Six Reasons to Update Your Estate Plan
Here are six reasons why you might want to consider updating your estate plan:
1. Most estate plans for a married couple over the past many decades were crafted to make use of the federal and state estate tax exemptions by mandating that when one spouse dies that spouse’s assets would pass to two trusts for the benefit of the surviving spouse: one that made use of the smaller exemption from state estate tax and one that could make use of the larger exemption from federal estate tax. And for very large estates, a third trust would hold assets that exceed both exemptions and qualify to defer taxes until the death of the surviving spouse. And worse, many trust documents mandated that one or more of these trusts be further divided into a trust that is exempt from generation-skipping tax and a trust that is subject to such tax. What a crazy mess!
Over the past few years we have found that mandating these trusts is cumbersome and we don’t draft documents like that anymore. Rather, we prefer that the first spouse to die leaves everything to a single trust for the benefit of the surviving spouse and, before determining whether to divide the trust into multiple separate trusts, or even terminate the trust and pass the estate outright to the surviving spouse, we want the surviving spouse to consider:
What trust structure, if any, will best address: (i) the amount of wealth at that time, (ii) the tax laws at that time, (iii) the surviving spouse’s desire at that time for control over assets and comfort level with trusts and independent Trustees, and (iv) the cost of administering one or more trusts.
Both federal and state estate tax exemptions have grown larger such that it may be reasonable to deemphasize estate and gift tax planning and focus more on income tax planning, which in turn might call for something different than the traditional trust structures.
The large exemption from federal estate tax belonging to the spouse who dies first no longer needs to be used at that death and instead can now be transferred to the estate of the surviving spouse, making the use of some trusts unnecessary.
2. New laws and regulations governing the deferral of income taxes for IRAs and for qualified retirement plans such as a 401(k) plan after the death of the owner have changed the game on the timing of income taxes to be paid by the beneficiary, in many cases limiting deferral to only ten years after the owner’s death. And where a trust for the benefit of the beneficiary is inheriting the IRA or qualified plan (the benefits of the trust could be protection of assets from the creditor of the beneficiary or from divorcing spouse of the beneficiary, or from exposure to estate tax at the death of the beneficiary) then the trust document needs specific language in it to qualify for any deferral of income taxes. And the required language in the trust has changes in just the past few years.
3. Estate plans have typically not been very flexible when it turns out that alternative provisions might have made more sense for the beneficiary. While some clients want their will and trust provisions to be iron-clad, many clients are interested to learn that a trust document can authorize the Trustee to make changes to the trust provisions that the Trustee thinks are warranted and which do not subvert the original intent of the trust. You may know the term “decanting” which is to transfer wine from one container to another. “Decanting” a trust means transferring the trust assets from the original governing document to a new governing document with preferred provisions. Many states have adopted laws that dictate when and how this can be done. In Massachusetts, we have no statute, but we do have the case of Morse v. Kraft where our Supreme Judicial Court determined that decanting a trust was permissible in certain circumstances and that it would be permissible in other trusts if made pursuant to an express provision in the trust permitting decanting and if in accordance with any limitations set forth in such provision. We now regularly discuss with clients putting into their trust documents an express decanting provision.
4. Your wealth may have changed since you last focused on estate planning and it may be that more (or possibly less) attention needs to be paid to tax planning.
5. You may want to review the nominations you made of agents in your power of attorney and in your health care proxy, a personal representative nominated in your will to wrap up your affairs after your death, and Trustees to oversee investment of trust assets and distributions of income and principal to your family members.
6. If you are like many clients we have worked with over the years, you no longer favor the charity that you named in your estate plan!