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I Thought My Will Would Last Forever so I Never Updated My Estate Plan. Now My Family Suffers Because of It. Estate Planning Mistake Number 6.

Roger McClure April 6, 2016

Change happens.

We are all used to computer hardware and software becoming obsolete. No doubt you’ve received many an emailed message that “Microsoft will no longer support version 5.50.” So, when your beloved 5.50 inevitably crashes, no one can help you, and you’ve lost irreplaceable data going back a decade.

Women’s hems go up…and down. And today, some of those hems look like the wearer can’t decide just what she wants as the “handkerchief style” has both long and short on the same skirt. Men’s ties go wide…and narrow, and from red to yellow and then back to red again. Wear the wrong hem length or wrong tie, and you are marked as hopelessly archaic. And even your best friend won’t tell you.

In 1960, consumer advocate Vance Packard wrote a best-selling book, The Waste Makers, in which he predicted that modern manufacturers planned for your shiny new car to become so obsolete so quickly that you just had to buy a new car…preferably every year.

50 years later, cars now open without keys, and show your journey ahead on a windshield projection out of a SciFi movie. They allow you to speak on the phone hands free using the car speaker system and use those same speakers to advise you to turn right in 800 yards then make an immediate left.

And that’s just the easy stuff. True to Packard’s warning, the changes keep coming.

Today, some cars can sense an impending accident and brake to avoid it. They can park themselves, and when you are ready to go home, they can drive themselves to where you are waiting out of the rain. And in a year or two, our cars may even be able to drive us from coast to coast with a minimum of human interference. Car mechanics have become computer technicians; drivers (the now-quaint term, soon to be replaced by something more accurate) have become auto financiers and riders.

Despite evidence of change all around us, people think that wills, trusts, estate plans, and powers of attorney are immune from becoming obsolete. “I did my plan in 1995 and it still must be valid,” says Oblivious Oscar.

Or maybe not.

It may be a shock to some, but people change. There are family feuds and fissures. On the other side of the family dynamics equation, I’ve seen one son so successful that he didn’t need an inheritance and wanted it to go to his struggling brother instead.

Furthermore, the best-laid plans can unravel with time. For instance, you made Betty your executor but Betty has died. Your back up for Betty, Clarice, is now in a nursing home with Alzheimer’s. Your children were minors in 1995, but are now capable of managing your estate. Oh yes—you keep forgetting where you put the car keys. Maybe it’s time to ask your daughter to help manage your bank account.

The law doesn’t change as fast as computers, hemlines, and car models, but it does change. There are a number of significant changes in the recent years that now make your old plan obsolete. For instance:

Dramatic Tax Changes. There have been some recent dramatic changes in estate and income tax law. Today, 99% of Americans are unlikely to pay estate tax. But, if they have a plan that was done before 2013 and they are married, chances are that they have a plan that will cause unnecessary income taxes. Usually, the pre-2013 plans were based upon the old tax law where the first spouse to die had to create a Family Trust to avoid federal estate taxes. For the 99%, such Family Trusts are no longer necessary to save federal estate taxes (Generation skipping transfer and state inheritance taxes are another matter).

But these old estate-tax avoidance trusts now lead the beneficiaries into an income tax problem that is totally avoidable.

For instance, Norm and Nancy had an old estate plan they did not update. When Norm died, Nancy dutifully set up the Family Trust as she was required to do when Norm died. She didn’t like the Family Trust because it was complicated, restricted what she could do with the money, and required her to pay for and have anxiety over another tax return just for the Family Trust.

When Norm died, there was $1,000,000 in the Family Trust of Norm. Nancy carefully invested the money so that when she died, the money in Norm’s Family Trust was worth $2,000,000.

Nancy’s children were shocked to learn that after they did what they were supposed to do, and sold the assets in Norm’s Family Trust to make the distributions to the heirs, that when the CPA did the tax return for the trust, there was a $290,000 income tax bill. Nancy’s children consulted an attorney and found out that simply inserting two new paragraphs in Norm’s trust document could have legally and completely avoided this $290,000 tax bill. But because Norm and Nancy never got around to updating their estate plan, the monies were due.

But the situation got even worse.

No HIPPA Powers. When Nancy went into the hospital, Nancy was unconscious and could not sign any documents at the admissions desk. As soon as Nancy’s daughter Karen found out that her mother was hospitalized, she went to check on her mom’s treatment. But because Nancy had not included a waiver of HIPPA giving Karen access to the private medical records covered by HIPPA, the hospital had to decide whether they would allow Karen to be her mother’s ombudsman. Thus the hospital—not Karen—determined if Karen could check on the hospital staff to ensure that her mom got the best care.

In todays’ world, there are complex rules governing who can get care and when. That complexity necessitates that you have your own advocate to look after you. This advocate needs full access to your medical, insurance, and payment records. Old documents often don’t provide critical family members the access they need, and without that access, they may be denied the right to help you when you are ailing and unable to help yourself.

Unprotected IRA. Recently, the Supreme Court ruled that if a child inherits an IRA from a parent, that IRA is not protected against the debts of the child. For some parents, their largest asset is their retirement plan and they want it to be protected for their children.

There is a way to protect an IRA for a child: leave it in a trust that qualifies to hold an inherited IRA under IRS regulations. But many of the old trusts do not contain the language that allows the child to have the inherited IRA in a protected trust.

Moved to New State, New Laws. Many states do not require powers of attorney to be recorded at the local court house to be valid. But some states do so require. The difference can be enormous. Documents that were valid in the state you just left may not be valid in your new home state until recorded. Thus if you need them, your trusted agent may not be able to help you immediately (when you really need them the help) and may be delayed until the powers are recorded –if they meet the requirements for recordation in that state. When you move to another state, you need to find out if your documents need to be updated.

High taxation of income trapped in a trust. At about $12,300 of income, trust income and capital gains are thrown into the top tax brackets of 39.5% on income and 20% on capital gains. Also at the $12,300 level, the additional 3.8% of Net Income Investment Tax can kick in.

The trust document needs to give the trustee the authority to distribute capital gains to the beneficiaries and to allocate capital gains to income. Without these technical provisions, on $100,000, the combined federal and state tax could be $30,000 (capital gains) to $49,000 (ordinary income) if trapped in the trust, but only $20,000 (capital gains) to $30,000 (ordinary income) if not trapped in the trust, depending upon local and state taxes.

While not as ego-satisfying as a hot new car in the garage, or a new power tie around the neck, keeping your estate planning up-to-date is vastly more important in the long run. Your family may soon forget you wore an ill-conceived handkerchief skirt, or refused to upgrade that ancient software package, but they won’t ever forget that you failed to keep your critical estate-planning documents in topnotch order.

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