Forget about it!

No really, you should look at your estate plan

Pamela Wheeler, EA, estate tax, gift tax, estate planning

Pamela Wheeler, EA, MST, CSEP

Sitting down with your estate planning professionals can feel like a daunting task. There are so many things to consider when drafting your estate documents, including summarizing your assets, identifying your beneficiaries and designating who will handle things when you no longer can. Once you finally finish the task, you tuck it away in a safe place and don’t want to think about it again. But things change quickly – our tax laws, your family, your assets, etc. Has your current estate plan kept up with all of the changes?

Portability vs “AB” Trusts

Portability was made permanent in 2013 and means when one spouse dies and does not make full use of their federal estate tax exemption (currently $5,490,000), then the unused exemption can be “ported” to the surviving spouse. The surviving spouse then has their own federal estate tax exemption plus the amount ported to them from the deceased spouse. When the second spouse dies, this allows a much larger (potentially up to $10,980,000 in 2017) group of assets to pass to your beneficiaries estate tax free and with a cost basis step-up to the fair market value on the second death, resulting in both estate tax and income tax savings.

Historically, the only way to use both spouses’ full estate tax exemption was through the use of an “AB” Trust arrangement. The “A” Trust contains the surviving spouse’s share of the assets and the “B” Trust (or Decedent’s Trust) holds the deceased spouse’s share of the assets, up to the amount of their federal estate tax exemption. The “B” Trust assets are not included in the surviving spouse’s estate but they do not receive new cost basis on the second spouse’s death. Be sure your estate documents are current and allow your Trustee the flexibility to use the new portability rules if appropriate for your estate.

Don’t name people who do not get along as Co-Trustees or Co-Executors

If you have more than one child, you may be inclined to name all of them as your Successor Trustee and/or Executor to prevent them from thinking you prefer one over the other. The role of Trustee/Executor can be a difficult and time consuming job on its own. Naming more than one Trustee/Executor, particularly people who do not get along, can make it even more difficult. This may be pitting them against each other and as a result, decisions may not get made timely. To solve the problem of hurt feelings, you can name a corporate trustee, such as your current bank, to administer your estate. Yes, they will charge your estate a fee for their services, but the fee may be well worth keeping peace in your family. Or, choose only one person and discuss your decision with your family now to avoid hurt feelings after your death.

Retirement account beneficiary designations

Make certain you know who you want to receive your retirement account on your death and ensure you have provided the name to the account’s custodian. Don’t forget to also provide the custodian with the name of who is to receive the account if the primary beneficiary dies prior to your death. Failure to identify your beneficiary may result in the account going to someone you did not intend. Check your beneficiary designation every year or two and particularly after a death or other family change.

You should not name your trust as the beneficiary unless instructed to do so by your estate planning attorney. Your attorney will draft the trust document with specific language that qualifies the trust to distribute the retirement account to your beneficiaries in the most tax advantaged way possible.

Stretch IRAs

Roth IRAs have always been great assets to give to young beneficiaries on your death. Distributions from a Roth are not taxable and can be stretched out over the beneficiary’s lifetime. But we may soon see a change to this planning. With few exceptions, a Senate Finance Committee has recommended that all retirement accounts, including Roth IRAs, be fully distributed to a non-spouse beneficiary within five years of the IRA holder’s death. If this recommendation passes, your non-spouse beneficiaries may pay a significant amount of income tax on inherited retirement account assets.

Joint accounts

As you grow older, you may need to set a child up on your bank account to sign checks and handle your financial affairs. The best way to do this may be to set them up as a signer on the account and not as a joint owner of the account. As a joint owner, the account may be available to your child’s creditors. Additionally, on your death, the child inherits the entire account. This may not be the result you intended. For example, if you have three children and planned for each to receive an equal one-third share of your estate, the child named on the joint account will receive 100% of the account plus one-third of all other assets.

Who should get your assets and other planning

Choosing specific assets to give to each of your beneficiaries can have very different tax consequences depending on the asset, the amount and the beneficiary. So, identifying who is to receive your assets should be done with thought and careful consideration with your estate planning professionals. Some examples:

  1. If you plan to give a large donation on your death to charity and you have a traditional IRA account, it may be better to give the donation directly from your IRA account and give other assets to your non-charitable beneficiaries. This is done by contacting the IRA custodian and designating the charity as an IRA beneficiary. If you have a Roth IRA and plan to give your grandchildren assets from your estate, under our current laws, the Roth IRA is probably the better asset to give them.
  2. If you are married and have children from a prior relationship, the “AB” Trust arrangement (mentioned above) may still be the best estate plan to ensure you retain control of your assets after your death, and the assets in the “B” Trust ultimately go to your children – not to your spouse’s children or a future spouse.
  3. Having your estate fund a trust that benefits your surviving spouse during their life is a great way to ensure your spouse has sufficient income for the remainder of their life and you retain control over the assets. But what if the surviving spouse intends to make gifts to the children who will ultimately inherit the trust assets after the survivor’s death? The spouse pays income tax on the distribution received from the trust and then may gift some or all of that income to the children. It may be better to give your Trustee discretionary power to distribute from the trust directly to the children and spread the income tax liability over more people, possibly paying tax at lower income tax rates.
  4. If you have a large estate (in excess of $5,490,000 in 2017) or have made prior generation skipping gifts, giving assets on your death to a grandchild or to a non-related person who is more than 37 ½ years younger than you could result in a generation skipping tax on the transfer, in addition to an estate tax. You may want your estate documents to include a clause that limits a transfer that would result in a generation skipping tax.

There’s no better time than now to review your estate plan so you can make sure everything is in order and be prepared for any future tax changes that may come from the new presidential administration.

Pamela Wheeler, EA, MST, CSEP, specializes in the taxation of trusts, estates and individuals. She can be reached at (480) 483-1170 or