The Perfect Storm for Estate Planning before the year end

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The Perfect Storm for Estate Planning before the year end

The pandemic has brought unprecedented challenges to the way we do and think about things. People are worried about their financial future, and what may be coming around the corner in the form of policy and consumer behavior. There is talk about looming recession and an economic down turn. The clouds gathering around us are dark and gloomy.

What is Estate Planning

This is simply the process of arranging for an orderly transfer of your assets to the people you want to receive them, it involves identifying who you want to give your assets to and when, either in your life time or at death; but sometimes done after death).

Looking at Updated beneficiary designation forms as one Estate planning we all need where it forms on life insurance policies, 401(k) accounts and other assets will generally override any conflicting provisions within a will or trust. It’s essential to make sure all forms are checked and updated regularly, ideally on an annual basis.

Two Estate Planning Documents Clients Need for College-Bound Kids

1. Health Care Directive

For health care decisions, state law applies and most states have default statutes for who can make medical decisions on your behalf. However, it is not always the order you want. This can be problematic when children are out of state at school because they might not be familiar with that state’s laws. A health care POA is most important, as it authorizes someone else to make medical decisions on behalf of the child, and gives access to medical records in the event that the child is incapacitated or temporarily unable to make decisions for their self. This document is state-specific to where it will be used.

2. Durable Power of Attorney

Another option people are selecting as well, is a durable POA to make financial decisions on their child’s behalf. This is also state-specific. The financial POA can authorize the designated agent to deal with student loans and sort out tuition bills. Both documents are relatively inexpensive and quick to put in place. It’s a good idea for parents with kids heading back to college to have them.

 Perfect storm in Estate Planning.

The Economic impact of covid 19.

The recession caused by the coronavirus has created gift and estate planning opportunities in two ways.

 Depressed Asset Values.

Asset values across all asset classes are significantly depressed, from the stock market, to real estate, to closely held businesses. Assets whose values have declined but are expected to rebound to pre-crisis values (or higher) are prime candidates for an effective gift-giving strategy.

Record Low Interest Rates.

The pandemic has resulted in record-low interest rates, including the Internal Revenue Service sanctioned interest rates (the so-called “Applicable Federal Rate” or “AFR” and the “Section 7520 Rate”), which are critical to some of the estate planning strategies discussed below. When an asset’s appreciation exceeds these IRS “hurdle rates,” the excess appreciation is effectively transferred as a tax-free gift to children or other beneficiaries. Therefore, these strategies are most successful when interest rates are low.

The schedule reduction of the gift, Estate and GST Tax exemption.

Any unused amount is available to eliminate estate and GST tax upon the individual’s death. Additionally, a surviving spouse inherits the unused gift and estate tax exemption (but not the GST tax exemption) of the first spouse to die if an election is made on a timely filed estate tax return for the first spouse’s estate. Gifts or estates in excess of the exemption amount are taxed at a flat 40% rate.

The upcoming presidential election

The upcoming election could result in changes that have a negative impact on estate planning.

Increased Taxes.

Tax may need to be increased to raise revenue for the massive federal stimulus spending enacted in response to the COVID-19 crisis. The gift, estate, and GST taxes might be seen as “low hanging fruit” or the ideal tax to raise more revenue because it will impact only the wealthiest Americans and not those perceived to be struggling the most due to the pandemic.

Accelerated Reduction in Exemption Amounts.

If the democratic party wins the presidency and control of Congress in the upcoming election, many have speculated that the exemption amount might be reduced before January 1, 2026, and to an amount as low as $3.5 million. It is also possible for the tax rate to be increased from the current 40% to 55% or even higher.

Get help

If you would like to learn more about the documents you need in estate planning, any one of our estate planning attorneys would be happy to assist you.

DISCLAIMER: The information provided in this blog is for informational purposes only and should not be considered legal advice. The content of this blog may not reflect the most current legal developments. No attorney-client relationship is formed by reading this blog or contacting Morgan Legal Group.

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