Does the thought of estate planning trigger a surge of anxiety? If so, you’re in plentiful company.
Estate planning can be one of the most intimidating, complex and emotionally charged financial necessities a family takes on together. There is little room for error, as savers look to safeguard their legacies and protect their families for generations to come. And while money and emotions are always entangled with one another, those feelings intensify as people face their own mortality during the planning process — and revisit the idea often as they seek to maximize long-term opportunity.
Those stressors are present even if everything else is calm and stable outside the boundaries of our lives and families. In reality, families now have to piece together effective estate planning strategies inside a tempest of political volatility and tax law uncertainty. In this climate, households need creative and sophisticated strategies that stand the test of time, while remaining flexible in the face of ongoing legislative and environmental changes.
Tax changes are always on the ballot
While it may seem dizzying to keep tabs on the endless proposed changes discussed on Capitol Hill, there are some tax legislative changes that bear greater impact on your financial and estate plans.
The estate planning landscape has seen significant transformation over the past few years, as legislators respond to the ever-changing challenges and needs of Americans. One important change happened via the Tax Cut and Jobs Act of 2017. This increased the estate tax exemption from $5.6 million to $11.18 million, adjusted for inflation. In 2023, that amount is $12.92 million per decedent. For a married couple, that means the estate tax (aka the “death tax”) wouldn’t kick in until their total assets exceeded $25.84 million. As recently as 2008, the estate tax exemption was only $2 million per decedent (or $4 million per couple).
Recent passage of the SECURE Act 1.0 and 2.0 implemented changes to inherited IRAs, required minimum distributions (RMDs), trusts and more. One key change was the elimination of the “stretch IRA” for non-spousal beneficiaries (some exceptions apply). Under pre-SECURE Act law, a child of the IRA owner could stretch distributions out over their lifetime, effectively reducing or delaying income tax on those distributions. Under current law, they must withdraw the entire account within 10 years of the original account owner’s death. Rightfully so, this had led to a rise in converting traditional IRAs (tax-deferred) to Roth IRAs (tax-free) during the owner’s life.
The 2024 presidential election is already heating up, and each party’s platform could have implications on your estate plan. Every year, the president releases the administration’s budget plan, known as the Greenbook (it gets its name from its distinctive green cover), which includes proposed tax law changes. While all these proposals won’t pass, it’s important to take note of what the administration is thinking.
For example, the current Greenbook would eliminate certain grantor trusts, eliminate the step-up in basis upon death and limit the annual gift tax exclusion to $50,000 per donor, rather than $17,000 per donee. In fact, even without any congressional action, the estate tax exemption is scheduled to roll back to a projected amount of $6.8 million to $7 million ($5 million indexed for inflation from 2017) after 2025.
This gives individuals only a few years to take advantage of the higher exemption unless the president and Congress agree to extend this provision. Extending at the current level will depend on who is in control of the White House and Congress after the 2024 election. When it comes to navigating these changes, strategic and advanced planning makes all the difference.
Creative strategies and advanced planning protect your legacy
While navigating these tax changes can be a challenge, they also present real opportunities for strategic planning. For instance, the estate tax exemption changes could drive higher-net-worth individuals to set up some kind of grantor trust, like a spousal lifetime access trust (SLAT). Another strategy, and one that works best in our current higher-interest-rate environment, is a qualified personal residence trust (QPRT). This involves gifting a property to a trust but allows you to retain effective ownership for a period of time (e.g., 10 years).
At the end of the term, the property passes to the trust beneficiaries. By retaining control for a period of time, the value of the gift is reduced below fair market value. Think of it as making a gift at a discounted value. The ideal individual is someone who has a family vacation home that they want to pass to the next generation but isn’t ready to give up complete control.
A lot of tax-advantaged estate planning strategies involve giving up control of some of your money to protect it. After years spent accumulating wealth, it can be difficult to trust in the process enough to relinquish control. Particularly in times of market turmoil, emotions are even higher, and individuals who are already watching their account balances go down due to the markets and economy don’t necessarily want to give more money up by funding their trusts.
