The 45th Annual Notre Dame Tax & Estate Planning Institute in South Bend, IN brings together some of the top estate planners from around the country to lecture at a two day conference. This is the first in a series of articles elaborating on some of the many planning nuggets gleaned from the conference that might have important planning implications to readers. This one is pretty simple, but incredibly important.
Most folks do not update their estate plans often enough. The most common (and most absurd) excuse for not updating planning that most advisers hear is: “nothing has changed.” If “nothing has changed,” you should not need to update your will. Well, estate planning is about much more than your will. The odds of “nothing” having changed after even a few years is pretty slim. It is pretty unlikely that your yellowing estate planning documents, or the planning that they were based on, remain current.
If you haven’t updated your planning after the 2017 tax act, it might be more apt to suggest “everything” has changed. The law made dramatic changes by increasing the estate tax exemption, eliminating personal itemized deductions and so much more. Also, has your family stayed the same? No one has married, died, divorced, had children? Could your portfolio be the same as years ago with the incredible market run up? The list goes on. Here’s some items that might make it imperative that you change or update your plan and/or documents:
· Change in the tax law.
· Marriage (your or an heir).
· Divorce (you or an heir).
· Death (in the family or of a key person named in documents).
· New child or grandchild.
· Move to a new state.
· Significant change in economic circumstances.
· Change in jobs (changes in beneficiary designations and benefits).
· New or worsening health issues.
· Change in wishes.
· Change in relationship with anyone named as a fiduciary or beneficiary.
· Possibility of a new lawsuit or claim.
· Resolution of a major lawsuit or claim.
· Change in life insurance.
· Change in state law that might affect inheritance rights, spousal right of election or other matters pertinent to you estate planning.
But you should not focus on a list of the changes that should trigger your updating your estate plan. Those lists of changes requiring update are often obvious reasons to update. But, it’s often the less obvious changes that don’t make the lists, and that you might not even think about, that require you update your planning and documents. You might not even be aware of a major change in your state’s tax laws. There are always loose ends to every estate plan and it’s only through regular meetings with advisers that those will be identified. Therefore, for all these reasons, the smarter and safer approach is to meet with your estate planning team (not just your estate planning attorney) anytime you think something significant has happened (and that’s often based on lists like those points above) but also, regardless of having a particular reason, you should meet every few years. The larger and more complex your estate is, the more complex your family, the more often that should be. For many every year is really wise, certainly every year or two makes sense. If your estate is smaller, be more cost efficient about the meetings. Try meeting by web conference. Prepare the information your advisers will need yourself (e.g. an updated balance sheet, current family information, a list of questions you would like to address, a list of changes you think might be desirable) to save the cost of your advisers doing that leg work. Saving costs is fine. Not meeting is probably a mistake.
Here was a case scenario discussed at the Notre Dame Institute that highlights an unexpected result that cost a family a hefty sum of income taxes that could have been easily avoided with meetings with the full advisory team.
Husband and wife met with an estate planning lawyer many years ago. They owned a lake house and were concerned how the estate tax (back then the estate tax exemption was a mere $1 million) would impact their ability to bequeath the family lake house on to future generations. So, on advice of counsel, they gifted the lake house to a trust to remove the value of the house, and especially future appreciation in that lake house, from their estate. The plan was to avoid estate tax. H died.
Well, mom and dad passed away and the children really didn’t want the lake house their parents had assumed they so loved going to (not an uncommon event). The children waited for the last of mom and dad to die before selling as they did not want to hurt their feelings about this matter. When they sold the lake house they got zapped by a large capital gains tax.
What went wrong? The clients never went back to their planning team to review the status and continued relevance of the plan. The estate tax exemption in 2019 is $11.4 million per person. The entire reason for setting up the trust was obviated by the later substantial increases in the estate tax exemption. Perhaps for the family a better approach might have been to terminate the old trust and to have distributed the house back to mom and dad while they were alive. Then, the house would have been included in their estates and the tax basis (the amount on which gain or loss is determined on sale) would have been increased (stepped-up) on death. There would have been no estate tax because of the large exemption, but the children would have avoided hundreds of thousands of dollars in capital gains tax on the sale. The trust might have been terminated by the terms of the trust, or perhaps agreement of all involved as a non-judicial modification, or in some other way.
This is not an unusual situation. As another common example, for decades a common estate planning approach was to create a credit shelter trust (also called family trust or bypass trust) on the death of the first spouse. That trust would have been intended to permit the surviving spouse to have access to the trust assets but keep them out of the surviving spouse’s estate thereby using and preserving the benefit of the estate tax exemption of the first spouse to die. That was intended to save a bunch of estate tax. For many people these commonly used trusts will now save no estate tax on the death of the surviving spouse (because of the current high exemptions) but may result, just as with the lake house example, in a greater capital gains tax. So might terminating the old credit shelter trust be beneficial? Maybe. But don’t jump the gun without discussing all the pros and cons with your advisers. It may be possible to that the surviving spouse has remarried and if assets are distributed the children from the first marriage will lose out completely. But in some instances terminating might be right.
The key is don’t rely on old planning. Meet with your team and review options and update as appropriate. The savings can sometimes be dramatic.