Three Considerations to Help Keep Your Estate Plan Current

Estate planning documents often receive little attention after they are drafted. Why? People tend to find the process emotional and burdensome, and that’s often motivation enough to put off updates until next year—or even several years!

Changes in the law or in family circumstances can make estate plans fall short of their intended goals. Here are three critical considerations to review with your attorney right now to help keep your plan current:

1. How assets are owned

Assets owned in joint tenancy go to the surviving joint tenant by operation of law, no matter what your will or trust may say. For example, by adding a child’s name to a parent’s account to provide “access” should something happen to the parent, the child becomes a joint tenant of the account. If the parent dies, those assets will most likely be awarded to the child, even if the parent’s will or trust specifies something else.

Assets owned under community property laws (applicable in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) sometimes receive a substantial income tax benefit—a double step-up in cost basis, which is used to calculate capital gains. If you live in a state where this applies, use caution when moving to a non-community property state.

Beneficiary designations are another critical factor in estate planning. If your spouse passes away before you do, their IRA, 401(k) or similar assets could go directly to your children rather than according to the terms of the will or trust that you’ve spent so much time and money crafting. Make sure that your beneficiary designations are up-to-date and aligned with your desired estate plan.

2. How assets are protected

In the event that both parents die, assets left to children are often placed in trusts. Such trusts may be drafted to provide that a percentage of assets shall be distributed to the child at a certain age and the remainder at a later time.

Consider changing this to make your child’s trust function as a “back door prenuptial” agreement that could help protect the assets in the event of a marital breakdown in the future. That is, include a provision that says the assets are to be kept in trust indefinitely and may be distributed at a given age at the child’s request. This can prevent the funds from being considered marital assets, while still making them available to your child.

3. How to minimize tax

The federal estate tax exemption for 2024 is $13.61 million,¹ which means that federal estate tax is not a concern for most families. However, if you think that your family will cross this threshold, you can work with your wealth advisor to explore provisions such as “portability,” which can allow a deceased spouse's unused exemption to be transferred to the surviving spouse, and mechanisms such as a Disclaimer Trust, which can potentially double the estate tax exemption for the surviving spouse. These types of strategies have the potential to shield more family assets from estate taxes.

A more pressing concern for many families is income tax - particularly the income tax that may be payable on the capital gains from inherited assets. One of the ways to minimize income tax on estate assets is to take advantage of how the cost basis of these assets is “stepped up” to fair market value on the date of death.

For example, if you purchased a stock for $100 five years ago and sold it today for $1,000, there would be a $900 taxable gain. But if you never sold the stock, it would receive a new cost basis at death equal to its fair market value—in this example, $1,000—which may eliminate taxable capital gains. If the stock had instead fallen to $90, your heirs would have the option of waiting up to six months after the date of death before committing to a new cost basis. The main takeaway? Consider arranging your asset ownership and document provisions to take advantage of the step-up at death.

Estate planning is a task that never really ends. Changes in everything from tax legislation and asset values to family structure and legacy goals can inspire updates and improvements over time. But working with your wealth advisor and estate attorney, it may be possible to make just a few changes today that could result in  better outcomes for generations to come.

¹ https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

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