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As 2022 draws to a close and the New Year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than in other years. While 2022 held plenty of events: the war in Ukraine, an improved “bivalent” coronavirus vaccine addressing new coronavirus variants, the U.S. midterms elections, etc., it was a relatively quiet year for legislative changes impacting planning. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning
Applicable Exclusion rises from $12.06 million in 2022 to $12.92 million in 2023.
GST Exemption rises from $12.06 million in 2022 to $12.92 million in 2023.
Annual Exclusion for present interest gifts rises to $17,000 in 2023.
Annual Exclusion for gifts to a Noncitizen Spouse rises to $175,000 in 2023.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the temporarily doubled Exclusion and Exemption to cover the transfers. You still have until January 1, 2026, before the law is set to change unless Congress changes things dramatically before then, which appears unlikely at least for the next two years given the closely divided Congress and Senate.

Income Tax Planning
Standard deduction amount:
Married, filing jointly, increases from $25,900 in 2022 to $27,700 in 2023.
Single, increases from $12,950 in 2022 to $13,850 in 2023.
Head of household, increases from $19,400 in 2022 to $20,800 in 2023.
State and Local Tax (SALT) deduction cap remain at $10,000 in 2023.
The income tax brackets creep slightly higher, as well.

As you plan for 2023, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. According to the Tax Foundation, less than 14% of taxpayers itemize each year after the TCJA. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year, and take the standard deduction in other years. You can do this by consolidating giving to a Donor Advised Fund (“DAF”) in one year. Then you can make grant recommendations from your DAF each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $17,000 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $27,000 of deductions and they’d be better off taking the standard deduction ($27,700 in 2023). Rather than giving $17,000 for each of three years to charity, they could give 3 x $17,000 ($51,000) in one year and they’d get a much better tax result. If they gave $51,000 in year 1 to a DAF, combined with their SALT deduction of $10,000, they’d have $61,000 of deductions instead of the standard deduction of $27,700. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($27,700 in 2023). The charities would get their funds each year just as usual when John and Mary make the grant recommendations from their DAF. John and Mary would get a much better tax result. In year 1, they’d have $61,000 of deductions instead of $27,700, an increase of $33,300. Their deductions in years 2 and 3 would not change, because either way they’d be taking the standard deduction in those years. Depending upon John and Mary’s income tax bracket, this increased deduction could save them over $12,000 in federal taxes alone.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2023!

As we wind down 2022 and begin planning for 2023, it’s a great time to consider your 2022 individual income taxes and explore ways to position yourself favorably for those taxes. There are still a few days left to make last-minute charitable gifts before December 31, 2022. While certain benefits like the special provision included in the Coronavirus Aid Relief and Economic Security (‘CARES’) Act and subsequently extended by the Taxpayer Certainty Disaster Relief Act of 2020 that allowed anyone (even those who take the standard deduction) to deduct up to $300 for donations to a qualifying charity on their federal income tax return ($600 for married couples) expired at the end of 2021, it’s still possible to take advantage of other favorable provisions designed to lower your overall tax bill if you are willing to itemize your deductions. Of course, this means that the taxpayer needs to do a little more work and “run the numbers” to determine whether itemizing makes sense for them.

Taxpayers who make donations to a supporting organization, Private Foundation, Charitable Remainder Trust (‘CRT’), or a Donor Advised Fund (‘DAF’) could take these charitable deductions as itemized deductions as noted above. A supporting organization is a charity that accomplishes its exempt purposes by supporting other exempt organizations, usually public charities. A Private Foundation is a trust or corporation dedicated to achieving a charitable mission created by a single individual, family, or corporation. A CRT is a trust in which the donor keeps an annuity or unitrust payment stream for a term of years or life and gives the remainder interest to a charity. The DAF is an account maintained by a charity that allows the donor to advise on how to distribute or invest amounts contributed by the donor held in the fund.

