For advisors, the beginning of the year is a good time to follow up with clients and help them revisit the basics of estate planning as well as to flag new trends and legislation. This year is no exception. New presidents are often accompanied by new policies, and with tax season on the horizon, the next few months are a great time to review and possibly revise current plans.
New Estate Planning Trends to Watch
There are four estate-planning best practices that are worth addressing with clients regularly, but there are also two new issues advisors must be aware of this year.
Staying Updated About Upcoming Changes. We have a new president, and there has been much discussion about the possible demise of the “death tax.” President Donald Trump’s plan calls for a repeal of the current estate tax, and a capital gains tax on estate assets in excess of $10 million with an exemption for family farms and small businesses. There is some discussion about whether the capital gains tax would be payable upon the death of the property owner, or upon the sale of the asset by the inheritor. Regardless, this would represent a change in the top tax rate from 40% (estate tax) to 20% (capital gains tax), a significant reduction for individuals and families impacted by the change.
(Related: Investing in Times of Trump, and Inflation)
What Your Peers Are Reading
Another potential change in the tax legislation involves the possible elimination of the “stretch IRA.” Under the current law, a beneficiary inheriting an IRA can opt to “stretch” the distribution of the account over his or her life expectancy, thereby deferring the payment of taxes on withdrawals for many years.
Last fall, the Senate Finance Committee passed proposed legislation called the Retirement Enhancement and Savings Acts of 2016 (RESA), which eliminates the stretch IRA, requiring individuals who inherit IRAs to withdraw funds over the five-year period following the original owner’s passing. This proposal applies only to balances in excess of $450,000, and is estimated to generate over $3 billion in additional revenue through 2026. (See “Why Estate Planning Still Matters in an Uncertain Tax Environment” for more on tax management in estate planning.)
Ensuring Access to Digital Assets. We live in a digital age, and the growth and definition of digital assets are a challenge for the estate planning industry, which is used to operating with physical and tangible assets. Nevertheless, the proliferation of digital tools over the past few decades has created assets and property worth preserving, despite their temporality and difficulty to value. It is up to advisors to create a true framework to ensure that such property is protected.
Some digital assets are familiar. These items include downloaded content and uploaded original property, such as photos and videos. Other types, however, are more complex, such as domain ownership or digital currencies like bitcoin.
One major obstacle to collecting and protecting digital assets within an estate plan comes from the ability to gain access to them. There are at least four significant, unique obstacles to accessing digital assets that aren’t encountered when dealing with more traditional types of assets: passwords, data encryption, legal authorization laws and data privacy laws. All of these can complicate retrieval of the asset by the family or fiduciaries, even if the asset should be accessible to a loved one. In the case of digital assets, access should never be taken for granted, and can be revoked or restricted depending on laws, service providers or other agreements.
Currently, the Revised Uniform Fiduciary Access to Digital Assets Act by the Uniform Law Commission provides the clearest legislation on access to digital assets. In the most recent revision of the Act in 2015, estate representatives may not obtain the contents of a deceased’s electronic communications unless that person has consented to the disclosure. So far, legislation governing access to digital accounts in the event of the account holder’s death has been introduced in at least 32 states, and at least 20 states have enacted such laws, according to the National Conference of State Legislatures.
As an advisor, the recommendation for clients should always be that they keep a list of passwords to digital accounts in a safe place, and to have some notion of what types of digital assets they would like to have preserved and open or restrict access for.
Once you’ve established a full understanding of the client’s digital assets, it is helpful to examine the transfer restrictions on his or her digital accounts, and incorporate specific authorizations in powers of attorney, revocable trusts, wills or other estate documents.
Estate Planning Best Practices
Clarify the Intent of Estate Planning. Everyone has an estate plan, even if they haven’t created one. For those who do not explicitly create an estate plan, the state in which they live has one for them by default.
Getting clients to understand how this default plan would impact them personally is usually an impetus for them to create their own estate plan. More often than not the default plan does not properly address and may even oppose the wishes of the client. Estate plan reviews should take place at least every three to five years and during major life changes, such as births or deaths in the family, marriage, divorce and retirement.
Many clients mistakenly believe that creating an estate plan means they are expected to make decisions they are not ready to make. This is far from the truth, and advisors can assist by breaking the planning process into segments that are easily understandable to the client. Start with the basics, then branch out into more complicated sections that require deeper deliberation. Even if the client is hesitant to make more complex decisions, at least there is a basic plan in place that will carry out their wishes.