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Is there a leak in your estate plan?

You have taken the time to have your estate planning documents prepared and you have signed them and locked them away in your safety deposit box — good for you! But your job is not done forever. Estate plans are like the roof on your house and require periodic “checkups” to make sure no leaks have developed.

While your plan was probably drafted to anticipate many changes in your life, no plan can anticipate every change. Take this quiz and make sure that changes in your life have not left a hole in your plan.

When was the last time someone reviewed your plan?

While estate plans are often drafted with a great deal of flexibility, many changes can make your estate plan outdated. Your “net worth” dictates many of the requirements included in your estate plan, which usually is drafted to minimize death taxes. Estate planning needs change as your net worth (and your spouse’s net worth) increases. Purchasing a life insurance policy alone could create some need for added planning. These changes require new strategies such as testamentary trusts, gift trusts, life insurance trusts, grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs) and family limited partnerships (FLPs). A recent Tax Court decision permitted an estate a 32% discount for a cash FLP interest. The family hit a “home run” and saved a fortune. As the value of your home, stock portfolio, retirement accounts, life insurance policies and other assets continue to grow and change, the need for more sophisticated estate planning increases. Many clients who did not require estate tax planning five years ago have significant tax exposure today. Make sure Uncle Sam is not the biggest beneficiary of your gains in the stock market. Perhaps it is time for an estate planning “check up.”

Who is the owner and beneficiary of your life insurance policy?

If handled correctly, life insurance proceeds can avoid the estate tax bite at your death, your spouse’s death and perhaps your children’s deaths. Using life insurance trusts or simply transferring your life insurance policies to your children can ensure that life insurance proceeds avoid estate tax. Otherwise, nearly half of the proceeds may be taxed by Uncle Sam in lieu of passing to your children.

Next time you receive a statement on a life insurance policy, ask yourself who is the owner and beneficiary. If you do not know — find out. You may be surprised to learn how many senior citizens have a predeceased parent named as beneficiary. If you own a life insurance policy or your spouse is named as the beneficiary, it may be time for an update.

Have you filed your gift tax returns?

Many clients make gifts each year to take advantage of the $12,000 gift tax exclusion. In many cases, a Crummey Trust (a.k.a. a Gift Trust) is used. If your spouse joins in the gift, the annual exclusion to each beneficiary increases from $12,000 to $24,000. To take advantage of this increase, however, gift tax returns are required to be filed.

In addition, many of these trusts are also drafted so that your children’s inheritances are held in further trusts for their lifetimes. One of the biggest reasons for creating trusts for your children is to reduce the “tax bite” in their estates, in addition to spousal and creditor protection.

These trusts require specific planning to avoid the imposition of the Generation Skipping-Transfer Tax. A quick review of your gifts and your trusts can ensure that your plan is on the right track. Have you sent “Notice Letters” to the beneficiaries of your Crummey Trust? To use a Gift Trust and take advantage of the annual gift tax exclusion, your trust may include provisions granting each beneficiary a limited right to withdraw his or her share of the gift within a certain time period.  Each time a gift is made, the beneficiaries of this trust must receive notice of the gift and of their right of withdrawal. A Notice Letter is your proof that you have dotted your “i’s” and crossed your “t’s” if the IRS should ever check.

Do you and your spouse have jointly held assets?

Assets that are held in joint accounts will pass to the survivor without regard to the terms of your estate plan. If too many assets are jointly held, the tax benefits of your estate plan can be completely lost.

Is your buy-sell agreement up to date?

Many business owners enter into buy-sell agreements to protect their family. An out-of-date agreement, however, can be devastating. If the redemption price of the agreement is too low, your family loses. If the price is right, but plans are not updated to fund the buy out, you have problems as well.  Make sure your agreement is still up to date, check the valuation provisions and the plan for funding the purchase. If you have any doubts, call us for a review.

Estate planning checkups are really needed every few years, or more frequently if your financial or family situations have changed. The review is quick! Treat your estate plan like the roof on your house. Fix the holes or your family will get wet!

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...

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