The rapid escalation of the coronavirus pandemic has motivated clients to finalize their estate planning documents with their attorney, accountants and financial advisor team all working from home.
With mortality at the forefront of everyone’s mind, clients who have been holding off on estate planning are now prompted to quickly finalize their estate plan so that they will have something in place should illness or death befall them. Without an estate plan in place, clients will be reliant on state laws and probate courts to appoint individuals who will be responsible for financial affairs and health-care decisions in the case of illness and ultimately the transfer of assets upon death. We recommend that our clients review their estate planning documents, including wills and trusts and their gifting techniques, to determine that they are in line with their goals and the tax law changes. The review of estate planning documents is particularly important during these unprecedented and unpredictable times.
Documents That Should Be Updated
Here is a list of documents you should have updated:
1. Power of Attorney—A power of attorney is a legal document that gives an agent the authority to carry on a person’s financial affairs and protect their property by acting on their behalf when someone is incapacitated. The power of attorney gives the agent the ability to pay bills, write checks, make deposits, sell or purchase assets, and sign tax returns.
Any competent adult can serve as your agent; however, it should be someone you trust to be honest, who exhibits common sense and who acts responsibly. Choose someone who is relatively nearby to manage the particular aspects of handling your finances. You should also choose a back-up agent in case your primary agent becomes unavailable.
Without a power of attorney in place, there is no person legally authorized to act on your behalf, and family members will be required to request the probate court to appoint a guardian to take over these duties. The court process may be very time consuming especially during a pandemic.
2. Health-Care Proxy—Similar to a power of attorney, a health-care proxy is a legal document that gives an agent the authority to make health-care decisions on your behalf if you are incompetent or incapacitated. If you are over the age of 18 and don’t have a health-care proxy appointed, your family members will have to request that the probate court appoint a guardian to make these important health-care decisions.
3. Last Will And Testament—A last will and testament is a legal document that allows you to direct distributions of your property at the time of your death. A will also allows you to appoint an executor who oversees the distribution of your assets. Everyone has assets that must transfer after a person’s death. Without a will, there is no direction as to how those assets will pass; distribution of your assets will be handled by the state and the court will decide on the best person to oversee the administration of your estate. A will also allows you to appoint a guardian to take care of minor children. Again, if you don’t have a will, a court will decide on the best person to fulfill this role.
4. Living Trust—A revocable trust is a legal contract with yourself to create an entity to hold your assets. You can change the trust at any time and you can set it up to outlive you. If you become incapacitated or are unable to manage your estate, your living trust avoids the need for probating your estate. You appoint a successor trustee who steps in and manages your affairs without the involvement of the court, avoiding the extra time and money associated with probate. A trust also affords you privacy surrounding the details of your estate since it avoids the need for probate, which is a public process.
Considerations As You Review Your Estate Plans
Additionally, the current low interest rate environment and market volatility provides increased opportunities to shift wealth to children and other beneficiaries. Clients may therefore find this an opportune time to review and make updates to their estate planning documents and to implement new estate planning strategies. The following is an overview of some of the questions and considerations clients may wish to keep in mind as they review their estate plans:
• In light of the historically low interest rates, should you be refinancing loans to family members and other beneficiaries?
• Should you consider lending funds to children or other beneficiaries or to trusts for their benefit, selling assets to a grantor trust in exchange for a note and establishing one or more Grantor Retained Annuity Trusts (GRATs)?
• Are the dispositive provisions in accordance with current wishes?
• Should any specific bequests be reduced in light of current or potential future market declines in order to increase the amounts passing to residuary beneficiaries?
• For a married couple, is the maximum use being made of the federal and (if applicable) state estate tax exemptions and the exemption from the federal generation skipping (GST) tax?
• Should the appointment of executors, trustees and guardians for minor children be updated?
• Who is named as the beneficiary and the secondary beneficiary on IRAs, 401(k)s and similar plans and payable upon death accounts?
• Who is the owner of life insurance policies and who is the named beneficiary?
• Clients owning life insurance in their name may wish to consider transferring the policies (through gift or sale) to a life insurance trust to remove the proceeds of the life insurance from their estate for estate tax purposes.
• Review health-care proxies, living wills and power of attorney.
• Are the appointments of health-care agents and attorneys in fact still appropriate?
Please contact your accountant to work through all of these important issues.
Sara Rabi, CPA, TEP, is a partner at Marks Paneth LLP. She specializes in individual and fiduciary tax preparation and advisory services.