Of the above charitable vehicles, DAFs have continued to grow in popularity in recent years. According to the National Philanthropic Trust, the 2022 DAF Report found DAF donors granted at historic levels with grants to qualified charities of over $45 billion in 2021. That amount represented a 28.2% increase in donations from 2020, which was higher by 28.3% than in 2019. DAF grant payout rate was 27.3%, which exceeded the ten-year average payout rate of 22.2% demonstrating the popularity and power of the DAF as a charitable vehicle. Contributions to DAFs give an immediate income tax deduction to the donor while creating a reservoir of assets for distribution to charities in the future. In addition, DAFs provide an opportunity for donors to invest contributed funds and make suggestions regarding which charities should receive the distributions. Donors may change their recommendations regarding charitable distributions allowing great flexibility coupled with immediate benefits. Donors may combine DAFs with other strategies to produce even better results. For example, if a donor gave highly appreciated public stock to a DAF, the donor would receive an income tax deduction for the full value of the appreciated stock without ever paying tax on the gains. DAFs complement any charitable giving strategy already in effect and provide a great opportunity for those new to charitable giving to discover the benefits it provides.

Individuals making any of these gifts need to itemize their deductions to receive a charitable income tax deduction. The foregoing charitable opportunities present just a few of the myriad ways in which a taxpayer can remove the assets, as well as the appreciation on those assets, from their taxable estate and obtain an income tax charitable deduction. Year-end presents a wonderful time to consider these and other Estate Planning issues. Charitable contributions offer an excellent opportunity to give by doing good for the community and to receive an income tax charitable deduction for your efforts. Several communities are still reeling from the pandemic, have suffered high levels of inflation, and need our help now more than ever.

The headline read “Battle Over Anne Heche’s Estate Settled” when it should have read “Yet Another Celebrity Dies Without an Estate Plan.” Anne Heche was a well-known actress who died unexpectedly following a fiery car crash in August 2022. Anne left behind two sons, one of whom is 20, the other of whom is 13, and no estate plan. Her case was tragic and the results were completely avoidable in many ways. Because Anne failed to create even a basic Will, her estate will pass pursuant to the laws of intestacy in California through a public probate process. In addition, California State Statutes will determine who will receive her estate and how they will receive it. Anne’s 20-year-old son petitioned and ultimately won the right to administer his mother’s estate, despite several claims brought by the father of Anne’s 13-year-old son. While he has won this battle, the war is far from over and he will undoubtedly have his work cut out for him administering his mother’s estate. Anne’s death illustrates yet another of the many reasons why it’s vital to have an Estate Plan, regardless of your age or level of wealth.

Anne could have avoided this result by creating a comprehensive Estate Plan. A comprehensive Estate Plan consists of a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and a Health Insurance Portability and Accountability Act Authorization. These documents protect a client during life and at death and, if properly structured, can protect the beneficiaries as well. During life, the plan acts as a set of instructions regarding who makes what decision, be it medical or financial if the client is unable to make those decisions. At death, these documents dictate who controls the distribution of the estate, to whom the estate will be distributed, and when and how it will be distributed to those individuals. If the client signed a Revocable Trust, then that would keep the decedent’s plan private, unlike the public fight over who would distribute Anne’s. Of course, even if Anne had a Will, that Will would be public, although it would have allowed her to select the individual responsible for administering her estate, rather than letting the court decide who would administer the estate. While she may have named her son who now holds that responsibility, it’s entirely possible that she would have chosen someone older and with more experience in dealing with such matters. Most clients would not choose an unemployed 20-year-old to serve in this role.

If Anne had created a comprehensive Estate Plan, she could have included provisions to protect her children. For example, a lifetime trust for the benefit of each son would provide continuing asset management, divorce protection, asset protection, and estate tax protection for them. Because Anne failed to create any plan whatsoever, her eldest son will receive his inheritance outright. That will allow him unfettered access to the funds and will not protect them from the claims of his creditors. Her youngest son’s inheritance will likely end up in an account administered by someone else, potentially with significant court oversight. If Anne had taken the time to create a plan, she could have decided how she wanted each son to receive his inheritance and who would be responsible for distributing the assets to that son. By failing to create a comprehensive Estate Plan, Anne deprived her sons of these benefits and saddled them with some undesirable consequences at a time when they should have room to grieve her untimely death.

Anne’s eldest son has significant responsibilities and duties in administering her estate. He needs to collect and distribute the assets of the estate while defending various lawsuits and incurring significant attorneys’ fees, all on a public stage and while grieving the loss of his mother. Make sure that the same cannot be said for your own family by creating a comprehensive Estate Plan.

