How can I apply some “spring cleaning” to my estate plan?
This month is a great time to review your Will. If you have experienced significant changes in your family, you should make sure the appropriate family members are named, including updating any trust terms. 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 recent changes in the law. Add a review of your Will to your “spring cleaning” list.
Additional Frequently Asked Questions
- What estate planning and tax changes should I be aware of in 2017?
As the year comes to a close and we move into 2017, stay tuned for potential interesting tax changes, including individual income, business, estate, trust, and gift tax related changes. Although unclear at this time, with the incoming Administration and Congress, there is potential for significant adjustments based on campaign suggestions, including individual income tax rate adjustments, elimination of the Medicare surtax, elimination of the Alternative Minimum Tax, carried interest adjustments, itemized deduction changes, elimination of the estate tax and the generation-skipping transfer tax, and basis step up changes. Any of these changes has the potential to alter business succession planning and estate and gift planning considerations. You may want to contact your professional advisors to consider any year-end actions in light of the potential changes. We will all see what ultimately happens, but be prepared for planning updates and opportunities in the New Year.
- What resolutions should I make for the New Year related to my gift and estate planning?
Resolutions for the New Year can be helpful, including when made for gift and estate planning. Some may be more urgent, such as if you have a gifting plan that includes transferring interests in family owned business and investment entities since proposed regulations may significantly impact your ability to apply discounts when valuing these ownership interests. Others may be more housekeeping, such as making sure your beneficiary designations and asset titling are consistent with your estate plan. If you have not reviewed your estate planning documents in a while, or if you have experienced changes in your financial or family circumstances, you should probably add a resolution to review your documents and note changes that need to be made. Regardless of how long your list of resolutions is at the New Year, include contacting your estate planning advisor.
- Who has access to my email, digital photos and social media accounts when I pass away?
Recognizing the need for access to digital assets by fiduciaries (personal representatives of estates, court appointed guardians, trustees, and attorneys-in-fact) upon the owner’s death, Washington recently enacted law to assist with access. The new law provides standards for access to certain digital assets (online banking and investment accounts, email, photos, and social media accounts, for example). While the new law may assist, taking a proactive approach to digital assets in an estate plan can save time, money and unnecessary stress. Identifying an individual to have control of your passwords and other digital assets in your Last Will and Durable Power of Attorney, keeping an inventory of digital assets, maintaining a list of access codes in a secure location known by your representative, and providing clear instructions are all helpful. There are other considerations as well, so be sure to discuss with your professional advisor as part of your estate planning.
- What recourse do I have if a person owes me money when they die?
Unfortunately, people often pass away before they have settled all of their debts, leaving the creditor wondering what action can be taken to collect from the decedent’s estate. In Washington, with some exceptions, pre-death debts can only be collected from a decedent’s estate by properly filing with the court and serving on the estate, a “creditor’s claim” within a certain period of time. The claim must be by the claimant, or her representative, state the address of the claimant or representative, the circumstances constituting the basis of the claim, the amount of the claim and if the claim is secured, unliquidated, contingent, and, if the debt is not yet due, the date when it will become due. Claims improperly or not timely filed can be rejected by the estate and be barred.
- How does a 529 College Savings Plan work?
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.
- In estate planning, what can you learn from Prince’s passing?
With such a well-known person passing without a Will, it is an opportunity for us all to learn a few things in estate planning. First, if you do not have a Will, your estate will pass according to state law. Under Washington law, this would mean that if you are not married and do not have children, your estate will be distributed to your parents and if they are not surviving, to your siblings. Second, without a Will designating your Personal Representative, you are not in control of who will administer your estate. In fact, your family members or friends would need to go to court to have someone appointed. If there is more than one person interested, disputes may arise. Third, if you are concerned with privacy, you can take steps, such as using a revocable living trust, to avoid probate and have your estate administered outside of the courts. Given facts and circumstances different from Prince, you may have other reasons to need a Will, including naming a guardian, protecting assets in trust for your beneficiaries, or including charities. Talk with your professional advisor if you have questions.
- Are no-contest provisions in a last will and testament enforceable?
Legacy planning must often include thoughtful planning to account for difficult family dynamics. Part of that planning can include the drafting of a no-contest provision in a will or trust document to mitigate the risk of litigation between beneficiaries. Washington recognizes the enforceability of no-contest provisions under most circumstances. Such clauses can effectively disincentivize litigation by penalizing the non-prevailing party in a challenge to an estate plan by reducing or eliminating the challenger’s request. Though so-called “will contest” actions place a strenuous burden on the contestant, no-contest clauses have been broadened in light of increasing instances of litigation to address gifts placed in trust, challenges to beneficiary designations in non-probate assets, the commencement of litigation against a surviving spouse, the commencement of litigation against former fiduciaries and the allocation of attorney’s fees to an unsuccessful contestant.
