The Care and Feeding of Your Estate Plan

| November 3, 2017 | 0 Comments

Most affluent Californians have some form of estate plan. While a will is a basic necessity, many people have invested in a comprehensive package including a will, trust, powers of attorney and advanced health care directive.

As I’ve written before, your estate plan determines what happens to your assets once you’ve passed away or when you’re incapacitated and can’t manage your own affairs. More complicated structures can be designed for purposes like asset protection or to enshrine charitable gifts, or even to pass assets to your heirs while you’re still living.

But just having the plan is not enough. And the more complex your plan, the more work you will need to put into maintaining it. Every estate plan has some basic maintenance requirements:

• Documents should be reviewed periodically. Changes in your life circumstances like marriage, divorce, or a death in the family may mean that your plan needs to be updated.

• Also, executors and trustees should be reviewed periodically to ensure that the people you’ve tapped to manage your affairs are still the right ones for the job.

• Review your retirement plan, insurance and annuity beneficiaries to ensure that these are still correct, since your estate plan doesn’t usually control who receives these funds at your death.

• “Correct titling of assets is critical,” says Genevieve Chesnut, an estate planning attorney in Mission Hills. Assets held in joint tenancy with a child may pass to the child rather than a spouse or trust, and assets not titled in the trust may also force probate, an expensive and time-consuming process.

More complicated structures require more effort. Below are some examples of estate management that people occasionally overlook.

Annual Gifting. If part of your plan involves giving gifts to your heirs during your life, this gets complicated quickly. You can give up to $14,000 (in 2017) to each of your heirs without having to file a gift tax return. Above that level, the gift may not be taxable, but you will need to record it with the IRS all the same. There are exceptions, such as payments made directly to educational or medical institutions on behalf of someone else. Gift tax rules are very complex and you should have a professional help you keep your gifts above board.

Trust Tax Returns. While a revocable living trust doesn’t usually need a separate tax return (it’s income goes on your own regular returns), most irrevocable trusts do. Once a trust becomes irrevocable, it is a separate legal entity (think of it like its own business). This entity may have income or gains, and the tax authorities want to know about it. The document may also require that this income be distributed periodically to beneficiaries. This can add an expensive layer of administrative costs to your plan.

Trust Management. Many successful people set up charitable trusts or foundations. There are a wide variety of options for doing this, but each of these requires annual maintenance as well. Foundations need to have board meetings and many trusts require special filings with tax authorities. You may even be required to report your earnings to the beneficiaries of the trust.

Annual Gift Letters. Some structures allow you to gift large sums of money to a trust (on behalf of your heirs) to hold until your death. One example is an irrevocable life insurance trust, which typically buys life insurance on the trust creator’s life and pays out at his or her death to the trust’s beneficiaries. The catch here is that the annual life insurance premiums are paid with gifts to the trust. In order for this structure to work properly, the trust’s beneficiaries must be allowed to take the premium payments out of the trust, even if you don’t really want that to happen. Documenting that they’ve been notified of the gifts (called a “Crummey Letter”) very important, but is often overlooked.

These are just a few examples of estate plan maintenance. You should work with a professional who specializes in estate planning to ensure this annual maintenance is done properly.

This column is prepared by Rick Brooks, CFA®, CFP®, with the assistance of the Financial Planning Association, the membership organization for the financial planning community. Brooks is director/chief investment officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

Tags: ,

Category: Life Style, Local News

About the Author ()