Check the ‘freshness date’ on your will
Whenever clients ask if they need to update their will or trust, my first question back to them is: “When was it created?”
If they tell me it was 10 to 15 years ago or longer, I might react like I’d found expired food in the fridge because it may not be safe to use something that old. Your family and personal situation has probably changed a lot since then (perhaps your will or trust was created when your children were in high school, but now they’re married with kids). The tax laws have changed a lot over the years, too.
Even if your estate planning documents are still valid, they may no longer work the way you intended.
So how do you know if your estate plan is out-of-date? If your will or trust predates these four key “freshness dates,” it may be time to visit your attorney for a review:
April 14, 2003
This date relates to the required compliance date of the privacy regulations under the Health Insurance Portability and Accountability Act (HIPAA), a law which was enacted in 1996.
The HIPAA privacy rule imposed strict guidelines on the disclosure of “protected health information” without the patient’s explicit permission. While these privacy protections are a good thing, they can also become problematic if your executor, trustee or agent (under a durable power of attorney) needs to deal with your employer, insurer or medical providers such as doctors, clinics and hospitals. Due to this rule, to act on your behalf, an authorized person must have a written document executed by you, with very specific language mandated by HIPAA.
So if your will, revocable trust, durable power of attorney or health care power of attorney 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, have an attorney update your documents to include the language required by HIPAA.
Jan. 1, 2005
This date is important if you live in a state that imposes its own state-level estate or inheritance tax.
Before 2001, there was a federal credit for state death taxes (the size of the credit varied with the size of the estate). Back then, there was not much incentive to make plans for avoiding state death taxes because those taxes were fully offset by the federal credit. But the Economic Growth and Tax Relief Act of 2001 (EGTRA) phased out the credit between 2002 and 2004. As a result, since Jan. 1, 2005, state estate or inheritance taxes apply on top of any federal estate tax. Today, 15 states impose their own state estate tax, seven states have an inheritance tax and a few states have both.
If you live in a state that imposes its own estate tax and your will or revocable trust was executed before 2005, visit your attorney to start planning for state taxes if they’re a concern for you.
Dec. 17, 2010
This is the date of enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (let’s call it “TRA 2010”), which increased the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million.
Before 2010, the threshold for owing federal estate taxes was much lower; the exclusion was just $600,000 in 1996, for instance, and $1 million in 2001. Effectively, TRA 2010 eliminated the federal estate tax for thousands of people.
If your estate plan was created before Dec. 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Your attorney might be able to recommend a simpler plan now.
In other situations, however, your estate plan may need to become more complex. For example, if you live in one of the 20 states that imposes a state estate tax or inheritance tax, your attorney might favor new strategies to deal with state estate taxes, which often begin at a much lower threshold.
The key point to remember is that tax laws are drastically different today, so documents drafted before Dec. 17, 2010 may produce unexpected or unfavorable results.
Jan. 2, 2013
This date is important for married couples with a combined taxable estate exceeding $5.43 million. The American Taxpayer Relief Act of 2012 (ATRA) became law on Jan. 2, 2013 and made the “portability election” a regular feature of federal estate tax planning. This election lets an executor transfer a deceased spouse’s unused federal estate tax exclusion to a surviving spouse, which can be an important estate-planning tool.
In effect, the surviving spouse can “stack up” the deceased spouse’s exclusion on top of his or her own exclusion.
If you are married and your will or trust was drafted before Jan. 2, 2013, you could be missing some valuable tax planning opportunities.
Traditional estate-tax planning strategies for married couples relied on creating a “credit shelter” or “bypass” trust that would not be part of the surviving spouse’s taxable estate. However, assets in this trust are not eligible for what’s known as a “step up” in cost 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; if the assets were sold in the future, taxes would be due only on the gain since the inheritance).
Today, your attorney might recommend one of several new strategies using the portability election, so assets from the first-to-die spouse would receive an additional “step-up” in cost basis at the surviving spouse’s death.
These newer strategies could help heirs save considerable amounts of capital gains taxes, but they don’t apply to everyone. The key point to remember is, if you are married, have a combined estate above $5.43 million and have wills or trusts created before Jan. 2, 2013, talk to your estate planning attorney.
Dan Prebish leads the Estate Planning and Business Succession team within the Key Client Solutions Group at Wells Fargo Advisors and is based in St. Louis, Mo. Wells Fargo Advisors is not a tax or legal adviser. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and separate nonbank affiliate of Wells Fargo & Company.
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