Your top 5 estate planning questions
Fidelity's David Peterson answers some of clients' most frequently asked questions.
- By David Peterson, Head of Wealth Planning,
- Fidelity Wealth Management
- – 02/09/2023
- The looming expiration of certain provisions of the Tax Cuts and Jobs Act presents challenges and opportunities.
- Lifetime gifting can be a powerful strategy for reducing your exposure to estate taxes.
- It’s a good idea to review your estate plan every 3 to 5 years, and potentially more frequently if certain life events intervene.
Estate planning is complicated, so it’s understandable that people have plenty of questions about the process.
Luckily, there are some answers among all the unknowns. One thing we do know now is that the current regulations that set the lifetime exemptions for federal gifting and estate taxes are set to expire at the end of 2025, and that could cause some people to rethink their estate plans now, regardless of what else may happen.
Here are the top 5 questions we're often asked about estate planning. These answers were compiled by Fidelity's Advanced Planning Team, including Sander Bleustein, Mike Christy, Terri Lyders, and Lisa Pro.
1. What happens if I give a gift in 2023 when it’s $12.92 million per person and then the exemption is reduced to something like $7 million later? If I start gifting significant amounts while I'm alive, will this cause problems when the current limits sunset after 2025, or if they are changed sooner?
In November 2019, the Treasury Department published regulations that, among other things, confirm that individuals taking advantage of the increased gift and estate tax unified exemption amounts in effect from 2018 to 2025—for both lifetime giving or at death—will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. For example, if a taxpayer gifts $10 million today and the exemption in place when they die is only $6 million, under current law there will be no "clawback" of exemption previously used that would cause estate taxes on the "extra" $4 million that was gifted. This would still be the case even if the changes to the exemption amounts are put into effect as of an earlier date.
Individuals can also give away money annually up to the current limit, which is $17,000 in 2023 , to as many people as they would like before it impacts the lifetime limit.
2. For estate taxes, does it matter what types of accounts I'm leaving to heirs? What if all my money is in a retirement account, like a 401(k), or it's all in a brokerage account or some other type of account? Do I need to start reorganizing how my money is held given the changes ahead?
The federal estate tax applies to the value of all assets that a decedent owns or controls at death, regardless of the type of account in which the asset is held.
You might want to consider, though, that only assets held in certain types of accounts can be efficiently transferred. For example, retirement accounts, such as 401(k)s or traditional IRAs, cannot be transferred to a third party during the account holder's lifetime without triggering income taxes and possibly penalties.
For this reason, most gifting strategies focus on transferring nonqualified, or taxable, assets, such as assets in a brokerage account or real estate. For people with a disproportionate amount of their wealth in retirement accounts, planning strategies shift to improving the income tax efficiency of the transferred accounts to reduce the beneficiary's income tax burden. Roth conversions, for example, may be an effective strategy to accomplish this goal. But, for estate tax purposes, the entire value of the converted Roth account will be included in the owner's estate.
3. If I'm leaving real estate to my heirs and they aren't going to sell it, do any possible changes in the estate tax matter to me? Would my heirs possibly be hit with a tax bill upon inheriting and have to come up with the cash? Does the same apply for leaving rental property, a family business, or a share in a business?
Any estate tax liability is generally the obligation of the decedent's estate, and not the beneficiaries who will inherit the property. The beneficiaries' plans for the assets are not relevant to the taxation of the inherited asset. The value of all real estate would be included in the decedent's gross estate and could be subject to the estate tax, depending on the aggregate size of the estate.
That said, for those in states with an inheritance tax, the beneficiary is typically responsible for paying the tax due. Six states have an inheritance tax: Nebraska, Iowa, Kentucky, Maryland, Pennsylvania, and New Jersey.
Right now, it’s possible that the estate tax exemption threshold could significantly decrease as of January 1, 2026, which could increase the tax liability upon the owner's death. When assets such as real estate are being transferred, it is critical that the estate has adequate cash on hand to pay for potential expenses, including taxes.
Estate taxes, when owed, are generally due within 9 months of death. So even if the heirs weren't planning to sell, if the estate does not have liquid assets on hand to pay the tax, the real estate or business may need to be sold to fund the tax liability. In limited circumstances, the estate may be able to make certain (complicated) elections that would allow the estate tax to be payable over time. These exceptions are typically related to assets like family farms and closely held businesses. The estate may also be able to borrow funds (often secured by estate assets) to pay the estate tax liability.
4. How should I deal with life insurance and my estate? Will any of that change in 2026?
The death benefit of life insurance is considered part of the decedent's gross estate. However, because an irrevocable trust is a separate and distinct entity for estate tax purposes, the value of a life insurance policy owned by the trust would not be included in the estate of the insured.
Currently, there is no limit to the number of annual exclusion gifts, whether to a trust or otherwise. As a result, people with multiple children and/or grandchildren (or other beneficiaries) can utilize their annual exclusion gifts to make gifts of $17,000 in 2023 to each beneficiary of a trust to fund life insurance policy premium payments.
5. I haven't touched my estate plan in 10 years and I no longer have an estate attorney or anyone to consult. How often do I need to revisit my plan and can you recommend anyone to help me? How do I even get started with so much in flux with the laws?
A good practice is to review your estate plan every 3 to 5 years, and potentially more frequently if certain life events intervene, such as:
- A significant change in net worth (including the receipt of an inheritance)
- Change in state of residence
- The birth of a child or grandchild
- Marriage or divorce
- Changes in federal or state laws covering taxes
- Death or change in circumstances of the people named to serve as executor under a will, guardians, trustees under a trust, and agents under powers of attorney
Fidelity's online Estate Planner® can guide you through the estate planning process and help you get organized to ensure an efficient meeting with your attorney.
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