Eleven Reasons Why You Should Update Your Estate Plan Now
February, 2009

The following matters are worth consideration when determining if your estate plan should be reviewed for potential updates.  Please contact us to discuss any questions or concerns you may have.

1. Have you updated your estate planning documents since 2003 to avoid a potential Massachusetts estate tax of $229,600?
Effective January 1, 2003, the Massachusetts exemption amount is no longer linked to the federal exemption amount.  While the Massachusetts exemption amount will remain capped at $1,000,000, the federal exemption amount is currently $3,500,000.  As a result, a potential Massachusetts estate tax of $229,600 could be payable upon the first spouse’s death.  This tax may force an unwanted sale of assets after the first spouse passes away.

2. Are your estate planning documents designed to protect your children and grandchildren’s inheritance from potential creditors and divorce?
Parents and grandparents may have cause to regret having made outright gifts to their children if a child subsequently divorces and the ex-spouse is awarded an interest in the gifted property by a court, or when the property is taken pursuant to a legal judgment against the child.  Also, with no trust mechanism in place, children may inherit large sums of money at early ages.  Such problems may be minimized through trusts which are specifically designed to provide distributions to children or grandchildren on an “as needed” basis and subject to a Trustee’s discretion.  These trusts may be structured to give the child significant control over the assets and the right to remove and replace Trustees.

3. Do you (and your spouse) have your assets properly titled so that the federal estate tax exemptions are not wasted?  Do you hold any assets jointly?
Asset titling will have a significant impact on the efficacy of your estate plan, especially in connection with your plan’s ability to minimize estate taxes.  As of January 1, 2009, a married couple may shield $7,000,000 from federal estate tax and $2,000,000 from Massachusetts estate tax.  However, this amount will not be shielded from estate taxation unless each spouse owns assets, either in his or her own name (not jointly) or in the spouse’s revocable trust, equal to his or her available federal exemption amount of $3,500,000.  To the extent that a couple’s assets are owned solely by one spouse or jointly, the combined estate tax for both spouses may be approximately $1,500,000 more than it would have been if assets had been properly titled.

4. Do you own your life insurance policies in a separate life insurance trust that shelters the proceeds from estate tax?
For estate tax purposes, your estate will include proceeds from life insurance policies owned by you, even if your estate is not the designated beneficiary of the death benefit.  This may cause the insurance proceeds to be taxed at an estate tax rate of approximately 50 percent.  By placing the insurance policy in a properly drafted and maintained insurance trust, your estate can avoid this tax, effectively doubling the value of the insurance. 

5. Have you properly designated beneficiaries of your retirement benefits to avoid unnecessary income taxes?
Individuals often implement a well thought out estate plan only to have it undermined by an incorrect beneficiary designation. 

6. Do you have the power to remove any trustee of your spouse’s trust after his or her death?  Do your children have the power remove the trustees after you and your spouse pass away?
Many trusts are structured to appoint an independent trustee to serve.  This requires the surviving spouse and/or children to deal with a trustee that may or may not be responsive to their needs.  Existing trusts should be reviewed to ensure that a surviving spouse and/or children have the power to remove and replace an independent trustee.

7. Are your parents or grandparents leaving your inheritance to you in trust or outright?
Receiving your inheritance outright may increase the estate tax payable by your family.  In addition, the property will be subject to potential loss to creditors and spouses.  On the other hand, an inheritance in trust will likely avoid unnecessary estate taxes and take advantage of the asset protection provided by such a trust.

8. Are your real estate holdings held in trust to avoid costly probate expenses?
Titling of primary residences, investment property and vacation homes is an important component of a comprehensive estate plan.  Absent proper planning, real estate is subject to probate in the state in which it is located.  In addition, if you own real estate outside of your home state, your estate may need to go through expensive, public and time-consuming probate in that state before the real estate may be transferred to the intended beneficiaries.  Probate may be avoided by transferring these assets to your revocable trust during your lifetime. 

9. Are you taking advantage of the annual gift exclusion ($13,000 per person) and other gifting opportunities?
Beginning in 2009, you may transfer $13,000 per person annually to your family members and other beneficiaries.  Implementing an annual gifting program is an effective strategy to transfer wealth to your loved ones without tax while reducing your estate tax exposure.  In addition, this gifting strategy is a mechanism to make gifts to irrevocable (creditor and spouse protected) trusts for the benefit of your children, grandchildren or loved ones.  Unlike a Uniform Gifts to Minors Account (UGMA), these trusts can be structured so the beneficiary does not receive the property directly at age 21. 

10. Are you taking advantage of tax planning opportunities available for gifting investments and other property that has lost value during these tough economic times?
There are several techniques that take advantage of depressed values and the historically low interest rates to shift assets to the next generation.  To the extent that the assets appreciate more than the current interest rates, the appreciation transfers free of tax to trust beneficiaries.  One technique (referred to as a Grantor Retained Annuity Trust or “GRAT”) is especially successful with appreciating property such as closely-held stock, business assets and real estate.

11. If you have ownership in a business, do you have an agreement (or succession plan) in place to protect your spouse and/or family members from disagreements over value, terms of a buyout and potential taxes?
A comprehensive estate plan should include a well-drafted agreement and succession plan to ensure the smooth transition of your business upon your death.