A commitment to employees, clients and community: The Bonadio Group’s response to COVID-19. View Here

5 Estate Planning Tips in Current Times

Your estate plan is an integral part of your overall financial plan, but often is neglected or not fully in order. There’s more to it than just the legal documents and you can benefit from guidance from more than just your attorney. If you own a construction company, care needs to be taken with gifting or succession planning strategies. The following are some things to consider when addressing your own estate plan.

Tip #1: You Need a Current Will

Your will is an important document that allows you to:

  • Name an executor to administer your estate.
  • Name a guardian for your minor children. Otherwise, the courts would decide that for you (yikes!).
  • Direct who gets your assets, how, and when. That’s much better than the state deciding that for you. If you die without a will in New York, not only might you leave a mess for your family, but your spouse will get the first $50k, then only 50 percent of the remainder. Your kids equally split the rest. Would that leave enough for your spouse?
  • Establish trusts and name trustees for:
    • Minor children (this could come in handy for your beneficiary designations).
    • Estate tax savings.
    • Asset protection purposes (lawsuit, divorce, re-marriage, kids from a prior marriage, spouse on Medicaid, etc.).
    • A child or grandchild who has special needs.

Tip #2: There’s More to Your Estate Plan Than Just Your Will

It’s important to understand how everything comes together to be sure it would work as you intend. Your will only directs the distribution of non-beneficiary designated assets titled in your own name. It doesn’t direct the distribution of:

  • Most joint assets.
  • Beneficiary-designated assets such as your retirement accounts, annuities, or life insurance.
  • Accounts that have a transfer-on-death (TOD) designation.

Your will might be well-written and current, but your estate plan still might not work the way you intend. Trusts you meant to have your assets flow into might not get created and funded. That can cause unnecessary estate taxes, risk disinheriting kids from a prior marriage, or leave assets to a minor, causing court involvement. Sometimes it’s thrown off after you had everything all set because the make-up of your finances change (i.e. account ownership, balances, beneficiary designations, etc). It’s important to stay on top of the financial aspects as well as the legal documents.

In addition to your will and possibly a revocable trust, beneficiary designations, and strategic account titling, a comprehensive estate plan includes:

  • Power of attorney to handle your finances if you can’t.
  • Health care proxy to make medical decisions if you are unable to.
  • Living will to express your wishes regarding life support and organ donation.

Tip #3: Determine if Federal and/or State Estate Taxes are an Issue and Plan Accordingly

Federal Estate/Gift Tax

The 2021 federal estate/gift exclusion is $11.7M, to use during lifetime or at death. Any unused exclusion can be carried over to the surviving spouse. That means a married couple can shelter up to $23.4M of assets from federal estate and gift tax – for now.

As a gift tax freebie, the annual exclusion enables you to give up to $15k, or $30k between spouses, to anyone you want each year. Other freebies include unlimited medical and tuition if paid directly to the institution.

State Estate Tax

Some states don’t have an estate tax. Some have a $1M estate exclusion. New York’s exclusion starts out high but could be phased-out to $0! The New York estate exclusion is $5.93M, but you must use it, or you’ll lose it. Your unused exclusion doesn’t carry over to the surviving spouse, so anything left gets wasted. If your estate exceeds the exclusion by more than 5 percent, the exclusion is fully phased out, leaving nothing (the cliff). Both factors make planning for the state estate tax even more critical.

New York doesn’t have a gift tax, so gifted assets are effectively removed from your estate if you live at least 3 years from the date of the gift.

The New York budget proposals include provisions to raise the estate tax rate a bit, but nothing is proposed to decrease the estate exclusion, remove the cliff, or resurrect the gift tax.

When you total up all your assets, you might think you don’t have an estate tax if it falls below the federal and/or state exclusion levels, but that might not be the case. It all depends on the flow of your assets by your will and outside your will.

Tip #4: For Large Estates, Make Gifts to Lock in the High Federal Exclusion Before it Goes Away

Biden has proposed dropping the federal estate exclusion down possibly to as low as $3.5M with only $1M of that for lifetime gifting. The estate tax rate might increase too. It’s possible the estate tax law won’t change until 2022, so time is of the essence if you’re able to lock in that high exclusion while you still have it. Any gifting also removes the future appreciation from compounding your estate.

There are many gifting techniques available. It’s a question of which ones best fit your financial, tax, and estate tax situation and then how best to customize them.

Consider whether charitable giving techniques during lifetime vs at death make sense to reduce your estate while also giving you an income tax deduction.

Tip #5: Plan for and Around Your Business

Most business owners don’t have a comprehensive estate plan or it’s outdated. If you own a business, you have even more to consider, including employees, co-owners, your goals for the business, and family financial security. Here are some questions to consider:

  • What would happen to the business if something happens to you?
  • If you have other owners, is there a buy/sell agreement? Is it properly funded? How is the company value determined?
  • Would your interest be sold (externally or internally) or the company liquidated to turn it into cash?
  • Or would it be bought out over time by a note? Would there be sufficient liquidity for family in the meantime and where would they be if the note is defaulted on?
  • If you leave it to a child, would that leave sufficient assets to meet your goals for other children?
  • Where would any estate taxes be paid from? Maybe you think there’d be enough left to fulfill your goals for your other children, but the estate tax bleeds the remainder of your estate dry.
  • Would there be sufficient liquidity to cover debts, estate taxes, and estate settlement costs to avoid a fire sale of the business?
  • If you have a life insurance trust, understand how the mechanics would work to make sure there’s no unintended consequences.

If you have decided you want to gift the business to family and have determined you can afford to do so, now may be a good time to do that while the federal exclusion is so high. There are many strategies, but the right one must fit the personal and business financial, cash and tax situation. The cyclical nature of the construction industry needs to be considered when selecting and designing strategies to make sure they’d still work during difficult economic times. Banking and bonding requirements need to be factored in as well.

It’s likely worth having a review of how everything comes together to make sure everything would work the way you want, and you’ve taken advantage of every opportunity available for your situation. Our accounting, tax, and financial planning expertise makes us uniquely qualified to guide you through the process. Contact us today to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.