 So, a few years ago you finished off your trust agreement (and you thought you understood it), signed it, and stuck it in a drawer. When the subject comes up, you feel righteous that you have that task handled.
If your trust agreement is more than 2-3 years old however, I urge you to dig it out, dust it off, and read it. First, make sure you really do understand every detail, then assess whether or not it needs to be updated. Times and circumstances change rapidly, and how you initially designed your estate plan may not reflect the reality of today.
I have recently assisted clients in reviewing their trust agreements, and they were surprised at how much the agreements needed to be modified. First, not one of them truly understood how their estate was to be passed to their loved ones, and in some cases, letting the old trust agreement operate at his/her death would have had tragic consequences. Through a series of discussions and diagrams, we addressed the potential flow of the decedent’s assets after death and assisted the client in thinking through the potential consequences of the agreement, followed by an evaluation of their current desires and financial position. In each case, the client met with his/her attorney and substantially modified their agreement. What are some of the factors we considered?
- The most prevalent one might be remarriage: creating new family relationships with a new spouse, step-children, and possibly joint children. As we all know, these relationships can be tenuous, and the goals and needs of each party can vary greatly.
- If new assets have been acquired or disposed of, or there has been a change in dependents, the trust agreement needs to be updated to recognize these events. We often find that assets are still titled in the individual’s name, rather than the trust’s, and we urge fixing that problem quickly so that they are covered by the terms of the trust (and don’t potentially become subject to the probate process).
- Not so uncommon is a remarriage that occurred some time ago, near the execution of the original trust agreement, when each spouse began the marriage with separate property. Particularly after a long marriage, the spouses likely have created some community property which affects the estate plan in a different way and needs to be addressed.
- Consider the current relationships among family heirs, and if there is dysfunction now, expect it to be even worse after you leave. There may be ways you can modify your estate plan to support equity and fairness in a way that can increase harmony later on. Leaving the ranch to warring beneficiaries could result in eventually losing it.
- In one case, the trust agreement was so old, the client anticipated that the ByPass Trust would be funded at his death for his children only (and not his second wife), at the estate exemption amount of the time, $650,000. If he passed away in 2009, when the exemption had risen to $3.5 million, he would have left everything to his children and nothing to his current spouse.
- Your children may have grown up and created wealth of their own. Consequently, adding your assets to theirs could create significant estate tax for your son or daughter. Skipping your child’s generation and leaving some of your assets to grandchildren (and possibly even to more future generations) could be very beneficial for your offspring.
- Perhaps you have developed a favorite charitable endeavor and would like to assure continuing support. That could occur with gifts during your life or from assets of your estate, and can be created in a complex way or simply outright. Even relatively small gifts to charity can save income tax and significant estate tax.
- If you have a business that is either new or has grown over the years, you have many decisions to initialize or re-evaluate. Sell it or pass it along to the family? How much to give to whom? Who will be in charge? To name a few critical questions. This is a complex area of estate planning that unequivocally requires consultation with knowledgeable professionals.
- Federal estate tax law has evolved, and there are many planning devices available that may not have been considered in the original estate plan – family owned LLCs, grantor annuity trusts, the uni-trust concept, charitable remainder trusts, life insurance trusts, dynasty trusts – and many, many more. Application of new concepts to your estate plan could allow you more flexibility and save significant tax.
- Although California does not have an estate tax, many states do, and the exemption amount can be low. (For instance, Oregon begins taxing estates at $1 million.) If you own real property or a business in a state that assesses estate tax, it could change an estate plan that relied solely on the higher Federal exemption.
- Review who you appointed as executor and/or trustee. The original people named may no longer be appropriate. In one case I worked on, the successor trustee had actually died long ago. Choosing the best executor or trustee may be one of the most important decisions you make, especially in blended families or when a business will be passed to someone else. There are possibly more options you haven’t considered – a bank trust department, a licensed private fiduciary, a business partner, different co-executors for varying trusts – and others.
- Consider the power of lifetime gifts. Proper design now can facilitate your estate plan, empower the donee, leverage your assets, provide cash outside the estate to pay taxes, and allow you to begin to put things in place now, rather than waiting until you are gone.
There are many reasons to dust off your trust agreement and review it every few years, and most of those are unique to you and your family. Please do your loved ones a favor and read it again. Better yet, discuss it with them, and then consult your BPM advisor for assistance. You will end up with something that better reflects today’s realities, protects the family relationships, and possibly save some tax. |
