Four questions to ask your estate planning attorney

This article was originally published in Family Business Magazine on December 8, 2023.

Estate planning is not as simple as executing a will. In order to protect yourself during life and to ensure a smooth transition of assets to your loved ones in a cost effective and tax efficient manner, your estate plan should take into consideration the rules of asset succession in your home state, potential transfer taxes and costs, and documents and strategies that can be put in place to expedite and simplify succession issues. Here are some important questions to ask your estate planning attorney when you meet to develop or update your plan.

How will my assets pass at my death? 

You may be surprised to learn that not all assets pass by will. The way your assets will pass at death depends on a number of factors, including where you live, where your assets are situated, what type of assets they are and how they are titled. In the United States, asset conveyance is governed by state law, so you should always consult with an attorney in your state of residence.  

Generally, assets held in joint name with right of survivorship pass to the surviving account or asset holder by operation of law. Assets that designate a beneficiary, such as IRAs and 401(k) plans, pass directly to the designated beneficiary, if any. Assets that are held in the name of a trust pass to the beneficiaries designated in the trust agreement. None of these types of assets pass under a decedent’s will. Only assets titled in a decedent’s sole name that do not designate a beneficiary (known as “probate assets”) pass under the will. 

In addition, if you live in a community property state such as California or Texas, community property will pass automatically to the surviving spouse. Each spouse is deemed to own one-half of community property and cannot bequeath more than their one-half of property through a will.

Even if you do not live in a community property jurisdiction, there may be rules in your jurisdiction that restrict free transfer of assets. Some jurisdictions (particularly countries based on civil law) have forced heirship rules, which require a certain percentage of assets to be distributed to a spouse or children. Many states have “elective share” rights for surviving spouses, allowing the spouse to elect to take some significant portion (in New York, it is one-third) of the deceased spouse’s assets.

In short, make sure your plan works based on where you live and how your assets are titled.

What legal documents do I need to have in place to protect myself and my family? 

This question should be broken down into two categories: (1) What documents do I need to protect myself during life? and (2) What documents do I need to smooth transition of my assets at death?

To make sure you are covered during life, you should have some sort of healthcare proxy appointing an agent to make healthcare decisions for you if you cannot do so for yourself, as well as a power of attorney, appointing an agent to make financial decisions on your behalf. Without these documents, it can be very challenging for a loved one to advocate for you if you become disabled or get into an accident.

To smooth transition at death, you should execute either a will or a testamentary substitute, such as a revocable trust, which directs disposition of your assets. Without a legally enforceable document directing how your assets should be distributed, your assets will pass according to the default rules of your state or jurisdiction, which may not be the desired result. For example, in New York state, if you do not have a will directing disposition of your probate assets, these assets will pass under New York’s rule of intestacy: roughly half to your spouse and half to your children. This may not work, particularly if your children are minors. If you have no spouse or children, assets will go to your heirs at law, which may be cousins or more remote relatives. 

Depending on your jurisdiction, using a revocable trust as your main dispositive document (the main document directing where assets go at death) in combination with a “pour over” will may significantly reduce costs and time associated with transferring assets, as it may help to minimize court involvement.

Will my family owe tax when I die? If so, what steps can I take to mitigate tax?

Estate, gift, inheritance and income tax rules vary greatly by jurisdiction and change over time. Therefore, it is important to consult with your attorney about what the tax rules are and how to accomplish your goals in a tax-efficient manner. 

Currently, the exemption from estate and gift tax in the United States is $12.92 million per individual, a cumulative amount that can be used during lifetime or at death. Amounts exceeding the “estate tax exemption” are taxed at 40%. (However, gifts to certain classes of beneficiary, such as qualified charities and U.S. citizen spouses, get the benefit of a deduction from estate tax.) This historically high exemption is slated to be cut in half as of Jan. 1, 2026. Therefore, some families are electing to “lock in” this exemption by making gifts currently.

In addition, some U.S. states have separate estate, gift or inheritance taxes. For example, New York has an estate tax. The exemption amount for 2023 is $6.58 million. Estates in excess of this exemption amount are taxed back to the first dollar at a rate of up to 16%. This means that a taxable estate with $6.5 million does not have to pay estate tax or even file a New York state estate tax return, whereas an estate of $7 million owes over $600,000 in New York state estate tax.  

If you want to leave some amount to charity, some to a spouse and some to children, there are ways to do so that are more efficient for income tax purposes. 

Have there been any legal developments that might affect my estate plan or business?   

As laws and tax rules change over time, it is important to update your plan regularly. Older versions of documents not only may be tax inefficient but also may defeat your intentions entirely. 

Consider as an example a typical estate plan that might have been executed in New York in April 2017 by an individual we’ll call Joe. Assume Joe has a second wife and two children from a previous marriage and an estate of approximately $10 million to $11 million. In April 2017, the U.S. federal and New York estate tax exemption amounts were the same, $5.25 million. (New York had recently changed the estate tax rules to match its exemption to the federal exemption.) Joe wants to give about half of his estate to his wife and half to his adult children, and he wants to minimize estate tax. He executes a plan that gives the amount of the federal exemption to his children and everything above this exemption to his wife. Had he died in October 2017, the plan would have succeeded in giving about half to the spouse and half to the children, and it would have eliminated estate tax.  However, in December 2017, under the Trump tax law, the federal estate tax exemption was doubled. Under the plan as constituted, in 2023 Joe’s entire estate would go to his children, leaving nothing for his wife.

In addition to changes in tax law, there may be changes to other rules that need to be addressed. For example, the Corporate Transparency Act (CTA), enacted on Jan. 1, 2021, imposes new reporting requirements on a broad range of entities, including common business and investment vehicles such as corporations and LLCs. Effective Jan. 1, 2024, “reporting companies” will be required to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) containing personal identifying information for the company’s beneficial owners. Failure to comply with the CTA’s reporting requirements may lead to civil and criminal penalties. FinCEN estimates that the CTA and the Final Rule will affect over 32 million entities, imposing significant new compliance burdens.