Don’t Gloss Over Your Will, Trusts, and Beneficiaries

KEY TAKEAWAYS:

  • Just having a will is not necessarily enough to ensure peace of mind about your estate and your wishes for your heirs.
  • Trusts are established in the will to administer your estate properly, to avoid estate taxes and to provide for your heirs over time.
  • Life insurance is included in your estate upon death. This is yet another reason to ensure that your will has the appropriate provisions to minimize tax on your estate.

My last post, talked about how we helped a new client (a couple with a young family) fix discrepancies in how their investment accounts were titled and how their beneficiary designations were prepared. Although the couple’s account titles and beneficiary designations were legally prepared and would have been appropriate in certain situations, these important documents were not correct based on the client’s estate plan, growing net worth, and the young age of their family.

As I mentioned in my previous post, simply preparing a will does not ensure that your estate plan and desires will be followed properly. With so many things in life, attention to detail is what makes the difference between getting the job done and getting the job done right. Understanding how the many components of estate planning work together is essential for both clients and their advisors.

THE CLIENT EXPERIENCE

In addition to reviewing account titles and beneficiary designations during our new client onboarding process, we also review the client’s will. In many cases the wills are properly structured, however, there are also many instances where we see one of the following scenarios:

  1. There is no will.
  2. The will is outdated.
  3. The will has been recently prepared, but the trust provisions may no longer be appropriate for the client, or they may not necessarily be in line with the client’s overall goals.

Again, anyone who has assets must have a will. Anyone with a spouse or children must have a will. Failing to have an accurate will complicates things for your heirs when you die and adds even more stress to an already difficult time. Further, the administration of your estate and decisions about guardianship could potentially be directed by the courts instead of by your wishes. Is that the scenario you want to see played out when you pass away?

While our new client did have a will, the will was missing some key components including a credit shelter trust, marital trust, and generation-skipping trust provisions. A will provides direction about the administration of estate assets and many times establishes certain trusts upon death. These trusts are used to avoid estate taxes and to administer assets for heirs over the long-term. An additional benefit is that trusts provide creditor protection for heirs, which is very important in these litigious times.

Unfortunately, our new client’s will did not establish a credit shelter trust or a marital trust upon their death. The will did create a children’s trust, but the assets were to be distributed to the children when they reached age 30.

Let’s break down the importance of the credit shelter and marital trusts and why we recommended restructuring the children’s trust.

1. Credit Shelter Trust – This type of trust is used to shelter assets from the surviving spouse’s estate tax when the first spouse dies. In the state of Washington, each spouse has a $2,129,000 estate tax exemption. So if a couple’s combined assets are under $4,258,000, then they would not owe any Washington State estate tax. However, assuming a combined estate of $4,258,000, if the deceased spouse’s estate goes to the surviving spouses free of trust then $2,129,000 potentially becomes subject to Washington State estate tax at the death of surviving spouse. The credit shelter trust uses the deceased spouse’s $2,129,000 exemption by placing assets in a trust that is not subject to the surviving spouse’s estate tax. However, the surviving spouse still has access to income from those assets and principal if needed.

2. Marital Trust – This type trust is established if the deceased spouse’s estate is in excess of the $2,129,000 limit in Washington State and is used to direct the deceased spouse’s assets to their heirs. Again, the surviving spouse receives income from the trust, plus access to principal if needed, but the trust ensures that the deceased spouse’s assets are distributed to their heirs upon the death of the surviving spouse.

3. Children’s Trusts – As mentioned earlier in our client’s case, there was a children’s trust established upon the death of both spouses, but the trust distributed assets to the kids when they reached age 30. This is not unusual, but many times it is more beneficial to create a trust that lasts for the children’s entire lifetime and then is distributed to the children’s heirs. At some point, the children can be trustee of the trust and there is significant flexibility with management of the assets. But, the trust provides protection from creditor claims and divorce and it skips the estate of the children. After several conversations with our new client, we decided to revise the children’s trust to become a generation-skipping trust (GST). Please see my previous post, Three Reasons to Consider a Different Type of Trust in Your Estate Plan for detailed discussion about the benefits of a GST.

Keep in mind that life insurance benefits that your spouse or children receive on your death, unless held in a trust, are generally included in the value of your estate. This is another reason that you want to make sure that your will has the right trust provisions.

EXPERT ADVICE

At Soundmark, we surround ourselves with professionals and a wide range of technical experts to provide advanced solutions to our clients. When it comes to wills and trusts, we can connect you with an attorney who will ensure that your will is properly structured. The estate planning attorney will communicate with us regularly to make sure that your estate is properly administered.

 

Todd Flynn, CPA, CFP ® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.