Creating a living trust is an important part of a comprehensive estate plan to protect the interests of your loved ones and ensure that your assets are distributed according to your wishes after you’re gone. However, many people don’t realize that it’s essential to periodically review and update that trust as well as their overall estate plan.
Over time, your assets change, your family circumstances change, and tax laws change. When these changes occur, and your schedule of trust assets isn’t adjusted, the plans that were once designed to help your loved ones may create a problem instead. Here are some of the top issues that can arise with outdated trusts:
Estate lawyers commonly compare a living trust to a bucket when describing its purpose; the trust itself is an empty bucket that you fill up with all the assets you wish to pass on to your heirs. For a trust to work as it’s intended to, you must make sure that your assets—bank accounts, real property, investment accounts—are titled in your trust. If you fail to do this, instead of avoiding probate, your estate may be dragged into court, negating the primary reason for creating a trust in the first place.
It’s easier than you think to end up with assets outside of the trust “bucket.” If you refinanced your home, it may have been taken out of your trust and not put back in. You may have created new accounts outside of the trust with the intention of properly titling them and then not getting around to it. Periodic reviews are essential to make sure all your assets are titled or designated appropriately to keep your estate plan on track.
The structure of a living trust is built to take the federal estate tax into account, as well as any applicable state taxes. Previously, the federal limit on what an individual could pass on was quite low, so a larger number of people were potentially subject to a death or inheritance tax. Now, however, tax law changes have greatly raised that threshold, allowing an individual to pass on $11,580,000 tax-free ($23,160,000 for a married couple). An older trust may very well contain rigid provisions based on a lower threshold, putting unnecessary restrictions on how survivors can use assets or causing unintended negative tax consequences.
A well-written trust will be structured to try to protect your loved ones against common reasons an inheritance might be at risk, such as divorce, debt, or a targeted lawsuit. However, family circumstances change, and you and your attorney may not have foreseen situations that require specific legal solutions. For example, it’s possible for a well-intentioned but poorly planned gift to a disabled or special needs heir to disqualify them for public benefits, leaving them worse off than before. You must discuss your intentions and your unique family situation with an estate planning attorney to ensure that the plan is current and effective.
How retirement plans fit into your estate plan can be another potential pitfall that derails your intentions for your heirs. In general, these don’t belong in your trust but should be passed on by designating a “payable on death” beneficiary. In addition, tax law governing retirement accounts changed significantly at the start of 2020 with the passage of the SECURE Act. Under old rules, beneficiaries inheriting an IRA could take out a little at a time over their lifetime, allowing them to strategically lower their tax burden and grow the inherited funds. Now they are required to take it all out within ten years. If you made your estate plan prior to 2020, you need to meet with an experienced estate attorney now to determine what impact this change has on your planning.
Just as a living trust can become outdated, other aspects of your estate planning can outlive their purpose if they’re not revised to fit your current circumstances. For example, you might have invested in life insurance when your children were young to pay off your mortgage, replace your income to support your family, and provide for their education should something happen to you. Once the children are grown and on their own, it may be wiser to rethink your insurance plan to provide for your own long-term care needs. A periodic review of the elements of your estate plan, such as insurance policies, is necessary to ensure that the tools at your disposal remain aligned with your estate planning goals.
A well-thought-out estate plan can help provide for the needs of your loved ones after you are gone, but it’s important to keep the information current. The experienced estate attorneys at Velasco Law Group can help you update your existing estate plan to avoid the unnecessary anguish caused by a plan that no longer serves its intended purpose. Velasco Law Group has seasoned litigation counsel in probate, estate, and trust litigation, we’ve truly seen it all—and we design your estate plan to help guard your family against the drama that can ensue. We offer bilingual services in English and Spanish to serve the Southern California community. To find out more about our estate planning services or to schedule a free initial consultation, contact us here.