While most people believe they have an estate plan in order, in many cases I find they don't. The reason is simple. Estate plans are often pretty complex. They involve assets that can change in value – sometimes dramatically – over time. They involve family relationships and priorities that can change as a family evolves.
So, it's a good idea to review the estate plan every few years, or any time a situation changes for one of the key parties to the plan.
Ask yourself these questions:
1. Should you gift during your lifetime? Gifting is a powerful tool to reduce a taxable estate. Couples can give $28,000 in 2014—$14,000 per individual—to an unlimited number of people per year, avoiding the gift tax. Under the American Tax Reform Act of 2012, this provision will be adjusted for inflation annually.
For many high net worth individuals, this is an opportunity to remove money from a taxable estate and help grandchildren, children, nieces, nephews, and other deserving individuals. In addition, when the gifts consist of appreciating property, significant sums can be removed from a potentially taxable estate.
Besides gifting to relatives, charitable gifts, both during life and in the form of bequests, can also reduce your taxable estate. In addition to gifts of cash, you may want to consider such special charitable vehicles as charitable gift annuities and charitable remainder trusts. Both combine a charitable gift with a lifetime stream of income to the donor.
2. Are there unique circumstances requiring specialized advice? There is no one-size-fits-all solution for legacy planning and many situations need specialized expertise. For example, if you own a family business, there may be issues involving equalizing inheritance for children who are actively involved in the business versus those who are not.
Multiple marriages can also complicate estate planning by creating issues between a surviving spouse and children of an earlier marriage. In the case of a large estate, there can be infighting over any trusts in terms of whether assets should be invested to yield maximum income for the survivor or the largest possible remainder for the children. An experienced attorney can help you sort out these issues to reach a solution that is appropriate for you and your family.
3. Have you planned for your own disability or incapacity? No one likes to consider the potential for disability and/or incapacity, but these situations can occur. To cover all the contingencies, it's a good idea to consider a living trust and/or a durable power of attorney so your affairs can be managed if you or your spouse becomes incapacitated. In such a case, you can serve as the trustee of your own living trust, with backup trustees named to take over when or if necessary.
Similarly, a 'durable' power of attorney—it must be durable to remain in effect during incapacity—can be structured so that it only takes effect when two or more physicians attest to incapacity.
The alternative to having these documents in place is that your family would have to seek guardianship over you to take charge of your financial affairs, a potentially unpleasant and emotionally draining task.
4. Are advance directives in place? Although end-of-life issues are not technically part of estate planning, they are a vital part of your overall plan. Consider drafting a living will that spells out specific measures to take in the event of a terminal illness or incapacity, along with a health care proxy designating someone to speak on your behalf if you can't do so yourself. Putting your wishes in writing can't eliminate the anguish your family might face in making end-of-life decisions, but your instructions can go a long way toward reducing their emotional burden.
5. Have you discussed the estate plan with your heirs? One of the most common mistakes we see is that parents do not share their estate plans with their adult children. This lack of open communication can increase conflicts within the family and result in expensive and protracted litigation, draining the estate of the very resources you want your family to enjoy in future years.
Despite the potential hassles and expense involved in creating a comprehensive estate plan, such a plan can ensure financial stability for your surviving spouse, preserve assets for your children and grandchildren, minimize potential taxes and other expenses. It can ensure that your wishes are carried out. If you haven't started the process, make a goal to start today.
For more estate planning ideas, see Your Most Important Estate Planning Questions – Part One
The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.