If you’re someone who updated their trust five or ten years ago, you might be wondering if it’s time for a refresh. Are there new legal changes that affect your trust? Or perhaps changes in your family circumstances that necessitate you to begin trust updates? It’s a common query, and rightly so. 

In this blog post, I’ll explore key reasons why revisiting and potentially updating your trust with your estate planning attorney is a wise move.

Legal Changes and Your Trust: What You Need to Know

Let’s jump right into the legal changes that might have you rethinking your trust setup, especially if you’re in California. But keep in mind that these shifts are making waves all across the US.

Estate Tax Exemption: A Major Consideration

First up, it’s crucial to talk about the estate tax exemption, which is currently a substantial $13.61 million per person. This elevated exemption level means the traditional A B split in trusts may no longer be necessary for many people. When such a high exemption is in play, your trust’s structure can be more flexible, potentially easing the tax burden significantly.

The Portability Regime: Simplifying Estate Management

Let’s discuss the portability regime, a key factor for married couples. Under this regime, when one spouse passes away, the surviving spouse has the ability to ‘port’ or transfer the unused portion of the deceased spouse’s estate tax exemption to themselves. This is particularly important because it simplifies managing assets after the first spouse’s death.

Imagine if your spouse used just a part of their $13 million exemption. The leftover amount could be added to your exemption, effectively giving you a larger buffer against estate taxes. This change has made the utilization of estate tax exemption more flexible and efficient.

Rethinking the A B Split in Your Trust

With these changes, it’s worth reviewing your trust, especially if you have an A B split – where assets are divided into an A trust for the surviving spouse and a B trust for the deceased upon the first death. Given the current high exemption and portability options, simplifying your trust to remove the B trust could be a beneficial move.

Consider Simplifying Your Trust

If you’re wondering whether simplifying your trust makes sense for your specific circumstances, or if you’re managing a parent’s trust that includes an A B split and are looking to streamline the process for the future, I’ve got just the resource for you. My video “Should I Simplify My Trust?” explores this topic in-depth, offering insights into how these legal updates can influence your estate planning decisions.

Checklist for Estate Planning: Keeping on Track

When dealing with such updates, having a checklist for estate planning can be super handy. It helps you keep track of all the little and big things you need to consider, from legal changes like these to personal circumstances that have shifted over the years.

Understanding Proposition 19 and the SECURE Act: Implications for Your Estate Plan

Proposition 19: A Significant Shift in Property Tax Rules

Let’s talk about a major legal change in California that, while not specifically about trusts, certainly impacts them significantly. This change is known as Proposition 19, and it became effective in February 2021. You’ve probably heard about it, and the news isn’t exactly uplifting for those planning to leave property to their children while retaining low property tax rates.

Proposition 19 has altered the way parents can pass property to their children while keeping that coveted low property tax rate. Spoiler alert: it’s a lot tougher now. I’ve covered this topic in detail in my video about Proposition 19, which I highly recommend watching. It’s a great primer, especially if you’re still getting your head around this new law.

Estate Planning Considerations Post-Proposition 19

So, how does Proposition 19 affect your estate planning? You might be thinking of leaving your property to your child, but now there’s the catch of increased property taxes. This might mean you’ll need to leave more liquid assets to your child to cover those taxes. 

Consider this scenario: you have a property valued at $4 million and you’re paying a mere $2,000 a year in property taxes, but once you pass away, that tax could leap to $40,000 a year. It’s likely your child might choose to sell the property rather than keep it, especially if it becomes too costly to maintain as a rental.

This shift in property tax laws may require you to rethink how you’re distributing assets among your children. It’s not as simple as assigning properties to different children anymore; you might need to mix things up to ensure fairness and practicality.

The Secure Act and Its Impact

Another key legal change that’s shaking things up in estate planning, although not directly related to trusts, is the Secure Act, which became effective in 2020. It’s essential to understand how this act can significantly affect retirement accounts and how they are inherited. While it doesn’t directly target trusts, its implications on parent-to-child transfers of pre-tax retirement accounts like IRAs, 401Ks, and 403Bs are noteworthy.This, in turn, may influence how you plan your estate, especially regarding the distribution of your retirement assets.

Understanding the Changes in Inheritance of Retirement Accounts

Previously, a child could inherit a retirement account and extend its benefits throughout their lifetime. They would only need to pay income taxes on the required minimum distributions (RMDs) – the amounts they were mandated to withdraw annually. This system allowed for a gradual, tax-efficient transfer of retirement assets to the next generation.

