The physical and financial health challenges caused by the COVID-19 gave us time to rethink our priorities and expectations. Estate planning is one area that has received a lot of attention. Here are three basic areas to review as you reassess your estate plan.
Document Review: Are the Papers in Place?
The COVID-19 crisis caused many people to recognize things can happen unexpectedly that turn your life upside down. Review your estate plan or create one if you do not have one in place. The documents that should be reassessed include the following:
- Health care directive. This document is called by different names. It memorializes wishes concerning your medical treatment should you become ill or incapacitated. It includes directives about your end-of-life wishes as well as other decisions about your care and treatment. It also names the individuals you want to act on your behalf if you are incapacitated and gives them the right to access your medical records. The latter point is especially important because without a legal document in place, privacy laws may prevent a hospital or doctor from releasing your records to them.
- Durable power of attorney. This document allows you to designate an agent to access your assets and act on your behalf regarding financial decisions if you are incapacitated.
- Will and trusts. Reviewing these documents is especially important if there have been changes in your family or financial situation since the documents were originally executed.
Financial Review: Make Sure You Are on Track
Historically low interest rates make this a good time to review the financial aspects of your estate plan. Some tax planning strategies have become more advantageous because of the current financial and economic environment. These include:
- Considering intrafamily loans to children or certain trusts. The interest rate for these loans uses the applicable federal rate, which is the lowest interest rate that can be charged on a loan. The proceeds of the loan can be used for purposes ranging from purchasing company shares to funding a mortgage. There are pros and cons to these loans that need to be considered, but overall they can be very attractive at current interest rates.
- Creating one or more grantor-retained annuity trusts allows the grantor to transfer assets to a trust for a term of years in exchange for an annual annuity. This annuity is taxed at the IRC § 7520 rate, which is based on the AFR.
- Converting a traditional IRA to a Roth IRA is another consideration, since the income tax on the conversion is based on the IRA’s value at the time of conversion. Doing the conversion when the assets’ value is lower can substantially reduce the income tax cost.
All these aspects are complicated. Before making any decisions, be sure to discuss your specific situation with your financial and legal advisors. Your specific goals and circumstances will guide the decisions that are best for you, your family and your beneficiaries. One thing is certain, when times change, your circumstances do too.
Do you have questions about tax and estate planning strategies? Contact William G. Miles, CPA, CFP® to discuss your situation.