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Estate Planning: Not Your Typical New Year's Resolution

January 22, 2016
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As seen in The Legal Intelligencer

Around this time, New Year's resolutions are top of mind for many, and those goals are usually related to exercise, diet and job performance or advancement. Professional advisers, on the other hand, spend a significant amount of time with their clients near the end of the year, making sure estate plans are implemented, assets are allocated, annual gifting is made, and any tax benefits are utilized. While year-end planning is essential to most clients, providing proactive planning in the early months of a new year provides the time typically needed for an individual to evaluate and consider their immediate and long-term needs, and implement the changes necessary in order to actually have a positive and sustainable impact for most of the year.

Granted, we are in the very early stages of 2016. However, personal and financial life crises do occur when you least expect them. Everyone should be encouraged to consider making changes early in any given year before time passes and you're already ushering in another one. This month, I encourage people to do the following:
  • Review beneficiary designations, especially in years of marriage, divorce and remarriage. Following the U.S. Supreme Court's decision last June, everyone should consider naming a specific type of trust as a beneficiary of their qualified plan or IRA. The Supreme Court held in Clark v. Rameker that an inherited IRA is not deemed under Bankruptcy Code Section 522(b)(3)(C) as "retirement funds" and is not exempt from creditors. Additionally, in a year of divorce, consideration should be made to see if there is a tax benefit of finalizing the divorce in the current year or prolong into a subsequent year.
  • If you made large donations of cash in the previous year, consider donating appreciated assets instead in the current year. You should communicate with a professional related to the potential disadvantage of losing the step up in basis if those assets remained in their estate at death.
  • Review your current legal documents. To the extent the life event that occurred would alter how your will, powers of attorney, and other vital legal documents are drafted, those changes should take top priority in the beginning of the year.
  • If you have a qualified retirement plan that is eligible to be rolled over into a Roth IRA, review the potential of rolling those funds into a Roth IRA in a year of unusually low income or in a year a loss for income tax purposes is expected. This solution most typically applies to owners of closely held businesses that have fluctuating income.
  • Review your current W-4 federal withholding statement choices. In a year after a calendar year that provides a significant refund due to excess withholding of federal tax, a change may be necessary such that less tax is withheld resulting in a reduced refund next April, but more disposable income on a pay-per-pay basis.
  • If you are eligible for Social Security but have not yet reached age 70-and-a-half, look into potential benefits of taking distributions now rather than waiting until the last possible moment.
  • If you have a long-term care insurance policy, make sure that you have designated a premium lapse designee so you will receive notification of a termination of the policy due to nonpayment of a premium.
  • If you reside in a state that provides an income tax deduction for contributions to 529 college savings plans, set them up early and pay the expenses you would have otherwise paid out of pocket out of the tuition plan. This is especially beneficial for the parent or grandparent who never funded college plans previously and currently has a family member attending college.
It is never too early to begin planning for a life event that may have either occurred in the previous year or may occur in the current year. A few of the various life changes our clients will need professional guidance on are: marriage, having or adopting children, change of employment, starting a business, incurring a medical disability, disasters, moving, getting a divorce, paying for college tuition, selling a business, getting remarried, caring for an elderly parent, retiring and death. Professional advisers should communicate with their clients frequently to be able to assist them at all times with planning opportunities created by an individual's major life events.

Reprinted with permission from the January 22, 2016 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.