Content provided by WealthCounsel.
Article written by James W. Garrett, Esq.
Estate Plans, like houses, need updating and remodeling from time-to-time. If you haven’t reviewed your Estate Plan in the last five years, you probably should. Congress recently passed two major tax laws that impact estate planning: the American Taxpayer Relief Act of 2012 (“ATRA”) and the Tax Cuts and Jobs Act of 2017.
If you are married and haven’t updated your Estate Plan since the passing of ATRA, your will or trust likely includes an “A/B trust” tax plan designed to minimize estate taxes. Since the 2017 Tax Cuts and Jobs Act raised the estate tax exemption to $11.2 million in 2018 ($22.4 million for a couple), the “A/B trust” tax plan adds unneeded complexity and may result in your children paying higher capital gains taxes. In many instances this tax planning ought to be removed.
If you have substantial retirement plan assets, you need to consider the taxation issues related to passing on these assets to your children and grandchildren. Further, you need to be aware of the impact of the 2014 ruling in Clark v. Ramaker where the U.S. Supreme Court ruled that inherited IRAs are not asset-protected from your children’s creditors. Fortunately, with proper planning, retirement assets can be passed down in trusts for asset-protection purposes, without foregoing your children’s or grandchildren’s ability to stretch-out distributions over each beneficiary’s life expectancy.
Aside from tax issues, if you have experienced some combination of changes involving your family, your health or your wealth, your Estate Plan is probably out-of-date because it no longer reflects your situation and goals. You should have your Estate Plan reviewed if you have experienced any of the following:
- Changes in your family structure, such as divorce, remarriage, birth of a new child or grandchild. If you are married and have children from a previous relationship, you need to update your plan to balance your desire to provide for your spouse, while insuring that your children do not get disinherited. And, if you desire to name an underage grandchild as a beneficiary of your life insurance policy or IRA, you need to understand the problems that will arise when a minor child inherits without proper planning in place.
- Changes in your risk profile. If you own rental property in your own name, you need to understand the legal risks. Since personal ownership subjects you to legal liability, you ought to consider establishing a business entity, perhaps a Limited Liability Company or Virginia Business Trust for asset-protection benefits and other management considerations.
- Changes in the risk profile of your children. When you did your plan several years ago, your son was a successful business owner and you left his inheritance to him outright. Now, as a result of poor business decisions and uncontrolled spending by his wife, your son has accrued much debt. If you were to die today, your son’s creditors could seize the inheritance you left to him. In such circumstances, you should consider changing your estate plan to protect your son’s inheritance by leaving it to him in a trust with an independent trustee.
- Changes to give your adult responsible child asset protection. Historically, most parents would leave an adult responsible child an inheritance outright. Today, many parents – after learning about the asset-protection benefits and family-line protections of a trust – leave that same child an inheritance in a lifetime, beneficiary-controlled trust.
Many old irrevocable trusts need updating too
Many irrevocable trusts need updating and remodeling, too. Old trusts can be hard to work with on a variety of levels. Remodeling these old trusts, consolidating them, or otherwise modifying them to make administration easier saves costs.
A common misunderstanding is that irrevocable means unmodifiable. Did you know that the Virginia Uniform Trust Code provides many ways for an irrevocable trust to be modified without court involvement?
Are you the beneficiary of an irrevocable trust established by a deceased spouse, parent or other family member? If so, the old trust may need updating to minimize capital gains taxation.
Are you the beneficiary of an irrevocable trust trusteed by a bank? Are you dealing with an out-of-state call center? Would you would prefer that you own financial advisor handle the trust’s investments? If so, you need to know that in many instances, a bank trustee can be removed and replaced with an administrative trustee, allowing your financial advisor to manage and invest the funds. (Note: Our law firm established Legacy Fiduciary Services, PLC to serve as trustee in such instances.)
As mentioned earlier, even if a trust is irrevocable, it is often possible to change it without court involvement, provided the change does not violate a “material purpose” of the trust. The exact mechanics will always vary depending on the trust and your situation, but it’s almost always possible to make some improvements.
If your estate plan is more than five years old or if you are the beneficiary of an old irrevocable trust, we’d love to explore whether a remodel is in order. Give us a call today and achieve the peace of mind knowing that your plan will address all of your concerns and goals.