It is important to think opportunistically about where your money is going and not panic just because the market is down. One approach to calm the waters is to revert to long-term planning — focus on the signal (e.g., markets steadily rise) and not the noise (e.g., daily market fluctuations).
Be flexible and diligent
When you are going into the estate planning process, flexibility is key. You should be clear about what your goals are and ensure your documents are drafted in a way that will offer your future self some flexibility to adjust the plan for changes in those goals, or external factors such as legislative changes.
One way is by providing broad distribution standards in your documents. This gives the trustee greater ability to make distributions as times and lives change.
A few other ways include providing powers of appointment, which allows the beneficiary some control over who receives money in the future; naming a trust protector; providing the power to change the trustee; or providing reimbursement provisions for grantor trusts, which allows the trust to make distributions back to the grantor to cover tax liabilities paid for by the grantor on the trust’s income. As Congress and the IRS continue to see individuals taking advantage of tax loopholes, laws will continue to change.
It is also important to be aware that many of the acts and changes that are proposed or talked about may not ever come to fruition. This is where it is important to work closely with a trusted adviser who will know when, or when not, to make a move and can filter through what is “media noise” and what actually needs to be addressed.
Finding a balance between being proactive in adjusting your estate plan, but not overly reactive to news that you hear, is crucial.
Many individuals think of estate planning as a once-and-done event, but that could not be further from the truth. It is crucial to revisit all of your estate documents on a regular basis to ensure they are consistent with not only your overall goals, but with the current laws that are in place as well. Staying informed and in contact with your financial adviser will put you in a better position to protect your legacy and your loved ones now and into the future.
Marshall Financial Group, Inc (“Marshall Financial”) is an SEC-registered investment adviser with its principal place of business in Doylestown, Pennsylvania. For additional information about Marshall Financial, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully.
Paula is the President of Marshall Financial Group in Doylestown, Pa., and has worked in the financial services industry for 19 years. She also serves as a Senior Wealth Advisor and specializes in helping corporate executives and women in transition make complex financial life decisions with comfort and confidence. She achieved her Bachelor’s degree from Rutgers University, Master of Science from the University of Florida and MBA from NYU Stern School of Business.
How To Get the Best Savings Account Bonuses
By opening the right savings account today, you could be maximizing your earnings through both compound interest and cash bonuses.
By Erin Bendig Published
Find The Best 30-Year Mortgage Rates
30-year mortgage rates — check out the best here.
By Erin Bendig Published
Inflation and Retirement: Five Ways to Soothe Your Worries
Sometimes you can deal with inflation and economic turbulence by not doing anything at all, but there are considerations for retirement savers to keep in mind.
By Michael J. Faust, CFA Published
Remember: Retirement Accounts Are Not All Taxed the Same
How you handle your pre-tax and after-tax accounts can make a big difference in your income in retirement and the legacy you leave.
By Jerry Golden, Investment Adviser Representative Published
How to Embrace Your Financial Wellness This Fall
Economic uncertainty can take a toll on your mental health if you don’t stay on top of your financial wellness. Here’s where to start.
By Greg Ward, CFP® Published
Four Threats to the Distribution Phase of Retirement
Keep challenges such as inflation, market volatility and more in mind when it’s time for you to shift from saving for retirement to spending.
By Cliff Ambrose Published
Using a 529 Plan? Here’s What to Keep in Mind
As the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
By Julie Virta, CFP®, CFA, CTFA Published
Why We Need Medical Professionals in Investing
Medical professionals who pursue careers in investing can help support the biotech companies that create treatments that improve, and save, lives.
By Kyle Rasbach, PhD, PharmD Published
Older Doctor Just Wants to Work, But New HR Boss Changes the Rules
How do you respond when a new person comes in and won’t honor the agreement you made with their predecessor?
By H. Dennis Beaver, Esq. Published
Five Key Advantages to Working at an Employee-Owned Company
Higher job satisfaction and security are just two reasons that getting hired at a company with an Employee Stock Ownership Plan, or ESOP, could be a good career move.
By Peter Newman, CFA Published