While many commentators saw the mid-term elections as an opportunity to focus on whether the Senate would remain blue and the House would turn red, they ignored other important aspects of the mid-term elections.   According to Ballotpedia, voters in 37 states considered more than just who would take office.  Folks cast ballots for a wide range of issues, such as approving the issuance of bonds for the development of low-income housing, raising the minimum wage, and increasing taxes.  You might think that with the continued rise of inflation, voters would oppose any measure that might increase their taxes, but as we will discover, that’s not always the case.

Perhaps unsurprisingly, Massachusetts, a state that has one of the highest individual income tax collections per capita ($2,477) passed a measure that would amend their state constitution by establishing an additional 4% state income tax on annual taxable income of more than $1 million, adjusted annually for inflation.  Massachusetts imposes a state income tax and taxes on both long and short-term capital gains.  Massachusetts also imposes a state estate tax on estates that exceed $1 million.  New York is the only state with a higher individual income tax collection amount per capita ($2,656).  New York also taxes individual income and capital gains and imposes a state estate tax; however, it imposes a state estate tax on estates exceeding $6.1 million.  According to Charles Schwab, Connecticut, California, and Oregon round out the top-five states with the highest individual income tax collections per capita at $2,268, $2,135, and $2,038, respectively.  Connecticut also imposes a state estate tax on estates exceeding $9.1 million and Oregon imposes a state estate tax on estates exceeding $1 million.  Oregon, along with Missouri and Montana, allows residents to deduct a portion of federal taxes paid from state tax liability.  Alabama, Iowa, and Louisiana allow a full deduction of amounts paid at the federal level.

California voters also had the opportunity to decide whether they wanted to impose additional taxes on personal income, ultimately voting against the measure to add 1.75% tax rate on income exceeding $2 million.  While California does not impose a state estate tax, it imposes an income tax and tax on capital gains at the same rate.  Alabama, Arizona, Arkansas, Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, and Wisconsin in addition to California, Connecticut, Massachusetts, New York, and Oregon all tax capital gains and individual income at graduated tax rates beginning at the low end of .25% in Oklahoma and topping out at the high end of 14.63%  in California.

As most everyone knows, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming levy no personal income taxes or taxes on capital gains at the state level.  While New Hampshire does not tax income from wages, it does impose taxes on dividend and interest income.  Finally, Washington doesn’t impose taxes on personal income or capital gains, but in 2021 a bill passed that would have imposed tax on long-term capital gains above $250,000 beginning in 2022.  It was struck down in March 2022 and Washington State has appealed the ruling to the Washington Supreme Court.  A hearing date is pending.

Six states impose an inheritance tax:  Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.  Of those, Maryland has the distinction of being the sole state in the nation that imposes an estate tax in addition to the inheritance tax.  Hawaii, Illinois, Maine, Minnesota, Rhode Island, Vermont, and Washington join Connecticut, Maryland, Massachusetts, New York, and Oregon in imposing an estate tax.  The amounts on which they impose the tax vary greatly.  As noted above, Massachusetts imposes a tax on an estate with assets exceeding $1 million as does Oregon.  Rhode Island levies tax on estates with assets exceeding $1.65 million, Washington $2.2 million, Minnesota $3 million, Illinois $4 million, Vermont $5 million, Hawaii $5.5 million, and Maine $6.01 million.  The rates at which each state imposes tax range from .08% in Rhode Island to 20% in Washington, with many of the other states topping out at 16%.

Estate planning often focuses on taxes at the federal level and advanced estate planning focuses on techniques designed to freeze the value of assets or reduce the value for estate tax purposes.  For those desiring to lower their overall tax burden, it’s important to understand the impact that the taxes imposed by the individual’s state of residence and how, if at all, to reduce that burden as well as the interplay with taxes at the federal level. 

Individuals began relocating in record numbers during the pandemic. Some moved to be closer to family, others for better weather. Still, others changed domicile for financial reasons, like the pursuit of different job opportunities, for lower taxes, or because they planned to retire. Folks desiring to relocate should consider the various taxes in the desired state of residence, especially when they are at or nearing retirement. It’s no secret that taxes vary widely from state to state. Some states may impose estate, gift, inheritance, or income taxes which could affect the decision to move. States diverge in their property and sales tax rates as well.

