Is Your Will/Trust Out of Date? Maybe!
Many people with wills sometimes have a “set it and forget it” mentality, and don't realize that wills can and do become out of date, needing periodic review and change.
There are also a number of reasons that people will put off reviewing and updating their wills and trusts, even though they know it could lead to unfortunate results. After all, dealing with the idea of one's own demise is not the most pleasant of subjects, and there are certainly many more pleasant or even “urgent” activities to distract us.
But the fact is, situations change and so must the plans you made. For instance, revisions may be needed because of a change in tax or other laws. Or maybe, for instance, your will or trust was created when your children were younger and now they are out of college and married with families of their own.
Whatever the reason, it's important to periodically take a look at one's plan to make sure everything is current, it does what you still want it to do, and takes maximum advantage of the law.
So, how do you know if your will or trust is out-of-date?
Well, first of all, if there have been major “life changes” that have occurred, your plan likely needs a revision. In addition to the example mentioned above, such life changes might include: *Personal marriage or divorce *Marriage or divorce of other family members, particularly children and grandchildren *Death of spouse or other family members *Creditor problems *Major change in career or business interests
There have also been several key law changes in recent years. If your will or trust has not been revised since these changes occurred, it may not work the way you intend anymore.
Here are three key changes and related dates that, if your plan predates, may indicate an out of date plan:
HIPAA April 14, 2003 is the first date to know, which is when privacy rules under the Health Insurance Portability and Accountability (HIPAA) Act took final effect.
The HIPAA privacy rules impose strict rules on the disclosure of protected health information without the patient's explicit permission. While the philosophy behind these privacy protections was well intentioned, they can also be a big problem if your executor, trustee or agent (under a power of attorney) needs to deal with your employer, insurer or medical providers such as doctors, clinics and hospitals.
Due to this rule, in order to act on your behalf, an authorized person must have a written document executed by you, with very specific language mandated by HIPAA.
If your will, trust, durable power of attorney or health care proxy was executed before April 14, 2003, your executor, trustee or agent may not be able to work effectively with your medical providers and insurers.
To fix this problem, your documents need to be updated to include the language required by HIPAA.
HIGHER EXCLUSION A 2010 law increased the federal estate tax exclusion to $5 million and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million.
Before this change, the threshold for owing federal estate taxes was much lower; for instance, the exclusion was just $600,000 in 1996 and was only $1 million in 2001. Effectively, the higher exclusion eliminated the estate tax for most people.
So, if your will or trust was created before Dec. 17, 2010 (the date of enactment), your documents may contain tax-planning provisions that are no longer needed or could even be detrimental. Thus, a revision is likely needed, and soon.
SHARING EXCLUSIONS (PORTABILITY) In early 2013, January 2, 2013 to be exact, The American Taxpayer Relief Act of 2012 became law. This law made a dramatic change by making a “portability election” available. This election lets an executor “share” a deceased spouse's unused federal estate tax exclusion with a surviving spouse, which can be an important estate-planning tool, especially for married couples with combined taxable estates worth more than $5.43 million.
Effectively, the surviving spouse can, as someone I heard put it, “stack up” the deceased spouse's exclusion on top of his or her own exclusion. So, if you are married and your will or trust was drafted before Jan. 2, 2013, you may need an update to take advantage of this tax planning opportunity.
The higher exclusion amounts and the portability election call into question a very common traditional estate tax planning strategy used for many married couples. This common planning technique entailed creating a credit shelter (also called a bypass trust) that would not be part of the surviving spouse's taxable estate.
The downside of this tool is that assets in such a trust are not eligible for what's known as a step-up in tax basis at the death of the surviving spouse. A step-up means no capital gains taxes will be due upon your death on the assets that grew while you held them. So, if the assets were sold in the future, taxes would be due only on the gain since the inheritance.
Because of these changes, the existence of a credit shelter trust may result in your heirs owing more in income tax on the sale of the inherited assets than they would with an updated plan that takes advantage of new provisions.
Hopefully you can see that making it a regular practice to review or have reviewed, your will and/or trust will bring you peace of mind, insure your wishes are carried out just as you desire, and benefit your heirs to the maximum extent possible.
