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Changes in tax laws could be affecting—and outdating—your clients’ wills and bequeathing plans.

14 November 2020 No Comment

NOVEMBER 9, 2020 • JEFF STIMPSON
Changes in tax laws could be affecting—and outdating—your clients’ wills and bequeathing plans.

A will, as your clients probably understand, ensures that their goals for legacy and asset disposition are met. What most clients don’t understand is that a will needs frequent revisiting and revision—especially if the document was written or involved the creation of a trust prior to passage of tax reform, the Tax Cuts and Jobs Act (TCJA), in 2017.

Wills are instruments to pass on money, but taxes have come to greatly influence how much money is passed on. Clients usually understand the prominent components, including tax implications, of their wills, said Timothy P. Speiss, a CPA and co-partner in charge of the personal wealth advisors practice at EisnerAmper. These components include the unlimited marital deduction; using current rules to make non-taxable gifts of up to $15,000 per individual; the current estate tax exemption of $11.58 million; health-care directives; levels of trustees and executors; and creating long-term trusts with non-taxable asset transfers, he said.

Many estates are large enough to be federally or state taxed. Wills and trusts set up before passage of the TCJA may not take into account that reform changed the amount that can be exempted from estate taxes. The TCJA more than doubled the amount that can be exempted from estate taxes, where the threshold for exemption was once roughly $5.5 million.

But clients can’t dawdle. The Democratic presidential victory means that this number could soon revert to TCJA levels.

“Don’t wait,” said Melissa Gonzalez, senior tax manager at Mazars USA in Woodbury, N.Y. “The potential tax changes could cause many more Americans to have a taxable estate and it’s important to have a full understanding of your assets, including those with sentimental value, and carefully decide who you want to receive them, at what age, and whether you want them passed outright or through a trust.”

Mary Kay Foss, a CPA in Walnut Creek, Calif., believes that in her state almost all the wealthy have trusts with a “pour over” will. “It basically says, ‘If I die with anything in my name, pour it over to my trust agreement,’” she said.

“Trusts are prevalent for many high-net-worth people all across the country,” Foss said. “With just a will, you need to have a probate proceeding. … That involves changing the title on assets from the decedent to the beneficiary directly or to testamentary trusts. Court proceedings are public information and you can obtain from the court filings details of an individual’s assets and estate plan.”

Privacy is one reason the wealthy often prefer trusts, as is faster processing and keeping fees lower than with a will and its possible probate.

“I’ve heard that many of the estate planning attorneys in my area are already fully booked for appointments through Dec. 31,” Foss added.

Documents can sometimes have defenses against tax changes built in. Trusts and wills use “formula” clauses tied to the exemption amount, which can quickly become outdated. A well-drafted will refers to the “maximum exemption” available at the time of death. Wills can allow a trustee or another designated person to change provisions to accommodate future changes.

Estate plans should generally be reviewed every three to five years; wills should be reviewed more frequently. Life changes are still the biggest factor that catch clients by surprise in drawing up or revising wills, Steiss said. Such changes can include divorce, separation or marriage; the birth of children; the aging to adulthood of a minor; changes to assets; a client’s relocation to another state; changes in personal representatives or heirs; or changes in health.

Changes in the lives of others in the will or plan—such as beneficiaries—should also be planned for.

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