If the desired state of residence imposes an income tax, then the individual needs to determine what types of income would be subject to taxation and how it would affect their bottom line. States most friendly to retirees exclude Social Security benefits from taxation and provide exemptions for other common forms of retirement income, such as private pensions or Individual Retirement Accounts (“IRAs”). Additionally, states friendly to retirees have lower property and sales taxes to allow those on a fixed income to make the most of every dollar.

Eight states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not impose a state income tax. This means that a retiree’s Social Security benefits, as well as other income, are safe from state income tax liability. Of course, that shouldn’t be the only financial factor considered. Of those eight states, Florida, Nevada, Tennessee, and Wyoming impose neither an estate tax nor an inheritance tax. Nevada provides another advantage with the seventh lowest median property tax rate of just over $572 per $100,000 of home value. Unfortunately, Nevada has a combined state and local sales tax rate of 8.23%. Wyoming provides both a low combined state and local sales tax rate (5.22%) and the eleventh lowest property tax rate at $605 per $100,000 of home value.

Arizona, Alabama, Colorado, and South Carolina impose a state income tax but none impose an estate or inheritance tax. Arizona, Alabama, and South Carolina all exempt Social Security benefits from state income taxes. Colorado exempts Social Security benefits from taxation at the state level if the retiree has attained the age of 65. South Carolina allows taxpayers aged 65 and over to exclude up to $10,000 of retirement income versus $3,000 for those under the age of 65. South Carolina also allows seniors to deduct $15,000 from other taxable income as well. Colorado’s combined state and local sales tax rate comes in at 7.77% and its median property tax rate is $505 per $100,000 of home value. South Carolina bests Colorado slightly with a combined state and local sales tax rate of 7.44% but has a slightly higher median property tax rate of $566 per $100,000 of home value.

Alabama may require seniors to pay a bit more in income tax than retirees in other states because it taxes IRA and 401(k) distributions. While those facts may weigh against a move to Alabama, its median property tax rate is the second lowest in the country at $406 per $100,000 of home value. It’s average combined state and local sales tax rate is a bit high at 9.24%, but it allows anyone over the age of 65 to exempt the state portion of property taxes and allows lower-income residents an exemption from all property taxes on their principal residence.

Interestingly, a recent Kiplinger article rated Hawaii and Delaware as the number 2 and number 1 states, respectively, for retirees. Even more shocking, Florida, a state known for its large retiree population failed to make its top ten list. Perhaps less shocking, New Jersey ranked as the least retiree-friendly state with its state income tax rate ranging from 1.4% to 10.75%, it’s average combined state and local sales tax rate of 6.6%, and its median property tax rate of $2,741 per $100,000 of home value. Kiplinger based their rates on the sum of income, sales, and property tax paid by two hypothetical retired couples, both with modest assets and income levels.

In addition to considering the potential estate, gift, inheritance, income, sales, and property taxes imposed by a state, individuals desiring to relocate should consider the types of ownership the state acknowledges, for example, community or separate property, and the nuances of property ownership in that state. The property ownership and nuances of the state of residence prior to the relocation may also impact Estate Planning in the new state. The decision to move involves complex considerations regarding more than just location. Of course, retirees will want to consider weather, crime, and proximity to friends and family. I can assist in demystifying these complex considerations.

As we gather with our family, friends, and loved ones to celebrate Thanksgiving, while year-end obligations may tempt us to rush through the meal and return to “normal,” we should not. Instead, we should stop, savor the moments together, and remember why we choose to spend our time with these individuals. This time of the year offers a special opportunity to show our loved ones just how much we care. We can do this in any number of ways, including gifting.

