The Care and Feeding of Your Estate Plan

Estate Plan Maintenance

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

As discussed previously in Top Estate Planning Mistakes and How to Avoid Them, 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 it’s 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. As financial advisors, we assist in the estate maintenance process by reviewing things like asset titling, account beneficiary designations, gifting strategies, and tax reporting of gifts. We also uncover estate maintenance issues during our regular client review meetings, when we walk through the financial summaries we’ve prepared and talk about them with our clients from an estate planning and tax planning point of view. We’re not attorneys, but we often find issues or raise questions that prompt a discussion with an estate attorney or tax preparer.

Review and discussion of your entire financial picture is something not every financial advisor is willing or able to do. But we think it is essential to your long term financial well-being, and well worth the time and effort. Contact us to talk about how we can help you bring confidence, clarity and direction to your finances.

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About 

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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