However, Congress has since shifted the advantage more toward individuals who are older and retiring, allowing them to retain more of their funds. Unfortunately, this change has made it more challenging to pass these assets to the next generation.

The 10-Year Rule for Neurotypical Children

For a neurotypical child inheriting a retirement account under the SECURE Act, instead of stretching the account’s benefits over their lifetime, they now must pay all income taxes within a 10-year period.

What’s more, they can’t defer these taxes until the end of the 10 years; payments must be prorated and made throughout the decade. This new regulation significantly alters the tax implications for inherited retirement accounts.

Special Considerations for Children with Special Needs

On a brighter note, there’s an exception for children with special needs. They are still able to extend the benefits of an inherited retirement account over their lifetime. This applies if the special needs child inherits the retirement account directly or through a special needs trust. 

In this case, the child’s life expectancy is used to calculate the required minimum distributions, and the remaining assets can then stay in the trust, offering a more tax-efficient and manageable inheritance.

Adapting Your Estate Plan to the SECURE Act

These changes brought about by the SECURE Act underscore the importance of revisiting and possibly updating your estate plan, especially in how you handle retirement accounts. It’s crucial to understand how these new rules can impact your children differently, based on their individual circumstances.

In light of these updates, your checklist for estate planning should include a review of how retirement accounts are incorporated into your overall strategy. If you’re unsure about how to update a living trust or other aspects of your estate planning in response to these changes, seeking advice from an estate planning professional can be invaluable.

Charitable Beneficiaries and Retirement Accounts in Estate Planning

New Opportunities for Naming Charitable Contingent Beneficiaries

A recent regulatory update, the SECURE Act 2.0, offers another interesting option for your estate planning, particularly concerning retirement accounts. Now, you can name a special needs trust as a beneficiary, and even though that trust names a charity as a contingent or backup beneficiary after your special needs child’s death, the trust can still benefit from the ‘stretch out’ advantages.

Understanding the Implications of This Regulation

While there might be some uncertainties about the practicalities of this regulation, the potential is certainly there. For those with significant retirement accounts – we’re talking about $2 million, $3 million, or even more – this can be a substantial part of your estate plan.

Strategic Planning for Retirement Account Beneficiaries

Given the size and importance of these accounts in some estate plans, deciding whom to leave your retirement accounts to requires careful thought. Unlike other assets, you don’t title these accounts in your trust. They remain in your name, and you update the beneficiary designations as needed.

So, a critical question arises: How do you want these accounts to be distributed upon your death? This decision has become increasingly important, especially with the new possibilities of naming charities as beneficiaries.

Special Considerations for Special Needs Trusts

For those who have a special needs trust, this update opens up new avenues for funding the trust, particularly through retirement accounts. To dive deeper into this topic, I have created a video titled “How to Fund Your Special Needs Trust with Retirement Accounts.” 

Watching this video can provide more details and insights on how to incorporate retirement accounts into your special needs trust planning effectively.

Adjusting Your Estate Plan for Family Changes and Asset Management

Upcoming Legal Changes and Their Impacts

As we move into 2024, there are a few more legal tweaks on the horizon, although nothing too drastic. The estate tax exemption has increased slightly, from $12.92 million to $13.61 million, which could offer a bit more leeway in planning. Additionally, the annual exclusion amount has risen from $17,000 to $18,000. This change means you can gift a little more to as many people as you like each year without incurring gift taxes or needing to report these gifts to the IRS.

Family Dynamics: A Key Driver for Estate Updates

Legal changes aside, let’s shift our focus to changes in your family situation. It’s these personal life events that often call for a revisit to your estate planning attorney. Major life events like the birth of a new family member, a death, a marriage, or a divorce are important moments that can significantly impact your estate plan. These milestones are prime opportunities to check in and assess if your estate plan needs tweaking. 

Ensuring Proper Asset Funding in Your Trust

One aspect that people often overlook is making sure their assets are funded in their trust. It’s crucial to ensure that your bank and brokerage accounts are correctly titled in the name of the trust. 

The same goes for your house and any other significant assets. Every check-in with your estate planning attorney should include a review of how your assets are titled and funded. Properly funding your trust ensures that your assets are managed according to your estate plan, significantly streamlining the process for your beneficiaries.

