Reviewing the State of Your Estate Plan

Happy New Year!  Now that the year has begun and those New Year resolutions are still being implemented, it is a good time to add planning and organization of your finances to your “to do” list.  Pulling together your financial data for your accountant or your own tax organizer provides a great opportunity to review the current state of your estate plan.

Did you experience any major life changes in 2015?  Marriage or Divorce? Birth of a child?  Death of a loved one?  Did you receive an inheritance?

Life changes and so should your estate documents.
You should be certain that your estate plan documents are in order and that they still carry out your wishes for your assets.  Make sure that the individuals you have named in your will, trust, health care proxy and power of attorney are still up to the task of acting in these roles. If you have recently changed or are considering making a change to your professional advisors, your documents must be in sync in appointing professional trustees, personal representatives and/or attorneys in fact.  If you have a dependent beneficiary who is better off having his or her assets held in trust and not inheriting outright, you should consider special needs planning for his or her long-term wellbeing in order to preserve eligibility for benefits.

Looking at Forms 1099 should prompt a review of your beneficiary designations in your wills and trusts and on your IRA, 401K, or other qualified retirement plan. You should also confirm that the primary and contingent beneficiary designations are up to date on any life insurance policies.

To prenup or not?
Are you planning a wedding and if so, would you benefit from having a prenuptial agreement to protect assets you might receive from parents or grandparents?

In the recent divorce case of  Pfannenstiehl v. Pfannenstiehl (Mass. App. Ct., Nos. 13-P-906, 13-P-686 & 13-P-1385, August 27, 2015) the Court held that a trust created by the husband’s parents for the benefit of the husband and children was part of the marital estate to be divided with his wife. This ruling certainly contradicted the husband’s parents’ intent.  They funded that trust with their money for their son and grandchildren.  Such case law demonstrates the importance for the bride and groom to put a contract in place before the marriage that plans for the division of their assets if the marriage breaks down. Of course, no one enters a marriage planning on divorce but it is a good practice for both future spouses to undertake before committing. Getting married involves a search in personal expectations and philosophies about money before saying “I do.”

Put trust in your trust. 
In light of what you owe for 2015, you may be looking to lower your income tax burden in the future. If you can afford to part with some assets, you could consider funding a trust with income-producing assets as a way to move that taxable income down to beneficiaries in a lower tax bracket. The trustees of any trusts created by you should also focus on the most tax efficient management of the assets. Irrevocable trusts are taxed at the top rate of 39.6% for income over $12,400 and subject to the additional 3.8 percent tax on undistributed net investment income (“NII”).   It may make more sense from a tax perspective for the trustee to distribute that NII to individual beneficiaries who are in a lower tax bracket and who are not subject to that extra 3.8% tax on NII. Chances are those individuals could benefit personally from the extra income.

If you inherited assets from someone with a large estate, who died after July 15, keep an eye out for your Form 8971, Schedule A, so you have the correct cost basis if you need to report a sale of the asset. You may also need to think about reducing the size of your taxable estate. The current federal exemption in 2016 is $5,450,000, up from $5,430,000 for 2015. The annual exclusion remains at $14,000 per person and the Massachusetts estate tax exemption remains unchanged at $1,000,000.

Although it is income tax season, it is the perfect time to consider the intersection of income and estate tax and the everlasting importance of planning.

Stay tuned for next week’s Part Two on estate tax reduction techniques that can help you this tax season!

If you have any questions about the information presented here, please contact Jennifer Fleming, the author of this alert at jfleming@princelobel.com.