Let’s make this year the year we give gifts that benefit both the recipient and the donor. Annual exclusion gifts provide a benefit not only to the recipient but also to the donor. Annual per donee exclusion gifts allow the donor to make gifts to multiple individuals without incurring any transfer tax consequences provided that the total gifts to an individual are present interests and do not exceed the threshold amount. Internal Revenue Code (“Code”) Section 2503(b) sets the amount that an individual taxpayer can gift to any other person at $16,000 for 2022 (which will rise to $17,000 for 2023). Giving now allows individuals to reduce the value of their taxable estate without impacting the lifetime exclusion amount of $12.06 million in 2022 (which will rise to $12.92 million in 2023). In addition to allowing the donor to avoid the use of any applicable exclusion amount, gifts remove future appreciation on the assets gifted from the donor’s estate as well.

The Code imposes no limit on the number of annual per donee exclusion gifts per taxpayer meaning that an individual taxpayer may gift up to that $16,000 amount to an unlimited number of individuals without ever worrying about estate or gift tax consequences. Gifting the funds or assets removes them from the donor’s taxable estate without ever impacting the lifetime exclusion amount. It’s one of the few totally “free” estate planning techniques. Because annual gifts reduce the size of the taxable estate, they also reduce the potential tax liability. For married couples, the benefit doubles because each spouse can gift the annual per donee exclusion amount to the same individual, and if the recipient has a spouse, then the donors can double the impact of their gifting again. Let’s review an example that demonstrates effective use of the annual per donee exclusion amount.

Assume that Mike and Carol recently met with their attorney who suggested that they start reducing the value of their taxable estate. The pending nuptials of their daughter, Cindy, caused Mike and Carol to be preoccupied. They realized that they better act quickly to utilize their 2022 annual per donee exclusion amounts. They decided to give each of their six now-married children, Greg, Marcia, Peter, Jan, Bobby, and Cindy an envelope containing $64,000 ($32,000 from each of Mike and Carol to each child, plus an additional $32,000 for each spouse of each child) at Cindy’s wedding on New Year’s Eve 2022. As the clock strikes midnight, the family rings in 2023, and Mike and Carol hand out another set of envelopes, this time, with $68,000 cash in each envelope.

In the example above, in just a few hours, Mike and Carol gave away nearly $800,000 without incurring any estate or gift tax consequences. Mike and Carol each gave $16,000 to each of their six children and their spouses, totaling $384,000 in 2022, and Mike and Carol each gave $17,000 to each of their six children and their spouses, totaling $408,000 in 2023, for a total of $792,000. In fact, Mike and Carol could each also gift $16,000 to a grandchild in 2022 and $17,000 to that same grandchild in 2023. The foregoing example demonstrates how quickly these gifts can add up and make a huge impact on an estate. In addition to using the annual exclusion gifts, the Code gives taxpayers a tax-free pass when they pay the medical bills of another individual or pay the tuition bills of a student. The Code imposes no limit on the amount of these medical and tuition gifts, as long as the amounts are paid directly to the provider. The Code also allows contributions to charitable exempt organizations. The Code imposes no limit on the amount of these contributions for gift tax purposes, which provides another easy option for those who want to do some easy estate planning. Such contributions may also qualify for an income tax deduction, up to certain percentages of the taxpayer’s adjusted gross income.

The upcoming holiday season presents the perfect time to consider these and other estate planning issues. Options may exist for use of the annual exclusion gifts in conjunction with trusts and a long-term estate plan. Giving now, rather than waiting until death provides several estate planning opportunities in the form of tax-free distributions, reduction of the gross estate, and appreciation outside of the taxable estate, not to mention the benefit to the recipient that the donor will witness while alive. I am always available to help you explore these opportunities and more to determine whether it makes sense for your family situation.

As the world continues to emerge from the pandemic, many find themselves taking trips that they had postponed. If the pandemic taught us anything, it’s that the world has become more interconnected than ever before. It’s common to hear messages about remote work, which means that individuals can work from anywhere. By extension, that means that there is a need to understand the ramifications for clients both at home and abroad, as well as for those clients who were not born here but reside here.

When I considers estate planning for an individual, I need to ascertain the client’s citizenship and residence. In addition, I need to understand the worldwide assets of the individual. The estate of a United States (U.S.) citizen includes the worldwide assets of the citizen, regardless of the location of such assets and the individual. Under Internal Revenue Code (“Code”) Section 2010, a U.S. citizen has a permanent exclusion of $5 million, adjusted for inflation. The Tax Cuts and Jobs Act of 2017 temporarily doubled the applicable exclusion through December 31, 2025. Thus, in 2022, a U.S. citizen has an exclusion from estate taxes of $12.06 million.

