Put your estate plan under a stress test to detect abnormalities
A well-designed estate plan helps cement your legacy, but that doesn’t mean it’s set in stone. Changing family circumstances, fluctuating financial markets, health issues and other factors can impact the effectiveness of your plan over time.Evolving tax laws can also greatly affect your estate plan. (See “The One, Big, Beautiful Bill Act boosts exemption amount” below.)
One strategy that can help identify potential weaknesses or vulnerabilities in your planis to conduct periodic stress tests.
Stress test defined
A stress test is an assessment tool used to evaluate the performance of a system, plan, process or person under extreme, challenging or changing conditions. These conditions may be real or simulated. For example, a doctor may order a stress test to evaluate a patient’s heart function during exercise. Or a bank may run simulations to see how adverse events or changes in interest rates or other market conditions would impact its financial performance. In either case, stress testing can reveal potential risks or dangerous situations that need to be addressed.
In estate planning, stress testing involves examining your plan and asking a series of “what if” questions to evaluate how your plan would perform in various scenarios. If the results don’t align with your estate planning goals, it may be necessary to modify your plan.
Potential findings
To stress test your estate plan, we would pose a variety of scenarios and construct models to show how your plan would perform under those circumstances.Every plan is different, so the results of stress testing depend on your particular circumstances. Examples of potential findings include:
Unplanned results.Stress testing may reveal that, if you were to die tomorrow, the operation of your estate plan may result in unexpected and undesirable consequences. Perhaps significant assets would be distributed outright to your children, even though they’re not yet prepared to manage the funds on their own. A solution may be to set aside those assets in trust for your kids’ benefit.
What happens if you get a divorce? Does your ex-spouse still stand to receive a significant inheritance from your estate? Some estate plans automatically disinherit a spouse in the event of divorce, but if yours doesn’t, an amendment may be needed.
Unexpected taxes.If the value of your estate exceeds federal or state exemption amounts, or if it will exceed those amounts if they’re reduced in the future, a sizable chunk of your wealth may be lost to estate tax.
If estate tax is a concern, considerimplementing tax-efficient strategies for removing assets from your taxable estate. Or set up an irrevocable life insurance trust (ILIT) to fund potential tax liabilities.
Insufficient liquidity. Stress testing may reveal that a significant portion of your wealth is tied up in illiquid assets, such as closely held businesses or real estate. This may make it difficult to distribute these assets fairly among your heirs and to cover taxes and expenses. Planning may be needed to create liquidity through life insurance or other strategies.
Improperly titled assets. Many estate plans employ revocable, or “living,” trusts to avoid probate and provide for the management of one’s assets in the event of incapacity. But these trusts are effective only to the extent that you fully “fund” them — that is, transfer title to assets to the trust. A stress test may identify assets that aren’t properly titled in the trust and, therefore, will be subject to probate and beyond the trust’s control in the event you’re incapacitated.
Missing beneficiaries or fiduciaries. This can happen, for example, if a beneficiary, executor, trustee or agent predeceases you and you haven’t named a backup. Failure to name contingent beneficiaries or fiduciaries can disrupt the operation of your estate plan or, worse, cause assets to be distributed to unintended recipients.
Inflexible trust language. If you were to die tomorrow, would your trust achieve your goals? For example, a “maintenance” standard wouldrestrict distributions to your beneficiaries’ most basic living expenses. If you wish to provide more for them, consider establishing a higher standard or even giving the trustee complete discretion to make distributions in accordance with your wishes.
Stress-free estate planning
To reduce the stress associated with estate planning, consider a stress test. By modeling how your plan would perform under various scenarios, stress testing allows you to make adjustments to ensure that it meets your goals. Contact us for additional details.
Sidebar:The One, Big, Beautiful Bill Act boosts exemption amount
The Tax Cuts and Jobs Act (TCJA) effectively doubled the unified federal gift and estate tax exemption to $10 million (adjusted annually for inflation). It also required the amount to revert to its pre-TCJA level after 2025, unless Congress extended it.This caused uncertainty for wealthy individuals whose estates would be exposed to gift and estate taxes if the higher exemption amount were to expire. The One, Big, Beautiful Bill Act (OBBBA) restores certainty for affluent families.
Beginning in 2026, the OBBBA permanently increases the federal gift and estate tax exemption amount to $15 million ($30 million for married couples). The amount will continue to be adjusted annually for inflation. The estate tax rate remains at 40%. Additionally, the generation-skipping transfer (GST) tax exemption will be adjusted to match the increased estate and gift tax exemption.
If your estate exceeds, or is expected to exceed, the exemption amount, consider implementing planning techniques today that can help you reduce or avoid gift and estate taxesin the future.
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