When should I review my will?In order to make sure your estate plan accurately reflects your current goals, your Will should be reviewed periodically based upon your circumstances. For example, if you have experienced significant changes in your family, you should make sure the appropriate family members are named and taken care of consistent with your plan. If your financial circumstances have changed considerably, formulas, set amounts or specific bequests in your Will, as well as various tools or gift plans, may require adjustments. The named representatives should also be revisited to make sure they are still appropriate, taking into consideration the type of assets in your estate, potential beneficiaries, and the overall role expected. In addition, if you are a business owner, your succession plan in the event of your death or incapacity should be updated based upon the current ownership, management, and overall plan. Finally, updates to your Will may be required based upon changes in the law.
Additional Frequently Asked Questions
Section 529 plans are college savings plans sponsored by states. In choosing a 529 plan, you may invest in one sponsored by a state other than your residence, and the funds may be used to pay tuition at qualified colleges anywhere in the U.S. The fees vary, so it is worthwhile to shop around. These accounts are popular for estate planning because you may make tax-free contributions to a 529 account up to the annual exclusion amount ($14,000 per donor per donee per year), and the assets will grow tax-free. It is possible to make a lump sum contribution covering 5 years of annual exclusions ($70,000 per donor or $140,000 for a couple; a gift tax return is required). If you have multiple beneficiaries, you may set up a separate 529 account for each one. If the funds are not used by the beneficiary for college, the account can be transferred to a different family member. Consult your professional advisor for further information.
Stay in contact, and check on your relative in person as frequently as possible. We have had cases where a relative living alone has sounded fine to family members on the phone, but was in fact slipping into dementia and not paying any attention to his or her finances. When the family members become aware of the problem, there are often stacks of unpaid bills, unpaid taxes, etc. that are expensive and time-consuming to sort out. And if the incapacitated person does not have a properly signed Durable Power of Attorney, the consequences can be severe. We recommend you work with a professional advisor to make sure your aging relative has all of the necessary documents in place.
With so many people keeping their records electronically, participating in social media and storing photos on their computers, digital assets should be considered in many estate plans. As with your other assets, your Personal Representative or Successor Trustee will have control of many of the digital assets when you pass away. However, there may be various concerns. First, the person needs to be able to identify these assets. Keeping an inventory of online accounts and other digital assets can assist with the identification. Next, the person needs to be able to access these accounts or assets. Having an updated list of access codes in a secure location known by your representative will be helpful. Certain providers may also have their own process to transition or remove accounts. Finally, providing clear instructions is important. There may be other considerations as well so be sure to discuss this with your professional advisor.
My sister, a resident of another state, tells me I need a Revocable Living Trust to avoid probate. Is that true?
Probate is the legal process for administering the assets owned by a person who has passed away. While it is true that a Revocable Living Trust will enable your estate to avoid probate when you pass away, it only works if you transfer all of your assets into the name of the Living Trust during your lifetime. Also, avoiding probate is not as compelling in Washington as it is in many other states, because we have simplified, “nonintervention” probate procedures, so our probates tend to be less expensive than in other areas. We recommend you check with your advisors to determine whether you should seek to avoid probate through your estate plan, whether by using a Living Trust or incorporating other methods.
Gift tax returns are due by April 15th of the year following the gift and are most commonly required when an individual gives any one person gifts during the calendar year that total more than $14,000. While there are penalties for failure to file gift tax returns, the penalties are generally based upon the tax due and often no tax is due. Even so, the tax community has seen an increase in gift tax reporting enforcement, including the IRS working with state agencies to obtain land records for intra-family transfers. Though historically rare, the IRS has examined hundreds of taxpayers in recent years. We suggest you meet with a professional advisor to determine if you are required to file a gift tax return.
In 2014, each individual has a $5.34 million Federal estate tax exemption. With spousal portability, if the first spouse to die does not use his or her estate tax exemption, it is transferred (ported) to the surviving spouse so that any unused exemption can be used at the surviving spouse’s death. Portability can be helpful when a married person dies intestate, an estate is left outright to a surviving spouse, or there is unequal asset ownership. It can also be a useful capital gains and income tax planning tool and can allow individuals to take better advantage of trusts. An important note is that we do not have spousal portability for the State estate tax. Spousal portability is just one of many considerations in your estate planning, so work with a professional and determine how portability may be used in your estate planning.
