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Year-End Estate Planning Moves to Make Before December 31

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Estate planning is not “set and forget”—not by any means! With the end of the year approaching, it’s time to take stock of your estate planning goals and review your documents. This year, the review should take account of changes brought about by the 2017 tax act which, among other things, increased the federal estate and gift tax exemptions. There also were some changes made by some states that might provide new opportunities.

Perhaps the changes impacting most people in this area were the increase in the exemption to $11,180,000 (to increase to $11,400,000 in 2019)…the $10,000 limitation on state and local taxes…and the elimination of miscellaneous itemized deductions such as investment expenses.

If you have a net worth in excess of approximately $5 million, consider making lifetime gifts to use the increased exemption before it sunsets in 2026. This will, of course, depend on how much you are comfortable giving away during your lifetime so as not to leave yourself in financial hardship. If you are in a position to make large gifts, consider using a trust to make the assets transfer tax exempt for future generations and to protect the assets from creditors and divorce. Recent IRS regulations have confirmed that there would be no “clawback” of the increased exemption amount after it sunsets, thus making such gifts permanently excluded from the estate tax.There are many options to consider in structuring such transfers, including ways to continue to have access to the gifted property should you need it. For example, if you are married, consider designating not only your descendants but also your spouse as beneficiary of such a trust to maintain maximum flexibility. Single people and some married people may want to create a self-settled spendthrift trust in which one can remain a discretionary beneficiary of one’s own trust. (If this isn’t permitted in your state of residence, you can create such a trust in another state, such as Delaware.)

Consider making gifts of the annual exclusion amount ($15,000 for single people, $30,000 for married couples in 2018) to as many people as you wish without using your lifetime exemption. Such gifts must be made before December 31 of each year. Alternatively, you can use this exclusion to fund 529 accounts that can be “front loaded” with 5 years’ worth of annual gifts at once without using any of your exemption (provided a gift tax return is filed to elect such treatment). The Tax Cuts and Jobs Act provides for 529 accounts to be available for up to $10,000 per year per student for elementary school or secondary school tuition, subject to state law limitations, however. Consider making such annual gifts into the IRA account of a child or grandchild if the recipient has enough earned income for you to do so.

Reviewing your wills and other estate planning documents to confirm that there are no changes needed due to the new tax law or changes in family situations (i.e. births, deaths, marriage, divorce) is also critical. This review should also include your beneficiary designations on IRAs and insurance policies as well as designations of executors, trustees and guardians.

If you own an interest in a family partnership, consult with your attorney to determine whether there are any changes made necessary by a recent U.S. Tax Court decision, Powell v. Commissioner, which held that if a taxpayer is entitled to vote on dissolving the partnership, all assets of the partnership may be subject to estate tax on the taxpayer’s death.

If you are a beneficiary or trustee of a non-grantor trust, consider discussing with your accountant or attorney whether to make distributions of income before year end to lower-bracket beneficiaries to avoid the higher income tax rate (37% plus 3.8% surtax on investment income) that trusts pay on income over $12,500.

A good practice is to update your net worth statement with a current list of all your assets. This has become more important in recent years since many folks conduct their affairs electronically, and thus paper statements can no longer be relied upon to provide a “paper trail” when one dies or becomes disabled. You should also make a list of user names and passwords for all your accounts, including social media, so the person you designate as your executor, trustee or agent under a power of attorney can access them.

You won’t need to make every kind of estate-plan move described here every year, of course—but don’t let a year go by without at least considering whether you should. Happy holidays to all my estate-planning blog subscribers, and thank you for subscribing to The Money Blog at Bottom Line.

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