Is It Time To Update Your Estate Plan?

As of January 1, 2015, the amount exempt from federal estate taxes is $5,430,000.00 and the amount exempt from Washington State estate taxes is $2,054,000.00. As the amount exempt from estate taxes continues to increase, and the taxation of trusts becomes more complex, I am suggesting that my clients evaluate the necessity of a trust to avoid estate taxes and consider other changes that might be appropriate for their estate plans.

To begin with, should your surviving spouse be named as the personal representative or trustee? I have worked on a number probates where the surviving spouse was not the money manager during the marriage and as a result the surviving spouse was overwhelmed by the task of gathering asset information. I suggest that couples talk about whether or not the surviving spouse should be the personal representative of the estate of the first spouse to die. Please note, Washington State law allows a surviving spouse to petition to be the personal representative of the community property owned by a married couple.

I have also dealt with a surviving spouses who did not understand why their spouses put their share of their assets into a trust for the surviving spouse and the surviving spouse could not then do as he or she pleased with all of the assets at the time of the first spouse’s death. Of course, there are many reasons that trusts are set up at the time of the first spouse’s death – estate taxes, Medicaid planning, remarriage, and control of beneficiaries. Also, if your assets will be in excess of $5,430,000.00 at the time of death, then it will be important to have bypass trust provisions in your wills or your revocable living trust to reduce estate taxes. If your assets are between $2,054,000.00 and $5,430,000.00, then you will want to consider whether or not you are concerned about paying Washington State estate taxes (that begin at 10% and climb to 20%). On a $4 million dollar estate, the estate would owe approximately $232,440.00 in Washington State estate taxes. Some people may consider that paying estate taxes is less onerous than having to keep the trust assets separate from their individual assets or paying to have a trust income tax return completed each year at an annual cost of $500.00 to $1,500.00. I have heard a couple of clients say “if I am dead, why do I care if my estate has to pay estate taxes.”  As the 10% and 14% brackets that would apply to estates between $2 million and $4 million at the state level are significantly less than the 40% federal estate tax bracket that applies at the federal level for everything in excess of $5,430,000.00, my clients need to decide for themselves whether or not the avoidance of estate taxes at the state level justifies the additional complications for a surviving spouse if their combined estate is between $2,054,000.00 and $5,430,000.00. If you are married and your estate is less than $2,054,000.00, you may want to remove trust provisions that were put into place only to avoid estate taxes.

If a married couple’s combined estate is less than $5,430,000.00 and the couple is over the age of 70 or not in good health, then they should consider if a trust is appropriate to protect their assets in case the surviving spouse needs to go into a nursing home. A married couple could insure against the risk of their assets being used to pay for long-term care, but some people do not qualify for long-term care insurance. If a couple wants to make sure that assets are available to pay for the extra items that would make a surviving spouse’s life more comfortable in a nursing home, then the couple should consider a special needs trust in their wills. If a couple believes that their assets should be used to pay for their care in a nursing home or assisted living situation, then language should be included in their durable powers of attorney that prevents their attorney-in-fact from making gifts to qualify them for Medicaid or the COPES program. In addition, they should not include a special needs trust in their wills.

In second marriage situations, couples should consider their children from their first marriages if they plan to give everything outright to their surviving spouse. If the couple decides they do not want the surviving spouse to be confined to the terms of a trust, the couple may want to make specific gifts to their children from their first marriages. I generally do not believe it is appropriate to name the surviving spouse of a second marriage as the trustee of a trust for the spouse’s benefit or to name a child from a first marriage as the trustee for the surviving spouse. I believe there is an inherent conflict of interest with a surviving spouse from a second marriage and the deceased spouse’s children from a first marriage. I have also seen situations where a spouse left everything outright to the surviving spouse with the idea that the surviving spouse would then divide it up between the children of both families, only to have the surviving spouse change his or her will to leave everything to the surviving spouse’s children only. If a couple wants to ensure there are assets to leave to the children of their first marriages, yet provide for the lifetime needs of the surviving spouse, it may be appropriate to name a trust for the surviving spouse, or to purchase life insurance to give to the children of the first marriages and then leave the remainder of the assets outright to the surviving spouse.

Another aspect to consider is if your children have outgrown the trust provisions in your estate plan. Sometimes parents put trust provisions in their wills for children who have not yet matured. However, once the children finish college or start a full-time job, they show their parents they are financially responsible and capable of handling large sums of money. On the other hand, sometimes parents believe their child has it all together only to discover their child has a substance abuse issue or is incapable of making financially responsible decisions. In either case, it is a good idea to update the trust provisions to fit the particular circumstances of each of your children.

