Is It Time to Review Your Estate Plan?

Anthony Fernandez
December 6, 2007 — 1,467 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

We would like to urge our clients and friends to consider revisiting your existing estate plans to ensure that your plan: (i) meets your current family objectives, (ii) conforms to ever-changing federal and state estate tax rules, and (iii) is being properly implemented. Here are ten questions that may help you determine if your current plan needs to be reviewed:

1. Has your estate plan been reviewed within the last three to five years? We generally recommend that your estate plan be reviewed every three to five years to ensure that it still accomplishes your wishes and any tax objectives originally incorporated into the plan. Such a review has become especially important in recent years, with the increasing federal estate tax exemption. As we reported in a prior UPDATE, federal tax law changes enacted in 2001 will result in the gradual increase of the estate tax exemption to $3,500,000 in 2009 (it is currently $2,000,000), the complete elimination of the tax in 2010 for that year only, and the reinstatement of the tax with a $1,000,000 exemption in 2011. In addition, the generation-skipping transfer tax exemption (currently $2,000,000) will be similarly increased, eliminated in 2010 and then reinstated. If an estate plan was prepared before 2001, it may be in particular need of review. If it was prepared after 2001 but more than three to five years ago, when the federal exemption was $1,000,000 or $1,500,000, it may still be a good idea to review that plan to determine whether any changes are needed in light of the increasing exemption or for non-tax reasons.

2. Are changes to your estate plan required as a result of the decoupling of New Jersey’s estate tax from the federal estate tax? New Jersey now bases its own estate tax on the federal regime that was in place in 2001, when the federal estate tax exemption was $675,000. As a consequence, unlike the result in years prior to 2001, a plan that makes full use of the federal estate tax exemption at the death of the first spouse will result in increased total federal and New Jersey estate tax. Married couples with larger estates will still likely pay less combined federal and state estate taxes by making full use of the federal exemption. However, for more moderate estates, it might make sense to add a disclaimer provision to the wills to give the fiduciary flexibility to make post-death adjustments that can minimize the overall state and federal estate tax consequences. If your estate plan was prepared more than three to five years ago, it may make sense to have it reviewed to ensure it addresses this issue.

3. Have your family or financial circumstances changed significantly since you last reviewed your plan? If your family or financial circumstances have changed significantly (e.g., divorce, death of a spouse, death or incapacity of a designated fiduciary, agent or sole beneficiary, birth of a child or grandchild, a substantial increase or decrease in wealth due to inheritance or other means, etc.), then it may be time to review your plan. Some of these changes can affect not only wills, but also powers of attorney, living wills, trust agreements, insurance coverage, etc.

4. Have you taken care of your favorite charities in your estate plan? If you are charitably inclined, you may wish to consider the best way to achieve your charitable objectives. A number of vehicles are available to accomplish charitable planning to gain income tax and estate tax advantages, if desired, and existing charitable plans could benefit from a review in light of possible rule changes over time.

5. Are you properly administering your irrevocable life insurance trust? If you have established an irrevocable life insurance trust to remove insurance proceeds from your estate for estate tax purposes, then the trust must actually own your life insurance and be named the policy beneficiary. Failure to complete and file the appropriate policy assignment and change of beneficiary forms with the insurance company will result in failure of the tax goals of that trust and inclusion of the proceeds in your estate. In addition, it is important to ensure that: (i) “Crummey” withdrawal notices are being sent to the beneficiaries each year that a transfer is made to the trust (this is necessary to obtain the benefit of the gift tax annual exclusion for the transfers made to the trust to pay the premiums); (ii) premiums are being paid by the trustee through a checking account opened in the name of the trust; and (iii) in the case of insurance trusts intended to be exempt from generation-skipping transfer tax, GST exemption has been allocated to the trust on a timely-filed gift tax return.

6. Have you recently reviewed the beneficiary designations of your benefit plans? It is important to remember that IRAs, 401(k) plans, life insurance and other arrangements that employ beneficiary designations do not pass according to the provisions of your will, but rather pass by those express beneficiary designations. Therefore, it is important that beneficiary designations be reviewed and updated, along with your will and other estate planning instruments, to ensure that the funds from these arrangements will be disposed of in a manner consistent with your overall tax and non-tax estate planning objectives.

7. Have you reviewed the title to your assets to make sure that the title is consistent with the plan in your will? It is important to remember that property owned with another person as joint tenants with right of survivorship or, for married couples, as tenants by the entirety, does not pass according to the will of the first co-owner to die, but rather automatically passes to the surviving joint owner. Therefore, retitling of joint assets may be necessary if you intend a particular asset to pass through your will, which is often essential for the success of the tax planning provisions incorporated in wills. For example, married couples whose wills contemplate the use of a “bypass” or “credit shelter” trust on the death of the first spouse should ensure that each spouse has title to sufficient assets to fund the bypass trust under his or her will in the event that spouse is the first to die. Additionally, a client who intends to have his or her estate pass primarily into a marital/QTIP trust may not accomplish his or her intended results if most assets are jointly titled with, or pass by beneficiary designation outright to, the surviving spouse.

8. Are you taking advantage of the low interest rate environment in your gift plan? Although interest rates have risen from their record lows a few years ago, many lifetime wealth transfer techniques that leverage the $1,000,000 gift tax exemption can still be attractive to certain clients. These include gifts to a grantor retained annuity trust, sales to intentionally defective grantor trusts, gifts of interests in family limited partnerships and limited liability companies at discounted values, and other techniques. You may wish to consider reviewing your plan to determine whether any of these techniques would make sense for you.

9. Have you revisited your annual gift plan since the introduction of Section 529 College Savings Plans? Section 529 College Savings Plans are state-sponsored savings plans designed to help families save for future college costs. Distributions from a Section 529 Plan are not subject to income tax so long as the distributions are used for qualified higher education expenses. An individual can give five years’ worth of gift tax annual exclusion gifts to a Section 529 Plan in a single year. A married couple can therefore fund a single plan with $120,000 free of gift, estate and GST tax in a single year. Given the benefits of Section 529 Plans, you might want to review your annual gifting program to determine whether a Section 529 Plan is right for you.

10. Are you complying with the formalities of your family limited partnerships? For plans that include family limited partnerships or limited liability companies, it is important that proper books and records be kept for these entities and the formalities of the agreements be complied with.

Anthony Fernandez

Riker Danzig