The temporary doubling of the exclusion offers unique planning opportunities for U.S. citizens, regardless of their country of residence. If clients have an estate that exceeds the applicable exclusion amount, it’s vital that they begin to plan for that now, while the exclusion remains doubled.

For anyone not a U.S. citizen, residence dictates how their estate will be taxed at death. If the individual resides in the U.S., even if they are not a citizen, whether here legally or not, the Code imposes tax on such individual, exactly the same as that of a U.S. citizen. If the person moves or changes residence, the result changes dramatically. A “green card” provides Lawful Permanent Resident Alien status to the holder. Thus, the green card holder pays taxes like a resident, whether or not physically residing in the United States. Someone who is neither a citizen nor resident of the United States pays tax only on their U.S. assets; however, the Code reduces the applicable exclusion amount to $60,000, rather than the $12.06 million enjoyed by a resident or citizen of the U.S.

Let’s look at an example. Jorge was born in Mexico and is a citizen of Mexico (and is not a citizen of the United States). Although Jorge has lived in the U.S. for decades, he has no documentation. Years ago, Jorge purchased shares of stock in Yahoo.com prior to it going public and made millions. He used those funds to purchase a ranch in California which has grown substantially in value to $12 million. If Jorge died today while living in the U.S., his estate would escape taxation because the applicable exclusion amount of $12.06 million would cover the value of his property.

Because of Jorge’s status, he faces the threat of deportation. If removed from the U.S., he would lose resident status. If he died after deportation, but while owning the ranch, his estate would face a significant estate tax liability. While the estate tax would apply only to his U.S. assets, the ranch represents a valuable asset. His non-resident exclusion would only cover $60,000, subjecting the remaining $11,940,000 of value to tax. While the first $1 million is subject to tax at graduated rates, the estate tax would apply on the amount above that at a rate of 40%. Jorge’s estate would owe over $4 million in U.S. estate taxes. If Jorge sought the services of a U.S. attorney, that attorney may have counseled that he could avoid tax exposure by owning the ranch in a foreign corporation, or by using other acceptable estate planning techniques.

Estate planning for the international client involves understanding numerous, and sometimes convoluted provisions of the Internal Revenue Code. Similarly complicated provisions govern gift and income taxation. Often, these clients need advice regarding the tax implications in another country as well, which means that I usually seek to partner with an expert from the other country to lay the best made plans understand the tax and legal circumstances that an international cliet may pose.

Creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding distribution of your assets. Unfortunately, as seasoned Estate Planning practitioners know, signing the documents alone does not solve every problem or guarantee that the plan will work as intended. Sometimes, mistakes occur that undermine an Estate Plan.

An Estate Plan involves more than just the documents evidencing the plan. Effective estate planning requires an understanding of an individual’s assets and how the plan will work for those assets. It also involves knowing what assets the plan won’t cover. Under normal circumstances, any asset that passes pursuant to a beneficiary designation, such as a retirement plan, life insurance, or an annuity passes outside the Estate Plan. Sometimes, these assets make up the bulk of an individual’s wealth. Thus, coordinating beneficiary designations for those assets constitutes an integral part of comprehensive Estate Planning. For example, assume that while single, Don named his brother as the beneficiary on his life insurance policy. Upon Don’s later marriage, he updates his Estate Plan leaving all his assets to his wife but fails to update the beneficiary designation for his life insurance. Upon Don’s death some years later, his life insurance passes to his brother, rather than his wife as was his stated intent. Simply put, Don could have avoided this result by updating his beneficiary designation upon his marriage.

In addition to considering beneficiary-designated assets, it’s important to consider the overall impact that taxes will have on the plan as well as the beneficiaries themselves. Obviously, it is important to understand whether the estate exceeds the Applicable Exclusion Amount ($12.06 million in 2022) which includes determining whether lifetime gifts reduced that amount. Further, if the estate will have an estate tax liability, then it’s important to consider which assets the estate will use to pay such liability. In a situation in which the client has children from a prior relationship, this matters a great deal. While assets passing to a surviving spouse do not incur an estate tax because of the unlimited marital deduction under Internal Revenue Code Section 2056, when those assets pass from the surviving spouse to the children of the first deceased spouse, a tax liability may occur and determine which party ultimately bears the taxes matters.

