Estate planning is a topic that advisors and clients often avoid. As investors, we know this is something we need to do, but its easy to postpone taking action until its too late. And from the advisors point of view, it can be uncomfortable to start a conversation about death and incapacity.
For a variety of reasons, clients will put off the task of updating their estate plan, even if they know tax laws have changed. Sometimes, their will or trust was created when their children were in high school and now those kids are married with families of their own. To get clients moving, bring up the idea of a freshness date.
Most people understand this concept. If you find something in your fridge with a really old date on it, you wouldnt eat it. How do you know if an estate plan is out-of-date?
If your will or trust predates these four key freshness dates, it may not work the way you intended.
The first date to keep in mind in April 14, 2003, which is when the privacy rule under the Health Insurance Portability and Accountability Act took effect. Although HIPAA was enacted in 1996, its privacy regulations were promulgated several years later, with a required compliance date of April 14, 2003.
The HIPAA privacy rule imposed strict guidelines on the disclosure of protected health information without the patients explicit permission. While these privacy protections are wise, they can also become problematic if your executor, trustee or agent (under a durable power of attorney) needs to deal with your employer, insurer or medical providers such as doctors, clinics and hospitals. Due to this rule, in order to act on your behalf, an authorized person must have a written document executed by you, with very specific language mandated by HIPAA.
If your will, revocable trust, durable power of attorney or health care power of attorney was executed before April 14, 2003, your executor, trustee or agent may not be able to work effectively with your medical providers and insurers. To fix this problem, have an attorney update your documents to include the language required by HIPAA.
STATE OF STATE ESTATE TAXES
This date is important if your client lives in a state that imposes its own state-level estate or inheritance tax.
Before 2001, there was a federal credit for state death taxes (the size of the credit varied with the size of the estate). Back then, there was not much incentive to make plans for avoiding state death taxes because those taxes were fully offset by the federal credit.
But the Economic Growth and Tax Relief Act of 2001 phased out the credit between 2002 and 2004. As a result, since Jan. 1, 2005, state estate or inheritance taxes apply on top of any federal estate tax. Today, 15 states impose their own state estate tax, seven states have an inheritance tax and a few states have both.
If your clients live in a state that imposes its own estate tax and their wills or revocable trusts were executed before 2005, they should visit their attorney to start planning for those taxes.
This is the date of enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which increased the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million.
Before 2010, the threshold for owing federal estate taxes was much lower; the exclusion was just $600,000 in 1996, for instance, and $1 million in 2001. Effectively, TRA 2010 eliminated the federal estate tax for thousands of people.
If your estate plan was created before Dec. 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Your attorney might be able to recommend a simpler plan now.
In other situations, however, your estate plan may need to become more complex. For example, if you live in one of the 20 states that imposes a state estate tax or inheritance tax, your attorney might favor new strategies to deal with state estate taxes, which often begin at a much lower threshold.
The key point to remember is that tax laws are drastically different today, so documents drafted before Dec. 17, 2010, may produce unexpected or unfavorable results.
This date is important for married couples with a combined taxable estate exceeding $5.43 million. The American Taxpayer Relief Act of 2012 became law on Jan. 2, 2013, and made the portability election a regular feature of federal estate tax planning. This election lets an executor transfer a deceased spouses unused federal estate tax exclusion to a surviving spouse, which can be an important estate-planning tool. In effect, the surviving spouse can stack up the deceased spouses exclusion on top of his or her own exclusion.
If you are married and your will or trust was drafted before Jan. 2, 2013, you could be missing some valuable tax planning opportunities.
Traditional estate tax planning strategies for married couples relied on creating a credit shelter or bypass trust that would not be part of the surviving spouses taxable estate.
However, assets in this trust are not eligible for whats known as a step up in cost basis at the death of the surviving spouse. (A step-up means no capital gains taxes will be due upon your death on the assets that grew while you held them; if the assets were sold in the future, taxes would be due only on the gain since the inheritance).
Today, your attorney might recommend one of several new strategies, which could help heirs save considerable amounts of capital gain taxes.
But they dont apply to everyone. Your clients should talk to your estate planning attorney.
Advisors shouldnt try to be experts on estate planning and interpret documents. Simply having a meaningful conversation on whether a clients existing estate plan predates one of the freshness dates is a good first step for them.
If you make it a regular practice to ask about these dates in client reviews, you will show that you thinking about their overall financial planning situation and build loyalty.
Daniel Prebish is director of Life Event Services at Wells Fargo Advisors.