The federal estate tax exemption equivalent for a person who dies in 2014 is $5.34 million. The Washington state estate tax exemption for 2014 is $2,012,000 per person. Given these exemption amounts, many decedents will not have a taxable estate. Nevertheless, we recommend having Last Wills that preserve the possibility of using both spouses’ exemptions by including a trust for the surviving spouse. For those who are unsure whether a trust will be needed, a “disclaimer” Will is a flexible approach that allows a couple to wait and see what the situation is at the time of the first spouse’s death. This type of Will gives the surviving spouse the option to create a tax savings trust if desired at that time. We suggest you contact your advisor for further details.
If you have charitable goals as part of your estate plan, naming a charity as the beneficiary of your traditional IRA or retirement plan can be compelling. When you name your spouse, children, or others as beneficiaries, the full value of your traditional IRA or retirement plan will be part of your taxable estate. In addition, the beneficiary will be subject to income tax on the distributions received. In contrast, if you name a qualified tax-exempt charity as your beneficiary, your traditional IRA or retirement plan will not be subject to estate tax as your estate will receive a charitable deduction. Moreover, the charity will not have to pay any income tax on the funds received. If you are including charities in your estate plan, talk with your estate planning attorney to determine if this is the right choice for you.
How does the repeal of DOMA affect federal and Washington State estate taxes for same-sex married couples?
As a result of the U.S. Supreme Court overturning the federal Defense of Marriage Act (“DOMA”) last June, all individuals who are legally married are now entitled to receive the same federal benefits, regardless of their gender. Among other benefits, samesex married couples can now take advantage of the federal estate tax marital deduction, which can result in significant estate tax savings. Washington State has recognized same sex marriage since 2012. Our state estate tax is tied to the federal estate tax, so until the Supreme Court issued its historic decision on DOMA, we did not know whether same sex couples were entitled to claim the marital deduction for Washington estate tax purposes. We now know they are. This opens up important estate planning opportunities for same-sex couples in our state.
If you own a business, it is important that you have some form of succession plan to ensure that your business will continue to operate in the event of your incapacity or death. The plan may be a means of transferring it to employees or family members and can be planned as a sale or as a gift. It may also provide for the management of the business in your absence. Depending on the type of entity, a shareholders agreement or LLC operating agreement should be reviewed for restrictions. In addition, your estate planning documents need to be consistent with your succession plan, especially if restricting ownership to certain beneficiaries. Various vehicles are available to use in your succession planning, which may include transfers during your life or transfers to take effect upon your passing. Talking with your professional advisor is a key element of any succession plan.
One of the biggest mistakes made in estate planning is ensuring that assets are titled and beneficiary designations are updated to be consistent with your estate plan. Based upon the intent of your Will, all or a large portion of your estate assets may need to be available to fully fund a trust for your spouse or provide for specific bequests. However, non-probate assets, such as assets held as joint tenants with rights of survivorship, payable on death accounts, life insurance, and retirement plans, pass outside of your Will. If you are relying on any of these assets to be available to fund a trust under your Will or to make a specific bequest, then accounts or real property should be held in your individual name, or with your spouse as community property or tenants in common. Moreover, depending on the directions given in your Will, beneficiary designations should name a particular trust itself or provide for a disclaimer into the trust. Remember to review these items with your estate plan.
Much of the discussion has been about the federal estate and gift tax exemption increasing to $5.25 million per person. However, in the State of Washington, the estate tax exemption is only $2 million per person. While this may seem high enough per person, it can be more easily exceeded when adding in life insurance policy proceeds or when one spouse leaves everything outright to the surviving spouse without using their exemption. Washington does not have portability, so if one does not use their exemption, it is lost and the surviving spouse has the entire estate with the benefit of only one exemption. Through proper planning with trust formulas in your estate planning documents, this issue can be avoided.
On January 1, 2013, Congress passed the “American Taxpayer Relief Act of 2012,” which is being described as a compromise deal to avert the fiscal cliff. This new law approves the first “permanent” set of estate, gift and generation-skipping transfer tax provisions in 12 years.
In general, retirement plan assets, such as IRAs and 401k accounts, pass by beneficiary designation and are not controlled by the account owner’s Last Will. Therefore, if your retirement plan assets are a large part of your net worth and you are married, you may need to take steps to ensure the value of those assets is available to fund a “credit shelter trust” or “exemption trust” under your Will, in order to fully capture the first deceased spouse’s estate tax exemption. Full funding of such a trust is recommended for estate tax savings because, even though we currently have portability of the federal exemption between spouses, there is no portability under the Washington estate tax law. Further, unless Congress changes federal law, spousal portability will not be available after 2012. We recommend you speak to your professional advisor to make sure your beneficiary designations are consistent with your estate planning goals.
