The Importance of the Right Estate Planning Documents

Estate Planning Documents
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Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), each individual who dies during 2019 will have a lifetime exemption amount of $11,400,000. Combine this increase with the ability to utilize unused exemption amounts through portability the need to shield and defer federal estate taxes is, perhaps, no longer the primary concern of most clients. For many married couples, “traditional” estate planning prior to the enactment of the TCJA often included a last will and testament that created both a bypass/shelter trust and a marital/ QTIP trust. Using this planning technique, a testator could shield his or her estate from any estate tax liability and should a decedent’s estate exceed his or her lifetime exemption amount, any estate tax liability could be deferred via the marital/QTIP trust until the death of the surviving spouse.

Incident to this type of planning is the treatment of the cost basis of the assets passing to the surviving spouse for income tax purposes. While all assets receive a new basis upon the death of the first spouse regardless of which type of trust is funded, only those assets transferred to the marital/QTIP trust benefit from a second change of basis upon the death of the second spouse. Alternatively, the assets held in the bypass/shelter trust, although still shielded from estate taxes, do not receive a second change of basis following the death of the second spouse; thus, a bypass/ shelter trust can now create significant income tax liabilities for future beneficiaries, especially where assets held in a bypass/shelter trust have the potential for significant appreciation.

This potential downside has led to a balancing act for many clients in deciding whether to create and fund a bypass/shelter trust for estate tax protection, or to forego the traditional structure in order limit potential income tax liability. Such consideration is made even more perplexing by the fact that the TCJA is set to sunset as of January 1, 2026, if not repealed sooner, at which time the lifetime exemption amount will revert to the prior exemption amount of $5 million, adjusted for inflation. Needless to say, if one had a crystal ball which would give one’s date of death, asset type and value, and remaining lifetime exemption amount, the balancing act would be much simpler.

In order to address these complexities, a last will and testament can be drafted to enable the Independent Executor to consider, at the time of the testator’s death, how best and whether to fund a bypass/shelter trust or marital/ QTIP trust. This consideration could be based upon the testator’s remaining lifetime exemption amount, the date-of-death values of the assets, whether the assets are likely to appreciate in value, or whether the assets will be sold in the future. Such considerations also enable the Independent Executor to determine whether a Federal Estate Tax Return (Form 706) should be filed in order to elect portability of the deceased spouse’s unused lifetime exemption amount, if any.

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ADDITIONAL BENEFITS OF TESTAMENTARY TRUSTS

Aside from the estate and income tax considerations that must be given when drafting a client’s last will and testament, an attorney must also consider other benefits a testamentary trust can provide to the beneficiaries under the testator’s Will. Including a testamentary trust in the client’s estate plan can provide creditor protection to assets left to a beneficiary and can help address substance abuse issues by controlling if and when distributions may be made. Further, if a beneficiary receives any governmental benefits that are needs-based, it is critical that a special needs trust be created so as to prevent the loss of those benefits. Additionally, it is uncommon for a testator to want his or her 18, 21, or even 25 year old son or daughter to have unfettered access to any assets he or she might otherwise receive; thus, placing those assets in a testamentary trust can help with the desired management and access. That said, testators tend to impart the responsibilities of being trustee on their child once the child reaches the age of 30, 35 or 40. Because the foregoing circumstances can change over time, it is important that the testator be reminded to periodically review their last will and testament to ensure that it continues to meet their goals, objectives and concerns.

Importantly, a testamentary trust can also help avoid a guardianship, whether for the surviving spouse or other beneficiary. Over the past few years, the Texas legislature has modified the statutes governing guardianships, which has arguably made it more challenging to create a guardianship. While the new statutes serve an important purpose in ensuring the safety and well-being of a Ward, it often makes more difficult a family’s efforts to help a loved one. Moreover, a guardianship proceeding is exceedingly stressful, expensive and time consuming for all involved. Thus, with the creation and funding of a testamentary trust, the need for and issues arising from a guardianship can often be avoided.

ADDITIONAL LIFETIME DOCUMENTS

Although many clients seek assistance with the preparation of their Wills, it is important to not overlook the additional lifetime documents that are critical to a client’s overall estate plan, which include, but are not limited to, a statutory durable power of attorney, a medical power of attorney, an advanced directive, a HIPAA authorization, an appointment of guardian, both for the testator, as well as the testator’s minor children, and the appointment of agent for disposition of remains. Moreover, significant legislative changes were recently made to both the statutory durable power of attorney and Texas’ medical power of attorney; therefore, even clients with existing lifetime documents should revisit those documents in light of the current law.

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For example, the current statutes pertaining to Texas’ statutory durable power of attorney were amended in 2017 to enable a principal to grant new, additional powers to the agent. Commonly referred to as “hot powers,” a principal can now expressly authorize an agent to do the following: (1) create, amend, revoke, or terminate an inter vivos trust; (2) create or change a beneficiary designation; (3) create or change rights of survivor-ship; and (4) make gifts. In addition, a principal can select one or more persons to serve together or independently of one another as co-agents, and can expressly authorize an agent to receive reasonable compensation or to be reimbursed for expenses incurred while serving as agent. These important revisions to the statue help to clarify the powers, authority and duties of an agent as well as confirming whether co-agents can be named and whether co-agents, if named, must jointly act when serving.

The revised Texas Medical Power of Attorney statute became effective as of January 1, 2018 requiring the mandatory disclosure statement that precedes the medical power of attorney to be included as part of the power of attorney. Updating the medical power of attorney form is critical to ensuring that a client’s agent for medical decisions is properly named and recognized for any medical power of attorney signed after January 1, 2018.

In sum, significant problems and unintended consequences can arise when a client does not have estate planning documents or has inadequate documents. If a stroke has occurred, it may be unlikely that a client can sign a power of attorney which might otherwise circumvent a guardianship. If a client dies without a Will, but leaves a child from a prior marriage or relationship, the division of the separate and community estates can be devastating to the surviving spouse. While “simple” estate planning documents may be sufficient in the appropriate circumstances, in other situations a more complex plan may be necessary to carry out the client’s goals and wishes and to address estate tax and income tax consequences. Knowing these differences can help you best advise your client.  Patty Rouse Vargas

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