- Should my spouse and I hold assets in both of our names as joint tenants with right of survivorship or in a transfer on death account?
Joint tenancy with right of survivorship or transfer on death (TOD) designations can be a convenient way for married couples to hold property, because upon death the account passes automatically to the surviving spouse. If all assets are held that way, there is no need for probate. However, a joint tenancy or TOD designation is not right in all circumstances. Without proper planning, those forms of ownership can cause complications if you have a potentially taxable estate because it can be difficult to make the assets available to fund a tax savings trust under your Last Will. If you have significant assets held in joint tenancy or TOD accounts, you should discuss that with your estate planning professional.
- When should closely held business owners consider succession planning?
Right away. Closely held businesses often delay succession planning for a myriad of reasons. However, it is one of the most critical aspects for the short term and long term success of a closely held business. Proper succession planning provides stability for the owners as well as the employees. It also provides comfort to those working with the business that the business is in a good position moving forward. Business succession planning may involve several different aspects, including CEO and officer succession planning (for both emergency and nonemergency situations), estate planning, buy-sell agreements (including funding mechanisms), valuation determinations, and tax matters, to name a few. Potential IRS tax regulation changes involving family businesses make succession planning particularly important right now. Moving into a new year makes it a perfect time for closely held business owners to consider their succession planning and engage with their advisors to discuss options.
- My spouse and I signed a Prenuptial Agreement 20 years ago and have been happily married ever since. Is there any reason for us to review it?
It is a good idea to review a Prenuptial or Postnuptial Agreement periodically to ensure it is consistent with your estate planning objectives. Are the property ownership designations and rights upon death reasonable in light of current circumstances? For example, if a family business is owned as community property and one spouse dies and leaves her interest to her children from a prior marriage, the surviving spouse will need to deal with those children as owners of one-half of the business. Do your documents give the surviving spouse the right to buy out the children’s interest? Are there sufficient cash reserves to fund a buy-out, or do you need life insurance? Have your documents reviewed and, if necessary, revised so you can better protect yourself and your family.
- I have a family member with special needs. What is a Special Needs Trust and how can it help?
A Special Needs Trust (“SNT”), also called a “Supplemental Needs Trust,” is a trust created for an individual who has special physical, cognitive or emotional needs and who is, or may become, eligible for governmental benefits, such as Medicaid, that are available only to people of limited financial resources. The SNT is designed to make assets available to the beneficiary in a way that will supplement, but not replace, governmental benefits. In general, the trustee of a SNT has complete discretion to determine the timing and amount of distributions, and the trust funds cannot be used for the basic support needs of the beneficiary. Without a SNT, a beneficiary who inherits property may become ineligible for governmental benefits. If you have a family member with special needs, you should consult your estate planning professional to discuss SNTs and other planning opportunities.
- How can I minimize the risk of my children fighting over their inheritance?
There are several things to consider in your planning to reduce this risk. Fiduciaries, such as the personal representative of your estate or the attorney-in-fact named in a power of attorney, have significant powers. Therefore, if you appoint one child as your fiduciary, the children who are not appointed may oppose or resent the child who is. Or if you appoint several children, they may not work well together, which could cause delay and complications in handling your affairs. As a result, in many cases it is advisable to appoint an independent third party as fiduciary. Another area that may cause tension in families is the division of tangible personal property such as artwork or jewelry. Unlike financial assets, tangible personal property can be difficult to divide equally and often carries emotional attachments. You can designate recipients of specific tangible items in your Will or in a separate list, or your Will can specify procedures your children should follow in dividing tangible personal property. We recommend you discuss these issues with your estate planning professional.
- Why should I act now to take advantage of potential valuation discounts for gifts to family members?
According to recent reports, the IRS is working on regulations that, in effect, would increase the value of interests in closely-held entities, such as partnerships and limited liability companies, that are transferred to family members for gift and estate tax purposes. Those entity interests currently are subject to discounts in value for minority ownership and lack of marketability. If the proposed regulations are enacted, those discounts will no longer be available for transfers to family members in many cases. It is expected that the U.S. Treasury will announce proposed regulations this September and, if so, the rules limiting discounts are expected to be effective immediately. If you are considering making gifts of your interest in a closely-held partnership or LLC to your children or other family members, you should act now if you want to take advantage of potential valuation discounts.
