• IF YOU HAVE MINOR CHILDREN, YOU NEED A WILL. None of the Biden administration tax-reform proposals affect the need for a Will. Having a Will is critical, especially if you have minor children. Through a Will, you can nominate a guardian to care for your minor children upon your death. Choosing a guardian should be a carefully reasoned decision made by you, the parents. Without a Will, a court will make the decision for you.
• IF YOU OWN A HOME, CONSIDER A LIVING TRUST. The closing of the courts during the pandemic magnified the need for a funded Living Trust. Those dying without a properly funded Living Trust essentially had their assets frozen without any recourse for correcting title. The assets could not be sold or refinanced until the court reopened, resulting in huge financial losses. Eliminate the need for a probate in court by holding assets in a Living Trust. A funded Living Trust also eliminates probate fees, which often range from $10,000 to $70,000 or more.
• JOINT TENANTS BEWARE. Unmarried individuals holding property as joint tenants could have to pay double estate taxes. The results for married couples can be equally costly because the surviving spouse does not get the full benefit of the step-up in tax basis upon the first spouse’s death. In other words, the surviving spouse selling a property held as community property instead of joint tenants could save significant capital gain tax on the sale of the property. Case law also allows couples to save significant estate taxes on community property by allowing them to take a 15% valuation discount. Usually the benefit of creditor protection for property held in joint tenancy is far less important than the benefits of holding property as community property.
• CONSIDER A NEW KIND OF “BYPASS TRUST” Leaving all your assets to your spouse could be disastrous estate planning. However, using a traditional bypass trust could also cause huge problems. Considering a QTIP Trust could add important flexibility in light of the sunset of current tax laws at the end of 2025, and the possibility of drastic changes in tax laws under the Biden administration. Also, be sure to discuss the so-called “Clayton Election” with your estate planning attorney as an option for flexibility in estate tax planning after one spouse’s death. Having the right advice to properly structure your trust will impact how much your family receives and how much goes to the IRS, now more than ever. Be sure to review and update your plan in light of the changing tax laws.
• A BYPASS TRUST AND/OR QTIP TRUST CAN PROTECT YOUR CHILDREN. Even if you do not have a taxable estate, you may want to have a Bypass Trust and/or a QTIP Trust to ensure that after your spouse’s death, at least ½ of your estate will be given to your children. Without a Bypass and/or QTIP Trust, your children may not receive any of your assets due to your spouse having the ability to change the ultimate recipients of your property.
• CHOOSING THE BENEFICIARY OF YOUR RETIREMENT PLANS AND LIFE INSURANCE. Under certain circumstances, you can name your Living Trust as the beneficiary of retirement plans. Review your beneficiary designations carefully, and confirm that your designations comply with the current law. You might also consider having your Living Trust as the beneficiary of your life insurance to protect some of the proceeds from a future second spouse of your current spouse. If you have young children, a properly drafted trust can be the secondary beneficiary to protect the children.
• ALL LIVING TRUSTS ARE NOT ALIKE. Without proper planning, estate taxes could eat up as much as 40% to 55% of your estate. A Bypass Trust or QTIP Trust will allow a couple to completely avoid estate taxes up to the applicable exclusion amount. A QTIP trust can ensure that property goes to your children, not to a second spouse. Address issues such as the type of formula clause that fits your estate, whether your spouse should be the sole trustee, and whether you want a separate share trust for your children, or a family sprinkling trust that provides for all family members from a single trust.
• YOUR FAMILY MAY RECEIVE ONLY PART OF YOUR LIFE INSURANCE PROCEEDS. If the gross value of the estate including life insurance exceeds the amount of the applicable federal estate tax exemption, the excess will be subject to federal estate tax. Having an irrevocable life insurance trust own the life insurance allows 100% of your life insurance proceeds to pass to your heirs without being subject to estate taxes.
• TAX LAWS AND PERSONAL CIRCUMSTANCES CHANGE. REVIEW YOUR CURRENT ESTATE PLAN AT REGULAR INTERVALS. Although one of the biggest mistakes people make is dying without a will, the second is not updating your will. An estate plan should be reviewed upon any major life-changing event (birth or adoption of a child, marriage, divorce, moving to a new state) and upon every major tax law change. At a minimum, you should review your plan every 2 years.
• CONSIDER PREPARING AN ETHICAL WILL. An ethical will is a non-legal document in which you share your wisdom, your values, and your hopes and dreams with your family. Even if all your estate planning is up to date and in legal order, if you haven’t prepared an ethical will, your family won’t know all that you want them to. Leaving your family with a writing that embodies who you are is a living legacy.
CHECKLIST OF QUESTIONS IN REVIEWING YOUR CURRENT PLAN
• Do we/should we have a Bypass Trust or QTIP Trust in our Living Trust?
• Is our trust for children a separate share trust or a family sprinkling trust?
• Do we need a life insurance trust and is the amount and type of life insurance adequate?
• Do we have a buy-sell agreement for our business?
• Have we reviewed our estate plan within the last 2 years?
• Are all of our assets (house, bank accounts, partnership interests and personal property) titled in our Living Trust?
• Do we own any property as joint tenants?
• Have we considered whether we should own any of our assets in a “Limited Liability Company”?
• Who is the beneficiary of our retirement plans (spouse or the trust)?
• Have we put our estate planning documents in a safe place (a safe deposit box or fireproof safe) and more importantly does the successor trustee and the person making healthcare decisions know where the documents are located?