It is also important to remember that the trusts reach the highest income tax bracket at $12,300.00.  Therefore, any capital gains that are taxed to the trust principal will then also have be subject to the additional net income investment tax of 3.8%. My documents created after 2013, generally direct that capital gains shall be considered as income and therefore the capital gains will flow out to the beneficiary to avoid the higher income tax levels and the net income investment tax.

OTHER QUESTIONS TO ASK TO MAKE SURE YOUR ESTATE PLANNING DOCUMENTS ARE UP TO DATE

1.  Have any of the people named in your documents died? If someone has died, is the share of the deceased person going where you want it to go? (For example, David has a child named Christina. Christina dies. David’s will directs that if Christina is deceased, her share will go to her children. However, David no longer wants Christina’s share to go to her descendants, but rather wants her share to go to Henry, Christina’s husband.)

2.  Have you divorced your spouse? If you have divorced your spouse, your entire estate plan needs to be reviewed to make sure that your ex-spouse does not receive any benefits if you die.

3.  Have you added any children to your family? It is important to keep your will up-to-date on your intended beneficiaries. I probated a will where a father failed to update his will and the two minor children, born after his will was written, claimed through their guardians that they should receive an omitted child’s share under their father’s will. This could have easily been avoided by the father updating his will and naming all of his children.

4.  Are all of the people or organizations that you want to receive your assets on your death named in your will? Are there any other people or charities that you want to benefit? Or do you have people or organizations named in your will that you no longer want to benefit?

5.  Do you want the person or company named as trustee to act as the trustee if a trust is created? If you have named a corporate trustee, are they still acting as corporate trustee? For example, if you named Frontier Bank as trustee (because they were a local bank at the time), are you now willing to have its successor, Union Bank of California, act as trustee? In addition, will the corporate trustee still be willing to act as trustee based on the size of the trust? Many corporate trustees will not accept trusts that are smaller than $1,000,000.00. If you have named an individual as trustee, has the individual demonstrated the ability to handle money in a trustworthy manner?

6.  Do you want to make any provisions for your pets? This question is really asking do you want to leave money for the care of your pet?

7.  Do you want the person named as guardian to act as the guardian for any children under the age of 18? Is the person named as guardian still able and willing to act in that capacity? Does the guardian have a medical condition that would impact that person’s capability to act as guardian?

8.  Do you want the person named as personal representative (executor) to act as personal representative? Is the person named as personal representative still able and willing to act in that capacity? Does the named personal representative and/or alternative personal representative know where to locate the will if something happens to you?

9.  Have you purchased real property outside of Washington state?

10.  Have you created a list to dispose of your tangible personal property? A signed and dated tangible personal property list assists a personal representative in knowing who is to receive a particular item. This can avoid a lot of family turmoil and time arguing about prized family possessions.

11.  Are you or your spouse going to be in need of nursing home care within the next five years?

12.  If you have a revocable living trust, is everything still titled in the name of the trust? If assets are not titled in the name of the trust, then a probate may be required at the time of death (which may defeat the purpose of the revocable living trust).

13.  Do you still trust the person named as your attorney-in-fact to make financial decisions for you? Will the named attorney-in-fact make financial decisions in your best interest? Does the person named as your attorney-in-fact know where to locate your power of attorney? Is your durable power of attorney more than five years old? As durable powers of attorney age, financial institutions become less likely to accept them.

14.  Do you still want the person named as your attorney-in-fact to make health care decisions for you? Have you discussed your health care wishes with your attorney-in-fact for health care and your physicians? Is someone other than your named attorney-in-fact actually accompanying you to doctor’s appointments and assisting you with your medications? Have you changed your mind regarding the care that you do or do not want to receive if you are terminally ill or permanently unconscious?

15.  Have you named only one of your children as a Joint Tenant With Rights of Survivorship (“JTWROS”) on your bank or brokerage account? Did you forget that you have a durable power of attorney and the attorney-in-fact named in that durable power of attorney can sign on your checking account without being named as an owner? Please remember that JTWROS accounts transfer to the named joint tenant and do not come under the provisions of your will.

16.  Do you know where your estate planning documents are located? The best planning is worthless if the estate planning documents cannot be located at the time they are needed.

If it has been more than 5 years since you last signed your estate planning documents, please make sure that the people that you have named to act on your behalf (your “fiduciaries”) are available and able to act. It is also time to update if there have been births, marriages, divorces or deaths among the people you want to be beneficiaries of your estate. Finally, it would also be appropriate to update your estate plan if we know for certain now that your estate is not going to be subject to estate taxes and you want to simplify your estate planning.

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