Estate planning can be complicated and easy to put off. Even when done, many often think things are done forever. Yet, things change. Here are some items to consider in light of life’s changes.
You name an executor to take legal control over your assets when you pass away. They collect your assets, pay final debts and expenses, and file federal and state tax returns, if needed. Unfortunately, it is not uncommon for the named executor, years after the documents have been signed, to have moved away, no longer be suited for the position or even deceased. Or, if a professional is named, are they even still in business?
Perhaps the financial condition of your children changed over time. Suppose your daughter is a high earner but your son decided to pursue a career with less financial rewards but more personal or social ones. Maybe an unequal distribution of assets is now in order to treat them fairly but not necessarily equally.
Or perhaps you’ve helped a child more so than another since you initially planned your estate. Maybe your child went through a divorce or had your financial help in starting a business. Should you modify your planning to account for this?
But maybe it’s you who changed. You moved into a new state with different laws. The State of Ohio Health Care Power of Attorney document you put in place while an Ohio resident was perfect. But is it now in your new state or the state you venture to during the winter months? Or perhaps there are estate or inheritance tax laws now to plan for.
Solution: Review the key people and provisions in your documents and your beneficiary designations every few years to ensure your plan is reflective of what you want today.
In 2019, individuals can exempt up to $11.4 million free of federal estate and gift taxes and twice this amount for married couples. Thus, few estates today will pay estate tax. Yet, traditional A/B trust documents done for you from years prior likely include planning that was appropriate for a much lower exemption. This may cause undesirable income tax consequences for your beneficiaries down the road.
For example, traditional trust language directs non-IRA assets into a bypass or B trust to be funded up to the exclusion amount. Given today’s high exclusion, all of your non-IRA assets may go into B trust even though your estate had zero estate tax exposure.
While the beneficiaries of your B trust can reap the benefits of having these assets protected within the trust, it may provide some unfavorable income tax consequences.
Why? The assets funding the B trust have the cost basis stepped-up on the first death, making any unrealized capital gains vanish. However, when the surviving spouse dies, the assets in the bypass trust do not receive a second step-up.
Suppose Dad passed and one million dollars in non-IRA assets went into the B trust. Mom lived for many years more and the assets doubled. The kids inherit assets in the B trust after mom passes, but the unrealized gains of one million dollars follow. If these assets are sold and assuming a twenty percent effective tax rate, they have to pay two hundred thousand dollars in capital gains tax. If not sold, they have a lot of tax and investment complexity to plan around.
This traditional language focuses more on estate tax planning while a more appropriate focus for most families would be on income tax planning – something the bypass trust does a poor job of in many cases.
Solution: Review your trust language and formulas. Savvy attorneys are drafting language that can accommodate plans whether the exemption stays high or goes lower. Flexibility is often the key in good planning.
Planned is in the past. Planning is ongoing. As people and things change, planning often needs to change too. A good estate attorney or financial advisor can help you review your estate planning every few years to ensure your plan is appropriate for today.