Finally, it is important for the client to understand the potential income tax consequences of the plan. For example, if the client has designated a beneficiary on an Individual Retirement Account (“IRA”), that beneficiary will have to pay income taxes on the distributions from the IRA unless it’s a ROTH IRA. The income tax consequences of receiving these assets may influence the client to structure their plan another way. Perhaps they intended to make a charitable bequest and after discussing the income tax consequences of distributions from an IRA decide that using a portion of the IRA to fund that charitable bequest makes more sense for their plan.

Beneficiary-designated assets and taxes make up an important part of any estate plan. As part of the complete Estate Plan, any time a birth, death, marriage, divorce, or change in financial situation or the law occurs, we need to update the beneficiary designations and consider anew the tax implications. Mistakes happen in many ways and lead to various unintended and potentially catastrophic consequences for the loved ones of those who fail to plan. These mistakes may make an impact during the life of the individual who failed to plan, and they certainly cause problems at death. Making matters worse, these mistakes may cause lasting trouble after an individual’s death either through an unnecessary (and possibly expensive or time-consuming) probate process or by improper planning for the intended beneficiary which takes numerous forms.

Creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, as most understand, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, there are things that the grantor or testator does or fails to do that undermine an Estate Plan.

Some clients prefer to avoid hiring an attorney for estate planning and take matters into their hands by titling assets so that said assets pass outside of probate. Of course, clients have other ways to avoid using the services of an attorney. Numerous organizations such as Legal Zoom, RocketLawyer, and Will Maker all claim to permit an individual to create estate planning documents without hiring or consulting an attorney. Documents created using these services sometimes lack basic elements such as a residuary clause, fail to include lapse beneficiaries, or fail to meet the statutory requirements for validity. Any items not specifically devised by a Will or Trust, or things not owned at the creation of the documents pass pursuant to the terms of the residuary clause. If the documents do not contain the residuary clause, it’s not clear how those assets will pass. Likewise, if the Will or Trust fails to name lapse beneficiaries, that also causes problems. For example, if a specific devisee predeceases the testator or grantor and there’s no lapse beneficiary, then the assets pass to the residuary beneficiary which may or may not have been the grantor’s intent. If the residuary beneficiary predeceases the grantor and there’s no lapse beneficiary, or if the documents lack a residuary clause, that creates even more confusion. In situations in which the documents lack a residuary clause or lapse beneficiaries, the fiduciary likely would need to petition the court for an order directing the distribution of the assets. This causes a delay in the distribution of the assets along with increased expense for the estate ultimately reducing the amount passing to the beneficiaries.

Even if an individual retains the services of an attorney to create their Estate Plan, that’s not the end of the attorney’s role. The client should consult the attorney to update the plan whenever major life changes occur. The death of a spouse, being one of the most critical such life events. Upon the death of a spouse, the surviving spouse should contact me to ensure proper administration of the estate and trust. If a client fails to contact me upon the death of their spouse that can cause significant issues. For example, many estate plans utilize a “Family Trust” or “Credit Shelter Trust” to hold assets of the decedent spouse equal to their unused Applicable Exclusion Amount. Pursuant to Internal Revenue Code Section 2010, in 2022 an individual may transfer up to $12.06 million (the Applicable Exclusion Amount) upon their death without the imposition of transfer tax. Some Estate Plans with a Family Trust requires the establishment of that trust as soon as practical after the death of an individual. If a Trustee fails to do this, said Trustee has breached their fiduciary duties to the beneficiaries of the Trust. Further, imagine the difficulty in trying to fund that Family Trust several years later when assets may have changed in value, been sold, or have otherwise been depleted.

