Review your Estate Planning

One aspect that has been illustrated as key in this time of uncertainty as a result of the COVID-19 pandemic is the need for everyone to evaluate, implement, finalize or update their estate tax planning. Throughout these times, a cautious family should review whether everything is in order in the event of an unanticipated fatality of a family member. A person who is a U.S. citizen or who is considered domiciled in the U.S. is subject to estate tax on any asset held at the time of their death (tax applies on world-wide assets 2 irrespective of the location of the decedent). A person who is not domiciled in the U.S. is subject to estate tax on any assets situated in the U.S. at the time of his death. These taxes can be as high as 40% of the fair market value of the estate property. Therefore, adequate estate tax planning is essential to mitigate the potential adverse economic effects that could result at the time of an unexpected death.

Although there are certain exemptions and deductions that can mitigate the applicable taxes, a lack of knowledge or lack of adequate planning could have devastating results. For instance, in principle, currently U.S. domiciled taxpayers are only subject to estate tax if their gross estate exceeds $11.58 million per individual. Although the basis for taxation seems quite high, it is anticipated that this exemption will expire in year 2025 at which time it could revert to the pre- 2018 exemption level of $5 million for an individual taxpayer, or it may be reduced earlier if there is a change in government in the upcoming presidential elections in November.

Anticipating these changes is the key to avoiding adverse tax effects. In the case of non-domiciled taxpayers, the risk is even higher since they are currently entitled to a deduction of only $60,000. Therefore, any assets that exceed the amount of the applicable exemption may be subject to estate taxes of up to 40% unless adequate planning is done. In addition, a lack of adequate planning may trigger the need to coordinate a judicial probate procedure in order to transfer title of property to heirs or devisees. This judicial process could be burdensome, time consuming and ultimately costly. It is therefore essential that everyone considers having a trust, or at the very least a will, in order to set forth specific indications for how the assets should be distributed and to coordinate a smooth transfer of property to the intended recipients at the time of death. A trust has the added benefit of eliminating the need to follow a judicial probate procedure. In some cases, trusts can be used to reduce the applicable estate taxes.

There are many variations of trusts that can be created, whether domestic or foreign. Therefore, it is key for taxpayers to obtain adequate legal counsel in order to set up the trust that suits their specific needs. In addition to a trust, there are other documents that form part of an adequate estate planning.

Just to name a few: (1) a will (also called pour over will) to determine how the inheritance should be distributed between the family if not included within a trust; (2) documentation to help cover the representation of the minor children in the absence of the parents, such as the nomination of guardian, power of attorney for the administration of the assets of the children and a 3 designation of health care surrogate of the children; (3) a living will in order to give instructions how to proceed in the event a family member is in a terminal condition, or persistent vegetative state; (4) a durable power of attorney, which is a general power of attorney that is primarily intended to give your named agent the power to deal with any non-trust assets; (5) a designation of health care surrogate, as well as an authorization and waiver for the inspection and disclosure of medical information, which gives your named surrogate the power to make medical decisions, obtain information, sign consents and/or releases with hospitals and/or doctors; (6) a declaration of pre-need guardian, appointing the desired person to act as your guardian and the guardian of your estate in the event of future incapacity (7) final disposition instructions, including specifications for the disposal of a persons remains at death. This list is not exhaustive but is merely an indication of the various documents that a family should consider with their estate and tax advisor in order to plan for an unexpected or accidental death.