Timely tips to help take stock of your estate plan

Crafting a good estate plan depends on many things. For instance, it can depend on the size and complexity of your assets, or what you want to leave to your heirs or charity.

Additionally, any changes in your family circumstances or even changes to the estate-tax laws can have big implications for a trust. The current economic environment can also play a role in making some estate-planning techniques more advantageous than others.

If you haven’t thought about your estate plan in the last few years, here are a few reasons to dust it off.

c-George | Getty Images

c-George | Getty Images

1. There was a change in your life. Although this point has been made many times, it bears repeating because so many people don’t act when something changes in their life. If you had a life-changing moment, like marriage, divorce, newborn children or selling a business, you should definitely review your estate plan.

A lot may have changed in your family since your original estate-planning documents were drawn up. Your children are likely older (but not necessarily wiser), the people surrounding your family have changed, or someone may have passed away.

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As a result, it’s important to review your current beneficiaries, trust documents and other documents to make sure the proper people are still in place if something were to happen to you.

If you have a new addition to the family, make sure they are referenced in your documents so your assets are distributed to your children in line with your expectations. You don’t want someone to be excluded because you forgot to review your documents.

2. You own or are selling a business. If you believe that your business will substantially increase in value, consider gifting an interest in your business to a trust or to your children. This way, the growth of that interest is outside of your estate, and your trust or your family will benefit from the appreciation.

Before selling a business, it pays to do some preplanning to avoid paying tax on the income or capital gains realized during the transaction.

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Consider gifting appreciated company stock to a charitable donor-advised fund before the sale of the business. (There are plenty of fund options available). This will reduce capital gains and increase charitable deductions.

You may have purchased an insurance policy to help your heirs pay any estate tax in the event that you died while still owning the business. It made sense to have cash available to them if most of your wealth was tied up in an illiquid asset. With the sale of a business, this insurance expense may no longer be necessary.

3. You have enough—the rest can go to future generations. If you have assets, such as stocks that have high growth potential, then consider putting them into a Grantor Retained Annuity Trust. This allows much of the appreciation to grow outside of your estate. I explain what this is and who should consider a GRAT in the next section.

4. You’re gifting stock. If you are making a sizable charitable gift, appreciated stock is a better candidate for gifting than using cash. Assuming that you have held the asset long-term, meaning more than a year, you’ll avoid paying capital gains on the appreciation and can take the full deduction on the current value (certain limitations apply based in your income for the year).

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For instance, if you paid $10 for a stock that’s now worth $100, you would not have to pay capital gains tax on the $90 appreciation and may be able to take the deduction for the full $100 fair market value.

Then, you can use that to repurchase the stock and reset the cost basis for the security. You accomplished your charitable goals in the most tax-efficient way.

Techniques for a low-interest environment

Today’s low-interest environment is ideal for using a GRAT. This relatively low-cost “heads I win, tails I don’t lose” estate-planning technique may make sense for those with taxable estates, meaning a single person whose estate exceeds $5.34 million or a couple with an estate greater than $10.68 million.

A GRAT allows the grantor to make an irrevocable gift to a trust for a predetermined period of time, say, two years. That principal must be returned to the grantor within those two years, along with interest. (The interest rate is determined by the Internal Revenue Service and adjusts monthly.)

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Here’s the important part: Any growth of the assets above the principal and interest is then transferred to a trust or beneficiary of the GRAT free of gift or estate tax.

Today the interest-rate hurdle is extremely low, currently 2.2 percent, making this a very attractive strategy. Any growth above the annual 2.2 percent would then be transferred outside of the estate, escaping estate gift tax.

This technique works best when gifting assets with the greatest growth potential. It would not make sense to fund a GRAT with conservative assets or a diversified portfolio.

Don’t forget state estate tax

While the Federal lifetime gift limit is very generous and portable—for example, if your spouse dies before you, his or her $5.34 million exclusion is added onto yours, for a total of $10.68 million—many states are not that generous.

If you live in a state with a death tax, like Maryland (currently $1 million but scheduled to increase and match the federal exemption by 2019) or New Jersey (currently $675,000), you may want to consider setting up trusts for assets in excess of your state estate-tax gifting limit.

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There’s a debate about whether these trusts are necessary, given the high federal limit, but if you live in the District of Columbia, for instance, where the state estate tax could be as high as 16 percent, you may want to consult an estate-planning attorney about your specific situation.

Changing circumstances, whether personal or driven by economic conditions or estate-planning laws, are your cue to revisit your estate plan. Don’t ignore them, because the potential mistakes or advantages can be significant.

—By Barry Glassman, special to CNBC.com. Glassman is founder and president of Glassman Wealth Services.

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