. Here we will outline important issues to have front-of-mind when speaking with your attorney and wealth advisor.
For most of us, updating estate-planning documents is the first, and most critical, step to consider. Wills, Trusts, Healthcare Proxies, Living Wills, and Power of Attorney are essential estate planning tools. Take this opportunity to review your Will and/or Trust to ensure it documents your current wishes as to the disposition of your property, guardianship of underage children, and appointment of an executor or trustee who will administer your estate or trust. You should also review your Healthcare Proxies, Living Wills, and Power of Attorney. In light of the pandemic and hospital and nursing home restrictions, the following considerations should be given:
- • Distinguish your wishes on intubation to treat COVID-19 as opposed to intubation if you are in a persistent vegetative state.
- • Indicate whether you would be willing to receive experimental treatment.
- • Review your agents, and ensure you have reliable successor agents named.
- • Include language that allows your agents to make decisions and conduct business via phone, email, video calls, and other methods of electronic communication.
Retirement accounts also play an important role in financial and estate planning. First, ensure that beneficiary designations are up-to-date. If a beneficiary designation fails for any reason, your retirement account will be payable to your estate, which can have significant tax implications. Second, discuss your retirement accounts with your attorney and financial advisor in light of the new Secure Act. A few key highlights that may affect you are:
- • RMDs are not required to be taken until April 1 following the year in which you reach 72 if you reach the age of 70½ in 2020 or later.
- • Anyone reaching the age of 70 ½ prior to January 1, 2020 is not affected by the new rules.
- • Penalty free withdraw up to $5,000 is allowed for qualified expenses within a year of a birth or adoption.
- • You are allowed to contribute to your traditional IRA regardless of age, as long as you are working.
- • Only spouses and those with a recognized disability may stretch the account out indefinitely. All others must withdraw the entirety of the account within 10 years.
As a final consideration, talk to your attorney and financial advisor regarding potentially changing tax laws. Three areas which may affect you are estate taxes, income taxes and capital gains taxes. The federal lifetime estate and gift tax exemption is currently $11.58 million per individual and is scheduled to increase for inflation until 2025. The exemption is scheduled to decrease to $5 million in 2026, although tax laws could shift prior to that date. Some considerations in light of this are:
- • The IRS has stated that gifts made prior to 2026 will fall under the higher exemption of $11.58 million, with no claw back applying, creating a “use it or lose it” scenario.
- • There are many strategies and options for individuals hoping to take advantage of the higher exemption limit, including gifting and various types of irrevocable trusts.
In addition to estate tax changes, there have been discussions of impending increases in income and capital gains taxes. Ways in which this may affect your planning include:
- • The income tax deduction afforded by charitable giving is made more appealing.
- • Individuals with significantly appreciated investments may need to consider whether it is sensible to sell those assets at the current capital gains tax rate.
While all of the above tax considerations warrant thoughtful conversation with your advisor, it is important to remember not to “let the tax tail wag the dog”—meaning tax considerations should only be one piece of your overall planning strategy, not the lone driving force.
It is undeniable that 2020 has been an unusually turbulent year. That said, from the planning perspective it is no different: answering tough questions and re-assessing planning directives in light of an ever-changing landscape is a wise practice every year. To be sure, the pandemic and the politics of the day have spawned unique considerations. However, your ultimate goal—creating comfort and security for you and your family—remains the same.
Tompkins Financial Advisors looks forward to helping you make these important decisions. Please feel free to reach out to us at (607) 273-0037.
The opinions voiced in this material are for general information only and are not intended to provide legal advice or recommendations for any individual.