How Life Events Change Estate Plans

Life happens – and fast. For many of us, before we can even register that it happened, we’ve —

• Sold a home
• Received an inheritance
• Had a new grandchild
• Started a business
• Moved across the country
• Got a promotion

— or had any number of exciting new experiences. It’s important to track these major life milestones because, whether you want them to or not, they will affect your estate plans and your long-term tax outlook.

How Do Major Life Events Impact Estate Planning?

There’s no one-size-fits-all answer to this question, but there are a few general rules to consider.

• If your income increases, so does your tax exposure. With significant boosts to annual taxable income, two things tend to happen: Your marginal tax rate increases, which means that for each additional dollar of income, you’ll be paying more in tax than you paid previously. You may be phased out of certain deductions and credits that are restricted for high earners. Your estate tax planner may be able to divert some of that new income into investments that can reduce your current-year tax liability, but only if you let them know your income changed. So, inform them as soon as possible so they can tweak their approach to support both your short- and long-term financial goals.
• If your wealth changes, your tax strategies should change. Income isn’t the only thing that will affect your estate plan; wealth accumulation will, too. With careful tax planning, most taxpayers — even those who accumulate significant wealth in their lifetime — can steer clear of the hefty 40% estate tax, but only if they make wealth planning decisions now.
• The more assets you have, the more protection you should have. As you acquire more wealth, you should take steps to protect your assets. In many cases, trusts, real estate, annuities, insurance policies, LLCs, prenuptial agreements, and retirement plans can protect your assets, some doing so while managing gift and estate tax liability. Talk to your estate tax planner, who can coordinate with your attorney to ensure you have the best protection in place for the types of assets you own.
• As your life changes course, so do your goals. We can rarely predict where our lives will end up, and that’s ok; estate plans are not meant to be static. With a good tax professional at your back, you can tweak your estate plan to align with your new aspirations, whether traveling more, investing in a friend’s business, going back to school, or anything else.
• As people come and go from your life, your beneficiaries may change. In some instances, like with irrevocable trusts, you cannot change your chosen beneficiaries, but many of your investments aren’t quite so limiting. Every few years, and after a significant life event, you should review your beneficiaries and make changes as needed.
• When you move, so do your tax laws. The federal estate tax is only one piece of the puzzle; state and local tax laws should also be part of your estate plans. If you move states, move internationally, or split your time between two jurisdictions, you’ll be subject to different tax laws. So, make sure those tax laws are considered in your estate plans.

Major Life Events – Examples

To better understand how tax and estate plans will change with major life events, let’s go over a few examples.

Birth or Adoption of a Child

Having a child may make you eligible for the Child Tax Credit or a more generous Earned Income Tax Credit, but it will affect more than just your tax return. Caring for children can be expensive, and childcare costs should be factored into your annual budget. It would help if you also considered investing in your child’s education. Education savings accounts like 529 Plans or Coverdell Education Savings Accounts can simultaneously help you save for your child’s education and defer tax on investment earnings.

Marriage, Divorce, Separation, or Death of a Spouse

When your relationship status changes, so does your filing status. A tax planner can show you how such a change will impact your tax return. You may also need to think about changing your beneficiaries (to life insurance policies, retirement accounts, etc.), updating your will, and updating other important legal documents like powers of attorney or advance directives.

Job Change

Job changes may impact your long-term earning potential, but there is more to consider than just your income stream.

• If you want to start a side hustle, you’ll need to be prepared to pay self-employment tax and estimated taxes.
• If you want to start a new business, you’ll need to think about your business’s legal structure and tax structure, the tax consequences of exiting your business, and your exposure to business liabilities.
• If you want to sell a business, your CPA can perform a business valuation and help you make changes to your operations to help boost sales value.
• If you lose a job, you may want to rethink your investment strategies and ensure you have the cash to pay your immediate obligations.

New Homeownership

Purchasing a home does not always affect your tax return, but it may depend on how you use that home. For example, you will need to report rental income and expenses on Schedule E if you rent your home for any significant amount of time. You’ll also need to consider how this asset will be valued when you pass on and who should inherit it.

Illness or Disability

Estate plans can provide you with the care you need in the event you acquire a disability. Revocable living trusts, long-term care insurance, disability income insurance, and even business insurance can be great ways to do this. Just as important, you should identify a trusted appointee who can manage your investments, tangible assets, and digital assets (like social media accounts, photographs, and documents) if you are cannot do so due to illness or disability.

Retirement

In retirement, there is still plenty of proactive estate planning you can be doing. You should consider required minimum distributions (and the tax consequences of those withdrawals), social security benefits, and changes to your cost of living. You’ll also need to learn how the assets remaining in your retirement accounts will be taxed when you die. For example, will those amounts be distributed to charity (which will not count toward your estate tax exemption) or distributed to your children/grandchildren/loved ones? And how will those amounts be transferred — via a trust? Directly? Through an annuity?

Time is Of the Essence

Being proactive about estate planning is vital because most estate planning strategies benefit from time. For example, an easy way to reduce your estate is to make annual gifts. If they are kept under the annual gift tax exclusion limit ($15,000 in 2021 and $16,000 in 2022), you’ll owe no gift nor estate taxes on those amounts, and you can keep your estate under the estate tax exemption (which is $12.06 million in 2022). But this tactic is only helpful if you adopt the strategy earlier in life.

Talk to an Expert

If you don’t know what your future holds, don’t fret; as you move through each stage in your life, your estate plan can move with you.

Contact Us

If you have questions about any of the information outlined above or would like to learn more about how Klatzkin can help with an estate planning issue or discuss your tax planning strategy, click here to contact us. We look forward to speaking with you soon.