As an estate planning attorney, I have been asked frequently about the impact that the Tax Cuts and Jobs Act of 2017 (TCJA) will have on planning due to the doubling of the exemption for the estate, gift, and generation-skipping taxes. As a result of this change, an individual can transfer up to $11,200,000, and a married couple can transfer up to $22,400,000, with no Federal Estate Tax liability. This is important because the marginal federal tax rate remains at 40%. As such, many assume that this change will result in less of a need for planning. The reality of the situation is that regardless of the changes set forth in the TCJA, there are significant nontax related issues that every family should consider.
Estate planning has two distant goals, each having equal importance. The first goal is tax planning. As stated above, the changes the TCJA has made to the exemption for the estate, gift, and generation-skipping taxes makes it less likely that an individual or family will be subject to the Federal Estate Tax. On its face this may support the argument that advanced planning is not necessary; however, the TCJA has no impact on state taxes, so individuals living in states with significant estate or inheritance taxes will still have ample immediate tax planning opportunities. Also, the TCJA changes to the applicable exemption are only temporary and scheduled to revert back to the 2017 levels (adjusted for inflation) beginning January 1, 2026. So even though a married couple may not have $22,400,000 in assets now, a couple that meets the prior exemption should still consider implementing some type of tax plan. Also, we simply do not know if the next administration will continue with these changes, and it is certainly possible that the exemption amount gets reduced earlier than 2026. As such, tax planning should always be considered, even if assets fall within the current exemption levels.
The second goal of estate planning is family planning. This can be described as nontax related planning that every family should consider, irrespective of wealth. Nontax planning includes distribution of assets, asset protection, financial provisions for children, guardianships for minor children, business succession planning, special needs trusts, the appointment of agents to handle finances and health decisions in the event of incapacity, etc. It can be difficult to discuss and make decisions about your impending death, but I always like to tell clients to think about it as an investment. By spending a little time planning now, you can save your family a lot of heartache and expense at a later date.
In Spite of the Tax Cuts and Jobs Act of 2017, we still recommend that every family member consider the following documents:
Will
A Will is a document that allows a person to set forth their wishes upon death. This includes the disposition of assets, appointment of persons to care for minor children (“guardian”), appointment of persons to manage assets passing to minor children (“trustee”), determination of how assets will be managed on behalf of minor children (“minor’s trust”), and appointment of persons to handle your affairs (“executor”). A Will can be as simple or complex as one desires. A good estate planning attorney will take the time to get to know you personally, review your assets and how they are titled, review beneficiary designations on life insurance and retirement assets, understand your wishes and desires, and then draft a Will specific to your individual needs.
Durable Power of Attorney
A Durable Power of Attorney (“DPOA”) is a document that an individual can use to appoint someone (“Agent”) to handle their financial affairs if they are mentally or physically incapacitated. A DPOA is a very powerful document, and I describe that power to my clients as ‘allowing someone to step into your shoes to handle your money just as you would yourself.’ The DPOA grants broad powers and allows the Agent to perform everyday tasks such as banking, paying bills, buying and selling assets, opening and closing bank accounts, authorizing medical care, and managing different services, including government services. The DPOA is critical for elderly clients and those showing beginning stages of dementia and Alzheimer’s disease, but it is also very important for all individuals to appoint someone to assist in this capacity. A good estate planning attorney will help a person understand the powers this document bestows, but also to help identify individuals to serve in that capacity. If a person does not have a DPOA and someone has to act on their behalf, the process to get someone appointed as guardian can be expensive and time-consuming.
Health Care Power of Attorney
A Health Care Power of Attorney (“HCPOA”) is a document that an individual can use to appoint someone (“Health Care Agent”) to make health-related decisions if they are mentally or physically incapacitated. Most HCPOA’s contain a Living Will portion, whereby the individual can express how they wish to be cared for, and what types of medical treatments they wish, and do not wish, to receive. Clients often struggle with this discussion, but I always remind them that it takes the burden off of family members when they know your wishes and desires.
Clients often ask what happens if they change their mind? It is important to note that the HCPOA is only applicable if the person is deemed incapacitated and unable to make healthcare decisions on their own. So long as you have the capacity, your immediate wishes will always supersede the HCPOA. It is also important to note that for persons who have not signed an HCPOA, doctors are ethically and legally obligated to administer all treatment options to keep you alive, even if that means that you will be in a permanent vegetative state.
Standby Guardianship
While a Will allows a person to appoint a testamentary guardian, this individual does not possess the necessary powers of the guardian until they petition the Court and a Judge signs an Order. This process can take time and be expensive. As such, we recommend that our clients sign a Standby Guardianship. This gives the guardian full power and authority to act as guardian for a period of sixty (60) days prior to having to file a petition with the Court to have the guardianship confirmed and possibly continued.
The Standby Guardianship is a powerful document. It can be helpful in short-term situations whereby a parent may be traveling out of the country, but it can also be used in longer term situations whereby parents are tragically killed in an accident, by permitting the immediate appointment of a guardian without Court approval. It allows for a more seamless and less stressful transition for minor children.
Beneficiary Designations
You have probably heard the term probate. This is the process that happens when someone dies, and their Will is registered with the Court. The Court then provides oversight to ensure the terms of the Will are followed and assets get distributed pursuant to that person’s wishes. It is important to note that the Court will only provide oversight of probate assets. These are assets that do not have their own beneficiary designations, and which pass under the terms of the Will. There are a number of assets such as life insurance, annuities, 401(K) retirement plans, IRAs, etc., that are considered non-probate assets. These assets have their own beneficiary designations, and distribution of these assets is not controlled by a person’s Will. As such, a good estate planning attorney will always review beneficiary designations with a client to ensure they still meet that person’s intentions and are compatible with the overall plan.
As you can see, just because the changes set forth by the TCJA will result in fewer families having to worry about Federal Estate Tax liability, there is still a tremendous opportunity to help families plan. A small investment in time and money now will result in less heartache and angst for family members in the future.
20 Pa.C.S.A. § 2501 et seq
20 Pa.C.S.A. § 5601 et seq.
20 Pa.C.S.A. § 5421 et seq.
23 Pa.C.S.A. § 5601 et seq.
Stephen Porter is an associate attorney in the MacElree Harvey’s Estate Planning Department. Licensed in Pennsylvania, Stephen helps families, and small business owners, develop plans and documents to ensure their businesses and loved ones are taken care of upon death.
To learn more about Steve’s practice email him at [email protected],
or call (610) 840-0256.
