Although in many situations the advantages outweigh the disadvantages when selecting beneficiaries, there are always exceptions.
The new federal and state laws are requiring a more dynamic approach to estate planning in order to efficiently manage and disperse a person’s estate. These laws affect estate planning tax, trust, and charitable strategies, and the higher your net worth, the more critical it is to re-evaluate your plan.
High Net Worth Individuals (HNWI) and Ultra High Net Worth Individuals (UHNWI) can make adjustments to maximize giving before the federal estate tax threshold rollback on January 1, 2026. Unless Congress intervenes, this historically high estate exemption limit of almost $13 million per individual will be reduced by approximately half. Clients with applicable net worth need to consider using exemptions as soon as possible. Changes to current tax laws seem unlikely in the near term.
The Secure Act and Secure Act 2.0
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) and SECURE Act 2.0 introduce several retirement planning changes that have implications for estate planning, including:
- Changes to Required Minimum Distributions (RMDs) – The age when individuals must begin to take RMDs from retirement accounts will increase from 70 ½ to 72. This change may impact current retirement account distribution planning in estate plans.
- Elimination of the “Stretch IRA” – Most non-spouse beneficiaries will no longer be able to “stretch” distributions from inherited retirement accounts over their lifetimes. Instead, these beneficiaries must typically withdraw the balance within ten years of the account owner’s death. This change may affect estate plans leaving retirement accounts to non-spouse beneficiaries.
- Exceptions to the “Stretch IRA” Rule – Some eligible designated beneficiaries can still stretch distributions from inherited retirement accounts over their lifetimes. They include surviving spouses, minor children, individuals with disabilities, and individuals not more than ten years younger than the account owner. Estate plans can be modified or designed to take advantage of these exceptions and minimize the tax impact on beneficiaries.
Reviewing and updating beneficiary designations on retirement accounts is crucial to align with your estate planning goals and the new rules. These actions will ensure the desired individuals or entities receive the assets as intended and tax-efficiently.
Ongoing Market Fluctuations and Interest Rates
The current market environment is tricky regarding tax management issues in short-term investing and estate planning. Reducing losses by optimizing investment tax write-offs is a silver lining for many. Still, the monthly movement in the applicable federal rate (AFR) can affect estate planning strategies, particularly regarding the Section 7520 rate used to calculate the value of a certain annuity. Market movements and rising interest rates shift estate planning strategies to some long-overlooked strategies.
Incorporating Asset Protection Strategies
Asset protection is becoming an increasingly important aspect of estate planning. Individuals are exploring strategies incorporating new laws and regulations regarding trusts, limited liability companies (LLCs), and family limited partnerships (FLPs) to safeguard their assets from potential risks and creditors.
Some states have extended or eliminated the rule against perpetuities regarding trusts. States with these changes may allow a trust to last 100 years or some to last indefinitely. Some states allow “directed trusts,” which appoint a trustee for the legal title and property custody, while at the same time, an investment adviser is granted decision-making authority, and a distribution adviser makes decisions regarding distributions to beneficiaries.
States are competing for trust business and creating greater flexibility and additional options regarding the administration of trusts. For example, a New York resident may want to create a trust in perpetuity for their descendants. However, there is a law against NY trusts in perpetuity. Instead, they can create a trust using a Delaware trust company as trustee because, under current law, forming a trust in Delaware permits the trust to last forever.
International Estate Planning
As globalization, cross-border relationships, and increased mobility become more common, international estate planning is gaining importance. The unique challenges of planning for assets in different jurisdictions, its tax implications, and coordinating with legal systems in multiple jurisdictions and countries are key considerations in international estate planning.
Integrating Digital Estate Planning
As digital assets play a significant role in people’s lives, estate planning increasingly incorporates provisions for managing and distributing these assets. Cryptocurrencies, social media accounts, and online businesses place greater estate planning emphasis on addressing these assets. The plan may include creating digital inventories, designating digital asset trustees, and providing instructions for accessing and transferring digital assets.
Family Business Succession
Succession planning for family-owned businesses will remain an important aspect of estate planning. Ensuring a smooth transition of ownership and management to the next generation or other designated individuals can help preserve the family’s legacy and protect the value of the business.
Sustainable and Charitable Planning
The trend toward incorporating sustainable and philanthropic goals in estate plans will continue. Many individuals may include charitable bequests, establish family foundations, or incorporate environmentally-friendly strategies such as impact investing or funding renewable energy projects in their estate plans. Some trusts can support charities and provide assets to beneficiaries using a charitable lead or charitable remainder trust.
Long-term Care Planning
With the aging population and rising health care costs, there is a growing emphasis on long-term care planning in estate plans. Provisions include funding long-term care, selecting appropriate health care proxies or agents, and establishing trusts or insurance policies to cover potential expenses.
Special needs planning is a subset of long-term care for individuals with disabilities. Establishing a plan that can evolve to address the needs of these individuals using trusts, ABLE accounts, and other planning techniques can assure additional support while preserving eligibility for government benefits.
Privacy and Confidentiality
Privacy and confidentiality concerns lead individuals to explore strategies to protect their personal and financial information in their estate plans. The goals are to limit public disclosure of assets, utilize trusts and other entities for privacy, and incorporate digital security measures.
These trends reflect individuals evolving needs and priorities in estate planning relating to changes in federal and state inheritance and tax laws. It’s important to meet with an estate planning attorney to create or review an existing estate plan. Our attorneys explain how these trends may apply to your specific situation and jurisdiction and ensure compliance with current laws and regulations while looking to the future.
We hope you found this article helpful. If you have questions or would like to discuss your legal matters please contact our office at (212) 252-1212. We look forward to the opportunity to work with you.