Some people think that estate planning is a once in a lifetime project. But, as John F. Kennedy said, “change is the law of life.” Periodic review of an estate plan is essential to ensure that your plan continues to accomplish your goals in the most effective manner.
Here are the top 10 reasons you need to review your estate plan periodically:
10. Change in Residence. While estate planning documents typically are valid from one jurisdiction to another, each state has its own peculiarities. For example, a couple moving from a separate property state to a community property state might find it advantageous to convert their separate property to community property. This can allow for advantageous income tax treatment of the property at the death of the first spouse.
9. Change in Assets. A significant change in the nature or extent of your assets may give rise to different estate planning opportunities. For example, the acquisition of a farm or business may raise issues of succession planning and discounted gifting.
8. Inheritance. If you or your spouse have received or expect to receive a significant inheritance, there may be new opportunities to reduce taxes or provide creditor protection.
7. Change in Tax Law. As we all know, Congress rarely leaves tax law alone for long. Changes in tax law can mean that your estate plan no longer accomplishes its goals.
6. Changes in Non-Tax Laws. Periodically, state legislatures change substantive non-tax laws. These laws may affect who gets your property or how your trust may be managed.
5. Change in Desires. With the passage of time, you learn more about yourself and others. For example, you may decide that your brother John, who lost everything in Enron and WorldCom, may not be the best selection to manage your assets.
4. Illness. If you or one of your family members becomes seriously ill, you may want to consider changing your estate plan to reflect their increased needs. For example, if a loved one now has special needs, you can leave assets in a trust that will not disqualify him or her from receiving government benefits.
3. Birth or Adoption of a Child. The addition of a new family member can radically alter your estate plan. It is likely that, if your spouse and you are both gone, you no longer want your assets to go to your parents. Also, you will need to appoint someone to act as guardian for the new child.
2. Divorce. According to the National Center for Health Statistics, approximately one-half of first marriages end in divorce. Divorce is particularly disruptive of an estate plan. Goals which you had before, such as providing for the now ex-spouse, probably have changed. A new plan should be put in place quickly, especially if the end of the marriage was not harmonious.
1. Marriage. When you marry (or remarry), you and your spouse bind your lives and futures together. Marriage can automatically give each spouse some rights in each other’s property. However, marriage does not automatically change your will or trust to provide for the new spouse. It is important to examine your estate plan in light of the new situation and your mutual and separate goals.
For these and many other reasons, it is important to consult with a qualified estate planning attorney to review your estate plan periodically.
Prior Marriage Estate Planning
More than half of all marriages can be expected to end in divorce. Add in widows and widowers to the numbers of divorced couples, and the potential for a second marriage that includes children of a prior marriage increases.
The primary issue is what happens to the property of the spouse who dies first? Typically, the deceased spouse will want to protect the surviving spouse and provide for the deceased spouse’s children when the surviving spouse dies.
There are two choices to accomplish the goal of having the surviving spouse economically protected by the deceased spouse’s legacy, while ensuring that the children of the deceased spouse benefit when the surviving spouse dies. They are:
1) the decedent leaves his or her property outright to the surviving spouse and relies upon the surviving spouse to provide for the children of the deceased spouse or;
2) the decedent uses a trust which provides economic protection for the surviving spouse and distributes any remaining trust property to the children of the first deceased spouse when the surviving spouse dies.
This special trust is called a Qualified Terminable Interest Trust, or QTIP. It is terminable, because the surviving spouse’s rights in the trust terminate at the survivor’s death. A QTIP trust is a very effective estate planning mechanism for second marriages where the decedent’s estate is in excess of the estate tax-free amount, $625,000 in 1998.
QTIP trusts are an integral part of estate planning with trusts for second marriages. Typically, the deceased spouse's property is divided at death into two trusts, a Credit Shelter Trust and a Marital Trust. The QTIP trust is simply a specially designed Marital Trust.
In 1998, each spouse may leave $625,000 to any person free of estate taxes. Generally, that would mean that the spouses could leave a combined $1.25 million free of estate taxes. However, if proper planning is not done, the first deceased spouse’s $625,000 can
Estate Planning for Children of a Prior Marriage won't be wasted. If the decedent leaves $625,000 to the surviving spouse, there is no estate tax all bequests to a spouse are free of estate tax due to the Marital Deduction. However, if the surviving spouse should die in 1998, he or she will have a taxable estate of $1.25 million and estate tax of $246,000 will be due.
Enter the Credit Shelter Trust. Using the above example, the decedent leaves $625,000 to the Credit Shelter Trust, which is for the lifetime benefit of the surviving spouse, but is not included in his or her estate. If the decedent owned more than $625,000, the excess goes to the Marital Trust and there are no estate taxes.
Now this is where the QTIP comes into play. The Marital Trust, to qualify for the Marital Deduction, may provide the spouse with as little benefit as an annual income. A fairly typical design for a QTIP trust is that the surviving spouse receives an annual income, but the assets may also be used for his or her health, education, maintenance or support.
This is also the typical design for the Credit Shelter Trust. When the surviving spouse dies, the first deceased spouse’s property remaining in the Credit Shelter and QTIP Marital Trust both pass to the first deceased spouse’s children. The property in the QTIP marital trust is included in the surviving spouse's estate.
In this manner, the minimum in estate tax is paid and children of prior marriages are made secure in their inheritance. Because the QTIP Trust property is taxable in the survivor’s estate, estate taxes attributable to the surviving spouse’s estate will reduce the balance
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