Kickstart Your Tax Planning: When to Update Your Estate Plan

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$33.3 trillion — that’s how much the entire U.S. housing market was worth in 2018. That also represents a whopping $1.9 trillion increase from its total value the year before.

With all that money invested in houses alone, owners should at least have an estate plan prepared.

Unfortunately, this isn’t the case — up to 55% of Americans don’t even have a basic plan. As for those who do, many tend to forget reviewing and updating it on a regular basis.

But remember what the wise man Franklin once said about death and taxes. Failing to update your estate plan can spell trouble for your loved ones after your death. That, or you can have the IRS on your tail due to unpaid estate taxes.

When exactly are the best times to update your estate documents though? Keep reading, as we’ve listed the most important times your plan needs a closer look (and maybe a few changes)!

Tax Education estate plan

Haven’t Reviewed Your Estate Plan in Three Years?

If so, then it’s time you have an experienced tax attorney and estate planner review it for you. This is true even if you live in states, like Michigan, without an estate tax. If you have estate outside of MI, that state may have its own specific estate tax laws.

You should also update your plan if you’re getting a secondary residence in a different state. A tax attorney and planner will help you figure out which state is your best pick as a principal residence. These tax experts can also help you acquire valid powers of attorney in your principal state.

Tax Education estate plan

Recent Changes in Federal Tax Laws

The Tax Cuts and Jobs Act led to many major changes in federal tax laws in 2018. While these changes already affected estates, lawmakers updated them for this year.

How does this affect you then?

For example, let’s say your estate is in Troy Michigan County, MI. Michigan doesn’t impose its own state estate tax, but you may still have to pay federal estate taxes. Note though that one of the 2019 tax changes is the higher estate tax and gift limits.

Back in 2018, the federal estate and gift tax exemption was set at $11.18 million per person. This 2019, the estate tax exemption went up to $11.4 million. For married folks, this can mean being exempt of up to a combined $22.8 million.

This means you can add more to your estate (up to the $11.4 million limit) and not pay taxes for it. The only time you’ll pay estate tax is if your estate is worth over $11.4 million (for single individuals) or $22.8 (for couples).

How much you’ll pay in estate taxes depends on the bracket your estate belongs in. Still, the maximum amount federal estate tax rate is only 40% of the value of your estate.

That said, if you’ve been thinking of investing in more properties, now may be the best time to update your estate. This way, you can take advantage of the higher federal estate tax exemption.

Tax Education estate plan

Changes to State-Specific Estate Tax Laws

Your own state estate laws may have also changed since the last time you reviewed your plan. Let’s take a look at some of these states that had recent changes to their estate tax laws.

Maryland

Maryland used to have a tax exemption amount equal to the federal level. With the federal exemption now doubled, that would mean the same for Maryland, right?

Unfortunately, no. On April 5, 2018, the state placed a $5 million limit to its exemption starting January 2019. Also, inflation doesn’t affect the state’s estate tax exemption, so it seems it’ll stay at $5 million.

New Jersey

On the other end of the spectrum is New Jersey, which as of January 2018, no longer imposes estate tax! The state still has inheritance tax though, so keep that in mind as you update your estate.

Also, you may have to pay transfer tax based on your relationship with the beneficiary. For example, if you’ll leave your estate to your wife or kids, there won’t be an inheritance tax imposed. Estate left to other family members, like a niece, may come with a graduated tax.

New York

Since 2014, New York had seen yearly changes to its estate tax limits. For this entire year (or before January 01, 2020), the basic exclusion amount is set at $5.74 million.

Furthermore, the state implements a “cliff” for its estate tax laws. Meaning, for an estate that goes beyond 5% of the exemption amount, the entire estate is taxable. In case the excess is less than that 5% threshold, then the estate owner pays taxes only on that excess amount.

These are only some state-specific examples. But they should be enough reason for you to see the value of regularly reviewing your estate plan. These also show you the importance of updating your plans as soon as your estate increases in worth.

Tax Education estate plan

Update Your Plan as Your Family Grows

The annual birth rate in the U.S. may be falling, but there were still 11.8 births per 1,000 persons in 2017. If your family is one of these households with a new member, it’s time to update your estate plan.

Again, a tax attorney can help you determine how a new addition to your family will affect your estate taxes. They can guide you through the best ways to include this new family member in your plan. They can also help you determine the best types of “gifts”, be it an education plan, a part of your estate, or a trust.

The same goes true if you’re planning an adoption yourself or if you now have an adopted grandchild. Speaking of adoptions, be sure to check if you’re eligible for the adoption tax credit. Eligible families may get up to a $13,840 non-refundable tax credit.

Tax Education estate plan

Whenever You Make A Substantial Investment

Let’s say you’ve made a few investments last year that only paid out really well last month. Perhaps you’re part of the lucky 30% of Americans who get to enjoy a wealth transfer in their lifetime.

Either way, both can mean a substantial addition to your assets. Even if you don’t reach the federal estate tax exemption, you should have an attorney look at your plan. This way, you can review and make changes to how you want your now-bigger estate distributed.

The same goes true if you’re expecting your assets to increase in value over time. A good example is when you’re planning to sell your business. If this will lead to your estate’s value going beyond the federal exemption, it’s time to review that plan.

With the help of your tax attorney and estate planner, you may be able to transfer some of your wealth. For instance, you can transfer some of your wealth to your kids so you can reduce your estate taxes.

… And When You Suffer Investment Losses

On the flip side, your estate may have suffered losses since the last time you updated your plan. Such considerable losses warrant a careful review of your estate documents.

Let’s say that when you executed a trust, your estate was still worth $5 million. That trust indicates that $500,000 will go towards your church and another $500,000 for charity. Your three kids and spouse will split the remainder.

Over the years though, you’ve lost quite a lot due to financial setbacks. This has led to your estate’s worth dropping to $1.5 million.

If you pass away, your church and charity may still get what your outdated trust indicates. Your four beloved family members may only end up with $125,000 apiece.

$125,000 is still a good amount, but you’d rather have more of your estate go to your loved ones, wouldn’t you? That’s why it’s crucial to always keep your tax attorney and estate planner in the loop. This way, they can help you make careful revisions to your estate planning documents.

Tax Education estate plan

Losing a Loved One

No one wants to think about losing a family member, be it a spouse or a child. Yet, death is inevitable, although many times, it is accidental.

It’s understandable if the only thing you want to do is to grieve and mourn. However, you should consider revising your estate plan soon. This is especially true if your lost loved one is your primary representative.

Don’t Delay Updating Your Estate Planning Documents

As you can see, there are just so many times that call for revisiting and revising your estate plan. Any major life changes, be it an addition or a loss, should have you reaching out to a tax attorney and estate planner.

This way, you can make sure you’re paying your taxes and that you’re paying the right amount. Most importantly, this allows you to better prepare for what the future holds.

In need of a tax attorney in Pontiac, MI or Palm Beach, FL that you can rely on to help you with your estate? Then please don’t hesitate to connect with us now! We can take care of all your estate tax headaches so you can prevent raising eyebrows in the IRS.

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