My spouse died in 2011 or 2012. Even though a federal estate tax return is not required to be filed, should the estate file one anyway?
In order to elect portability, a federal estate tax return (Form 706) must be timely filed. Portability allows a decedent’s unused federal exemption to be transferred to the surviving spouse’s exemption, allowing the surviving spouse to use his or her own exemption, plus the unused amount, when he or she later dies. Based upon the changes in the estate tax laws at the end of this year, portability may be an effective estate planning tool for a surviving spouse. Please note that the Form 706 must be timely filed, though recent regulations have provided for an automatic extension when the decedent passed away in the first six months of 2011. If you’ve lost your spouse recently, be sure to talk to your professional advisor about the portability election.
First of all, this question assumes probate should be avoided. Because Washington has a relatively simple probate process, many people do not have much to fear from probate. Nevertheless, avoiding probate is generally done by employing a “Revocable Living Trust.” A Living Trust gives title of your assets to a Trustee (usually you) to hold for your benefit. At your death, your named successor Trustee holds legal title to your property and may transfer your assets to your named beneficiaries without probate. Probate is also avoided if all of your significant assets are held as “joint tenants with rights of survivorship” or have beneficiary designations. There are pros and cons to consider, so whether you should avoid probate, and how to best accomplish it should be discussed with your estate planning attorney.
A qualified personal residence trust (“QPRT”) is an estate tax savings strategy that uses your personal residence to make a gift during your lifetime that will ultimately save estate taxes. For instance, if you make a gift of your home to your children now, you can reserve the right to live there for a number of years. The right to live there has a value, which is deducted from the value of your home in determining the amount of the gift. You save estate taxes because, if you survive for the number of years you reserved, the house passes as a gift to your children and is not in your “gross estate” for estate tax purposes. The amount of the gift consumes a lower portion of your gift/estate tax exemption that otherwise would occur, so there is more of your exemption left to shelter other assets.
Unlike baked bread, pop music and designer clothes, your Will does not grow stale with time. A Will written in 1945 still may be valid and effective today. However, your Will may get out of line with your intentions as your family and financial circumstances change, or as estate tax laws are revised. For example, the $5 million gift to charity may no longer make sense when your net worth declines from $20 million to $10 million. Likewise, the nomination of Uncle Jim as Executor becomes inappropriate when Jim develops dementia or moves out of state. Rather than updating your Will with the passing of time, use significant changes in financial or family circumstances, or tax laws, as a trigger to review your Will.
What is the difference between a Living Will, Health Care Directive, Advance Directive and Do Not Resuscitate Order?
Living Will, Health Care Directive, and Advance Directive are interchangeable terms for the legal document that instructs your physicians to remove you from life support should you be in a terminal condition or irreversible coma. This document also can provide customized instruction for end of life care (for example, specific instructions mandated by conscience or faith). We recommend all of our clients possess a current Living Will/Health Care Directive/Advance Directive. In contrast, a Do Not Resuscitate Order is a document appropriate only for the seriously ill, as it instructs physicians not to make efforts to revive you from cardiac arrest. This instruction is not appropriate for all clients and should only be given after consultation with your physician.
Why should I consider appointing a professional trustee to manage the trust for my children? Aren’t trust companies too expensive?
A professional trust company may well be worth its fees. Consider the following reasons why it may not be best to appoint a family member: First, by serving as trustee, your family member is exposed to liability for which he or she has no training. Secondly, the relationship between your family member and the trust beneficiaries may be stressed by the financial entanglement created by the trust. Finally, if the trustee does fail in some respect, would you rather have your children seek legal redress from their relative or from a licensed and insured professional? Make the best choice for your family, but don’t dismiss professional fiduciaries out of hand.
Living Trusts are frequently used in place of a Last Will as the primary means of transferring assets at death. They have unique qualities that make them an attractive alternative for certain individuals. In comparison to Wills, Living Trusts are more private and allow the estate to pass without probate if correctly implemented, among other qualities. However, Living Trusts also are more complex to create, require more maintenance, and can often fail to avoid probate if neglected. Don’t accept your neighbor’s word you are missing out, but do have a conversation with a qualified estate planning lawyer to judge for yourself whether a Living Trust meets your needs.