- What types of current gifts should I consider for my gift tax planning?
In 2015, you may gift up to the annual exclusion, or $14,000, per person per year without using your federal lifetime exemption. You may choose to gift cash, an interest in a business, or other property. You may also contribute to a child’s 529 college savings plan: these plans may also be front-loaded with five years’ worth of annual exclusion gifts. If you pay a beneficiary’s medical or education expenses directly to the institution, these payments will not be counted against your annual or lifetime gifting exclusions. Gifting limits the growth of your taxable estate. If you gift over the annual exclusion, you will be using some of your federal lifetime exemption, however, you will be removing assets from your estate, along with any appreciation. Also, the State of Washington does not have a gift tax, so if you gift over your annual exclusion, you are simply reducing your taxable estate. Discuss gift tax planning with your professional advisor to see what types of gifts are best for your situation.
- Should my digital assets be a part of my estate plan?
In light of the reliance many people place on their electronic records and social media accounts, digital assets should be considered in an estate plan. You should specifically name someone to have control of your passwords and other digital assets in your Last Will and your Durable Power of Attorney. In addition, you should make sure your designated representative will 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. Providers may also have their own processes 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.
- What happens to my Facebook® account if I pass away?
Facebook has recently added a feature that allows users to designate a “legacy contact,” a person to manage your Facebook account if something happens to you. If a person dies without having designated a legacy contact, Facebook will freeze the account if it learns of the death. The designation of a legacy contact is made on Facebook by accessing “Settings/Security/Legacy Contact.” The person designated as the legacy contact cannot terminate a Facebook account, see private messages or alter or remove items that were posted by the decedent during lifetime, but the legacy contact can post a message on a Facebook page, respond to friend requests and change a profile photo. Another option is to have a Will or Durable Power of Attorney that includes the designation of a person to handle all of your digital assets if you pass away or become incapacitated. Check with your professional advisor for further details.
- Estate and Business Succession Planning in the New Year: Are You Prepared?
For individuals who wish to manage their estate portfolio as they would manage their investment portfolio, having the peace-of-mind that comes with a finished, thorough estate and business succession plan is often far from reality. Why? Certainly many of us simply have yet to get around to it, or never move beyond a basic Will. Others start the estate planning process but do not see it to completion. Why not start now?
There are at least two compelling reasons to plan your estate. First, proper estate planning ensures that your assets will be distributed in accordance with your wishes. Second, proper estate planning can minimize or eliminate estate tax upon your death. Having professional assistance is critical, in order to ensure your plan is not derailed by failure to attend to details. For example, did you know that your Living Trust has to be funded to work as designed? Are you confident your beneficiary designations are protected, and not working at cross-purposes to your Will?
- What do I need to know about changes in estate tax laws?
The federal and state estate tax exemptions are adjusted each year for inflation. In 2016, the Washington state estate tax exemption will be $2,054,000 per person and the federal estate tax exemption will be $5,430,000 per person. The federal lifetime gift tax exemption and generation-skipping transfer tax exemption also will be $5,430,000 per person in 2016. The federal gift tax annual exclusion will remain the same, at $14,000 per person. The federal estate/gift tax exemption is portable between spouses but the generation-skipping transfer tax exemption and the Washington state estate tax exemption are not portable. You should consult your estate planning professional to make sure your documents reflect the latest estate planning strategies to take advantage of spousal portability and the increased exemptions and to ensure the full use of the exemptions that are not portable.
- 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.
- What is the single most important thing I can do for my aging relative?
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.
- 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.
- When is a gift tax return required and what happens if I don’t file one?
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.
- How is spousal portability important in estate planning?
In 2015, each individual has a $5.43 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.
- What is the current estate tax exemption?
The federal estate tax exemption equivalent for a person who dies in 2015 is $5.43 million. The Washington state estate tax exemption for 2015 is $2,054,000 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.
- Should I name a charity as beneficiary of my traditional IRA or retirement plan?
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, same sex 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.
- Why is it important to review the titling of my assets and my beneficiary designations?
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.
- As a Washington resident, what is important to keep in mind with my estate planning?
Much of the discussion has been about the federal estate and gift tax exemption increasing to $5.43 million per person. However, in the State of Washington, the estate tax exemption is only $2,054,000 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.
- How do retirement assets fit into my estate plan?
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.
- How do I avoid Probate?
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.
- What is a qualified personal residence trust?
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.
- How often should I update my Last Will?
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.
- My neighbor tells me I need a Living Trust. I have a Will. Am I missing something?
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.