Year-end Planning

Get your estate plans in order—and check your list twice

Tax planning is one good reason to revisit your estate plan at the end of each year, but it's not the only one.

If you've experienced a change in marital status, celebrated the birth of a child or grandchild, lost a loved one or watched your assets change in value, your will, trust fund, power of attorney and other estate-planning documents may no longer reflect your financial intent.

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"There are lots of reasons to periodically look at your estate plan to be sure it is up to date," said Carol Kroch, managing director of wealth and philanthropic planning for Wilmington Trust.

It's important to change your beneficiaries, for example, if you divorce or remarry, or the person you expected to pass your assets to precedes you in death. Be forewarned: If you change your will post-divorce but forget to amend your individual retirement account beneficiary form, your ex-spouse will be legally entitled to your IRA assets when you die, since the IRA beneficiary form overrides your will.

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It may also be necessary to redistribute assets named in your will if the house you plan to pass to your daughter is now worth more than the IRA you have earmarked for your son.

Ideally, your health-care proxy—also called a living will—and financial power of attorney, which are among the most important legal documents in your estate-planning arsenal, should also be revised if you move out of state, Kroch said.

The powers that be

"Since there are different estate and probate laws in each state, on top of the federal laws, it's always better to have those documents in the state where you reside," she said, noting it's easier on family members, who will already be suffering emotional stress, to minimize legal hassle. "If you end up in a hospital in New York state, you want the institutions you will be working with to be familiar with your paperwork."

A durable financial power of attorney is a legal document that designates an individual to manage your financial affairs according to your wishes should you become incapacitated.

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Similarly, a health-care proxy allows you to designate someone to make medical decisions on your behalf should you become unable to do so. It also allows you to declare your preferences regarding life-sustaining procedures and end-of-life care.

While beneficiaries and powers of attorney get priority treatment in any estate-plan review, it's important as well to consider the people who will carry out the terms of your will.

Advisors prep clients for 2015
Advisors prep clients for 2015

"Oftentimes, people don't pay as much attention to who they have named as executors and trustees," said Mitchell Drossman, an estate-planning attorney and national director of wealth planning strategies for U.S. Trust. "They forget about updating them."

You may change your mind as the years tick on about who is best suited to assume those roles, he said, or forget to name a successor if your trustee or executor dies first.

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Likewise, if you named a legal guardian for your children, the oldest of whom is now 18, you may no longer need that safety net in place. "We sometimes see the naming of the oldest child as the guardian of the younger siblings, since they've reached the age of majority," Drossman said. "Not necessarily for their money but for their care."

There's no specific urgency to review or amend your estate-planning documents by Dec. 31, said Drossman.

Now's the time

But like changing the smoke detector batteries in your home, it does make sense to put it on your to-do list at the same time each year.

And with your investment portfolio already on the table for tax-planning purposes, the year-end is as good a time as any to put your financial future under the lens.

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"When it comes to estate planning, the turn of the calendar is not necessarily significant, but there are a few decisions, primarily tax-related, that impact your estate that may need to be executed by the end of the year," he said.

Those who wish to give money away to their loved ones, for example, must give monetary gifts (and the checks must be cashed) by Dec. 31 to qualify for this year's annual gift-tax exclusion.

The annual exclusion allows you to give away up to $14,000 ($28,000 for married couples) in 2014 to as many people as you like without those gifts counting against your $5.34 million lifetime exemption.

You must also donate to charity before year-end to claim the current year charitable gift-tax deduction. Contributions are limited to 50 percent of your adjusted gross income and may be limited to 30 percent or 20 percent of your AGI, depending on the type of gift made and the type of organization to which you donate.

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Highly appreciated property that qualifies for capital gains treatment, including stocks, real estate, antiques and art, yield the biggest return, since you avoid the taxable gain on the donated amount and the charity receives the fair market value.

If you're donating to reduce your taxable income, however, consult your accountant first. You may be subject to thresholds or phaseouts that limit your ability to deduct your contribution, Drossman said.

You have to be sure that your documents are up to date after every change in circumstance.
Mitchell Drossman
national director of wealth planning strategies for U.S. Trust

While you should be able to determine whether your beneficiaries and powers of attorney are current at a glance, you will need the help of an attorney to revise any documents as needed and to determine where any holes in your estate plan may lie.

Many people, for example, make the mistake of setting up a revocable living trust, which is supposed to ensure that assets titled in the name of the trust fall outside of probate, but they forget to actually put those assets into the trust, said Wilmington Trust's Kroch.

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"It's the document-in-the-drawer syndrome," she said. "If you don't put anything in it, you don't make the trust a living, breathing thing, and your will then will govern it all. These two documents should work together."

Proper estate planning ensures that your assets will be preserved, protected and distributed according to your wishes after you die, said U.S. Trust's Drossman. But it's not a "set it and forget it" tool.

"You have to be sure that your documents are up to date after every change in circumstance," he said. "A birth, death, change of address, marriage or divorce can have a real material effect on your estate plan.

"Those are great reasons for revisiting," he added.