Between 2010 and 2018 the median age in Maine increased from 42.7 to 44.9, this according to the U.S. Census Bureau. That 2.2 year increase is twice the national average and a reminder that our state’s population is aging. When you consider this fact alongside the recent changes in the estate tax code, it may be likely that you’re due to reevaluate your own estate plan.
How the Estate Tax Has Evolved
If you haven’t made updates to your estate plan in a long time, it’s possible that it was put together using obsolete tax codes and exemptions.
At the turn of the century, the unified estate and gift tax exemption was a mere $675,000. It was increased to $1 million in 2002, while the top estate tax rate was 55%. Legislation gradually increased the estate tax exemption to $5 million in 2011, indexed annually for inflation, and lowered the top estate tax rate to 35%. (There was a one-year moratorium on federal estate tax for people who died in 2010.)
Along the way, the unified estate and gift tax exemptions were separated and then reunified, as they remain under current law. Therefore, any amounts used to cover lifetime gifts erode the remaining estate tax shelter.
Notably, subsequent legislation also created and then preserved a “portability” provision. This allows the estate of a surviving spouse to use the unused portion of the deceased spouse’s exemption. So, it effectively “doubled” the $5 million exemption for married couples to $10 million.
Starting in 2018, the TCJA officially doubled the estate exemption per individual from $5 million to $10 million, with annual indexing for inflation. For 2019, the exemption is $11.4 million for an individual or $22.8 million for a married couple.
While the TCJA may help you shelter all or a large portion of your estate from taxes, those provisions are scheduled to expire after 2025. For 2026 and thereafter, the law will revert to pre-2018 levels, unless Congress takes further action.
Why Estate Planning Still Matters
Given the dramatic increase in the unified estate and gift tax exemption over the last couple decades, there’s a common misconception that estate planning is only for the super-wealthy. But even if your estate is below the exemption threshold, there are a few key reasons why you should revisit and — if necessary — revise your estate plan.
Circumstances change over time, and if it’s been several years since thinking about your estate plan, you should make sure it is up to date. Is your old list of beneficiaries still complete and accurate? You may need to update your will and estate plan to reflect births and (unfortunately) deaths and divorces in the family.
Also think about the executor of your estate. The executor is the quarterback of your estate planning team. Maybe your children were minors when you originally drafted your plan but now they’re older and may be better suited to serve as executors than your aging parents.
Carefully select your executor and successor (to serve as a backup executor in case the appointed executor predeceases you or is otherwise unable to fulfill the duties). To prevent problems after you die, consider meeting with the successor to iron out any potential problems and discuss the challenges that must be met. Even if your first choice is still on board, you may periodically want to “check in” and review matters.
Your estate plan also may need an overhaul if you’ve divorced, especially if you’ve remarried and your new spouse has children of his or her own. Along the same lines, one or more of your children may have divorced, requiring adjustments to your estate plan. The need to update your plan could even extend to pets that need care if you should unexpectedly pass away.
Changes to assets and liabilities
It’s a good idea to review your estate plan any time there’s a significant change in the value of your estate, including the value of any business interests, real estate or securities you own. A major increase or decrease in the value of one asset could cause you to rethink how your holdings will be allocated among your beneficiaries. Similarly, the sale or purchase of an asset may require adjustments to your plan.
Change in residence
It’s not uncommon for Mainers to retire and spend their winters in warmer states like Florida, Texas or Arizona. Conversely, some folks from out-of-state retire and move up to Maine year round. If you count yourself among this group, it can affect your estate. State law generally controls state matters, and, therefore, the state where you legally reside can make a big difference.
The differences may range from the number of witnesses required to attest to a will to the minimum amount a spouse must inherit from an estate. Furthermore, the legal state of residence may affect other estate planning documents besides your will, such as a power of attorney, living will or advance medical directive.
If you’re planning a move to another state or have already moved, meet with a local estate planning advisor to review your current plan and determine whether changes are needed. This is especially important when you have a substantial estate for tax purposes. Sometimes, an old home state may assert that a person didn’t change his or her legal residence and continue to pursue state death tax obligations.
Estate tax changes
If you haven’t updated your estate plan since the TCJA passed, it’s worth checking in with your estate planning advisor to ensure your plan reflects current tax law. The wealthiest individuals may still set up complex estate planning strategies to shield their estates from federal estate tax. But simple trusts may still be used to protect assets from creditors and guard against spendthrift family members.
Also, remember that the estate tax provisions of the TCJA are in effect only through 2025 — and there are no guarantees the current estate tax levels will remain in effect until then. Congress could change the law again before 2026 — or make it permanent.
Moreover, the federal tax law changes don’t provide protection on the state level. So, it’s important for your estate plan to take any applicable state death taxes into account.
Time to Update
People often create an estate plan — including a will — with the best of intentions. But if you simply complete it and stick it in a desk drawer of safe deposit box, you could be defeating the purpose of the estate plan, which is to provide security for your loved ones. Without ensuring that your estate plan is in line with your intentions and current tax code, you could leave a legacy of estate tax complications and frustrations for your family members when they can least afford it — financially and emotionally. To ensure your final wishes are kept and your assets are preserved, revisit your estate plan and ensure it’s up to date, flexible and comprehensive. Then, be sure you review on a regular basis.