Even if the decedent’s plan did not mandate the creation of a separate Trust, other decisions impact the estate and trust. For example, perhaps an intended beneficiary recently won the lottery. That beneficiary could disclaim an inheritance and let it pass to the next beneficiary under the plan. A qualified disclaimer under Internal Revenue Code Section 2518 allows an individual to refuse a gift or bequest without transfer tax consequence and must be made within nine months of the creation of the interest. I always walk an individual through the process and he/she will know the requirements for a qualified disclaimer. Many plans that leave everything to a surviving spouse include disclaimer language that gives the surviving spouse the option to decide whether to disclaim assets and use the decedent spouse’s unused Applicable Exclusion Amount thereby saving estate taxes upon the surviving spouse’s later death.

Creating an Estate Plan without an attorney saves neither time nor expense, in fact, it’s likely to cost the family more in the long term.

Creating an Estate Plan that includes a Revocable Trust, Pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, there are things that the grantor or testator does or fails to do that undermine an Estate Plan.

Creating an Estate Plan requires an individual to disclose sensitive information to create the plan. Many of us agonize over a discussion focusing on mortality, yet that’s exactly what a discussion about Estate Planning does. A comprehensive Estate Plan though implements a plan for that eventuality. People creating an Estate Plan often make the mistake of failing to inform their beneficiaries and fiduciaries of the plan. While the conversation may be awkward, having it not only lets your loved ones know of your plan and their role therein but also prevents hurt feelings and potential litigation if the plan deviates from a beneficiary’s expectation.

Clients may hesitate to discuss their plan because they worry that a beneficiary who knows that they will receive an inheritance will lose motivation to work hard. Others may worry that disclosing the information will cause current conflict or believe that the details of their plan should remain private until after their death. Still, others may have a hard time assessing family dynamics or the limitations of their intended beneficiaries. An experienced Estate Planning practitioner assists a client in working through these concerns and encourages an open dialogue with the beneficiaries and fiduciaries to reduce conflict after death. As Trust and Estate litigators know, a beneficiary whose inheritance failed to meet their expectations makes a great client. Plenty of contentious battles begin because the grantor treated one beneficiary differently than another or one person decided something of which another disapproved.

Having a conversation with the beneficiaries during and at the end of the process provides several benefits. First, it allows the client to provide the beneficiary with their underlying reasoning or motivation for creating the plan. That helps the client understand and manage the beneficiary’s expectations and address the beneficiary’s questions or concerns. Second, the conversation might help the grantor or testator better understand the beneficiary’s needs. That conversation may serve as motivation for the beneficiary to undertake their own Estate Planning. Third, the conversation helps prepare the beneficiary for experiencing the testator’s end-of-life. Imagine a healthcare agent faced with the decision to terminate life support, now imagine they never had a conversation with the individual hooked up to the machines. Imagine trying to make that decision without all the information. A conversation about your wishes with those who will make the decision reassures them that they know what to do when the time comes.

Having a tough conservation with your beneficiaries about the contents of your plan goes a long way toward preventing litigation. Unfortunately, it can’t prevent all litigation. The plan itself also plays a role. If the plan fails to address incapacity, that could cause significant issues. A comprehensive Estate Plan that includes all the documents noted above addresses incapacity if the Revocable Trust has been funded and contains provisions regarding who serves as Trustee if the original Trustee (who is typically the Trustor) cannot because of incapacity and how distributions from the Trust should be made during the period of incapacity. If there are assets outside the Trust, then the Attorney-in-Fact acting under the Property Power of Attorney can make decisions about those assets. Relying upon the Property Power of Attorney could cause issues if the Power of Attorney is outdated or otherwise insufficient. In any scenario, the individual acting pursuant to the Health Care Power of Attorney will control decisions regarding health care for the incapacitated individual. If an Estate Plan lacks these documents or the documents don’t properly address and plan for incapacity, then the family or loved ones will have to go through the time, effort, and expense of initiating incapacity proceedings.

As this article has demonstrated, while there are reasons that folks want to keep the details of their Estate Plan secret, that can backfire in big ways. Further, failure to include provisions in an Estate Plan can result in expensive litigation for the estate, ultimately reducing the benefit to the beneficiaries. I encourage clients to have tough conversations, includes provisions that address a range of circumstances that the client might experience in their life, and ultimately creates a plan that honors their legacy and protects their beneficiaries. Any plan that fails to address these matters ultimately fails the creator of the plan and their loved ones, at a time when they are least equipped to deal with it.