January 2015

QUARTERLY INSIGHTS FOR CLIENTS: Estate Planning Resolutions for 2015


A big part of maintaining your current estate plan is keeping up with changes in family, finances, and the law.  What better time to do this than early in the New Year, when motivation to keep resolutions remains strong?  Our first edition of Quarterly Insights for Clients this year highlights some of the steps you should resolve to take so that your estate plan will work as intended.

Have Your Family, Friends, or Other Beneficiaries Changed?

Estate plans never operate in a vacuum.  They deal with our family, friends, charities and other beneficiaries.  As changes occur, you should check your plan to see if it needs updating.  Estate plans usually need changing in the case of marriage, divorce, births, deaths, and changes in ages, health, mental capacity, or residency.  Also, if your charitable goals have changed, and charitable organizations are part of your estate plan, updates likely are needed.  Finally, people you named to important roles such as trustees or guardians may no longer be appropriate, for any number of reasons.

The kind of changes needed may be varied.  Obvious changes include adding new children, grandchildren, or spouses.  Usually our wills and trusts include “after-born” children, grandchildren, or other beneficiaries, but it is worth checking to be certain that they do.  Sometimes California law can produce an unforeseen result in such cases if our documents are not updated.  For example, a “pretermitted” spouse – a spouse not mentioned in a will – usually is entitled to a share of the other spouse’s estate.  If you marry without updating your estate planning documents, you risk having your spouse share in your estate based solely on the law rather than on what you want.

Less obvious changes may be necessary.  Here are two common situations:

  • A portion of your assets probably will pass under documents other than your will and revocable living trust.  For example, if you have an old life insurance policy which lists the names of your grandchildren on its beneficiary designation form, grandchildren born after you filled out the form probably will not be included without an updated form.  The fact that your will and revocable trust include such after-born grandchildren doesn’t matter.
  • If a family member or friend has been given an important role in your estate plan, such as serving as a trustee, executor, guardian, attorney-in-fact, or agent, changes with that individual may require changes to your documents.  This can happen if that person has fallen ill, died, moved away from your family, suffered financial or personal loss, or no longer has the time, inclination, or ability to help.  Also, your relationship with the person named may simply be different now, or you may have someone else in mind who is more appropriate.

Have Your Financial Circumstances Changed?

Your estate plan deals with and disposes of your assets and liabilities, for the benefit of you and your beneficiaries, during your lifetime and upon death.  As your assets and liabilities change, your estate plan may need to be changed to carry out your intentions.  For example, years ago you may have been of modest means and had young children.  A simple estate plan designed to protect a surviving spouse and children in the event of a premature death might have been appropriate.  However, what if a new business opportunity turned very profitable and your net worth sky rocketed?  Or, what if your career has proved successful over the years and your wealth has greatly increased?  A simple plan that just leaves your estate to children once they reach age 21 may now create a risk of spoiling the children or exposing them to claims from creditors or future ex-spouses.  It may be prudent to update the plan with trusts designed to protect the additional wealth for the benefit of the children, and defer the age when the children gain unfettered access to funds until they gain necessary maturity.  There may be an opportunity to create lifetime trusts for the children to move any assets now expected to have high growth potential, like pre-IPO or founder’s stock, out of the parents’ estates at significant tax savings.

Acquisition of new business ventures or expansion of an existing business may require that you address who should step in to manage the business in the event of disability or death.  Usually someone with the necessary time and business acumen is the best choice to handle active business management, and that might not be one’s spouse, children or other family members.

Acquisition of unique assets may require special estate planning steps.  For example, a new vacation home intended to be kept in the family for enjoyment by future generations may require a special vacation home trust provision, tailored buy-out language to accommodate children who might not want a share of the property, carrying cost arrangements, or restrictions on transfers outside of your family.  A special lifetime trust like a Qualified Personal Residence Trust (QPRT) might be considered.  A growing art collection may require different provisions than other assets.  These provisions might leave the collection to a museum that will preserve the collection into the future, producing charitable contribution tax deductions, rather than to family members who don’t share the collector’s art appreciation, producing a potential estate tax liability.

Have Relevant Laws Changed?

Our past Quarterly Insights for Clients have described the major changes made to the federal estate, gift and generation-skipping transfer taxes over the last few years.  Perhaps the most important was enactment of a much higher exclusion from tax of $5,000,000, indexed for inflation.  This new exclusion became effective in 2010, and indexing began in 2012.  Last year the exclusion climbed to $5,340,000, and in 2015 it became $5,430,000.  This increase in the tax exclusion – the amount that can pass free of gift, estate, and generation-skipping transfer tax – presents opportunities for individuals looking to save tax.

With proper estate planning, a married couple can now leave a combined estate of $10,860,000 to family, friends, and other non-charitable beneficiaries, free of estate, gift and generation-skipping transfer taxes.  Any estate plan not updated with this larger exclusion in mind may miss tax savings opportunities.  Also, estate and gift tax savings may now be available for some married couples using a simpler estate plan than in the past, due to other changes made to the tax exclusion (“portability” of a predeceased spouse’s exclusion to the surviving spouse).  For individuals using lifetime gifts to move assets to family or other beneficiaries and to save future estate tax, the new $5,430,000 exclusion allows them to make larger gifts that are free of gift tax than before.  For individuals who had exhausted their entire exclusion by the end of last year, the $90,000 increase to the exclusion this year gives them an additional amount that they can now give away without gift tax.

Another feature of annual gift programs is use of the gift tax annual exclusion.  This exclusion allows an individual to make any number of gifts each year to any number of donees, free of gift tax, as long as the yearly total remains under the exclusion amount for gifts to each donee.  With the new year comes a renewal of the full annual exclusion, available to use before the end of the year.  The sooner you use your exclusions in 2015, the more post-gift income and appreciation can be shifted to donees.  Note that the annual exclusion is also indexed for inflation, but that it remains at $14,000 because the inflation adjustment this year was below the minimum threshold needed to increase the exclusion.

Finally, while gifts to a spouse can be in any amount without gift tax, special rules govern gifts to non-citizen spouses.  Those gifts remain subject to federal gift tax (once the donor has exhausted the $5,430,000 exclusion).  However a special, larger, gift tax annual exclusion applies to the gifts.  This exclusion is $100,000, indexed for inflation.  Last year the exclusion was $145,000, and this year the indexed amount increased to $147,000.  For individuals looking for a simple way to move assets to a non-citizen spouse free of U.S. estate and gift taxes, this increasing exclusion can be used each year.

In Conclusion

No estate plan has an unlimited shelf life.  With changes in family, finances, and the law, such as discussed here, comes the need to review your estate plan.  Also, any estate plan that is more than a few years old runs the risk of becoming outdated.  The process of checking to be sure an estate plan is up-to-date is rarely as involved as creating the plan in the first place.  Another plus to updating your plan this year is the satisfaction that comes with making a resolution and sticking to it!  An easy way to see if your plan is in need of an update is to get in touch with your estate planning attorney and explain what has changed for you.