The Importance of Active Trust Management and Responding to Life Changes

The Trust as a Basket: Ensuring It’s Effectively Filled

When it comes to understanding trusts, I like to use the analogy of a basket. Think of a trust like a basket – it’s only effective if it’s holding the things it needs to. What’s the point of a basket if it’s empty, right? 

I’ve actually discussed this topic in my video “Funding Your Trust.” It’s a great resource to help you ensure that each of your assets is properly integrated into your trust, whether through titling in the trust’s name or updating beneficiary designations.

Responding to Life’s Changes and Challenges

Over the past few years, especially during COVID-19, many families have faced significant challenges, including mental health issues, particularly among young adults. 

This situation has often resulted in setbacks in mental health and personal development. If your family has experienced these difficulties, it’s crucial to consider how these changes impact your estate planning.

Planning for Children with Special Needs

If your child is struggling with mental health or other life challenges, ensuring they receive support even when you can’t provide it directly is essential. This could mean planning for the right housing, medical care, services, or job training they might need. Your estate plan, and particularly your trust, should provide the necessary framework to offer this support.

The Dynamic Nature of Trusts

Remember, we call it a revocable living trust for a reason.

Your trust should evolve with you and your life’s changes, not remain a static document signed once and then forgotten on a bookshelf. Regular reviews and updates are key to ensuring that your trust accurately reflects your current wishes and circumstances.

Keeping Your Trust Aligned with Your Goals

It’s important to regularly revisit your trust, especially when significant life events occur or when your family dynamics change. Ensure that your trust is not just a document, but a living, breathing part of your estate plan that adapts and grows as your life does. By actively managing your trust and making sure it’s fully ‘funded’ with your assets, you’re taking proactive steps to protect and provide for your loved ones according to your exact wishes.

Navigating Trust Amendments and Restatements

The Value of Flow Charts in Estate Planning

When it’s time to revisit your trust, visual aids like flow charts can be incredibly helpful. It’s beneficial to look back at the flow chart provided a few years ago and ask yourself: does the flow of your assets and instructions in your trust still align with your current wishes? Thinking through your estate plan visually can bring clarity and highlight areas that may need updating.

Types of Changes to Your Trust

When you decide to update your trust, there are generally two paths you can take, especially if you’ve worked with us before.

  1. Partial Amendments: This is a simpler form of change where we modify a specific part of your trust. For example, if you had previously included a $50,000 gift to a nephew but later changed your mind, we can amend that part of your trust. It’s a straightforward process of revising just the necessary sections.
  2. Restatements and Amendments: For more substantial updates, we opt for what’s known as a restatement and amendment. This involves keeping the trust’s title the same but updating the contents. It’s particularly convenient because you don’t need to retitle assets that are already in the trust. For instance, if your trust is titled “The Smith Family Trust 1997,” we would maintain this title but label the update as the first restatement and amendment of “The Smith Family Trust 1997.” This approach ensures continuity and ease in managing trust assets.

Working with Original Attorneys for Minor Revisions

It’s important to note that for minor revisions to trusts created by other attorneys, it’s best to return to the attorney you originally worked with. This is because taking on revisions of another attorney’s trust involves assuming responsibility for the entire trust, which can be complex and time-consuming.

Privacy and Simplification in Trust Restatements

Privacy in Restatements

One significant advantage of opting for a restatement and amendment is related to privacy upon the trust’s execution. Upon your death, those entitled to a copy of the trust, as explained in our trust administration video, will only receive the document starting from the restatement and amendment. Not disclosing previous versions of the trust can be beneficial for various reasons, including privacy and simplicity.

Other Benefits of Restatement and Amendment

A restatement and amendment approach is advantageous from several other perspectives. It not only simplifies the process of updating your trust but also maintains the continuity of your estate plan. Furthermore, it eases the administrative burden upon your death, as beneficiaries and trustees deal with the most current version of your trust, ensuring clarity and reducing potential conflicts.

Streamlining Your Trust in 2024

As we begin 2024, take a moment to reflect on your trust and family dynamics, considering any necessary updates to align with your current wishes and life changes. 

Remember, updating your estate plan is a continuous process that is essential for safeguarding your legacy. Whether responding to legal shifts, personal milestones, or just ensuring your trust is accurately structured, Cookman Law is here to assist.

Please feel free to reach out for guidance or visit www.cookmanlaw.com for more information and support in this crucial aspect of life planning.

P.s – Don’t miss our fun infographic summarizing the key points from this blog! It’s a great way to quickly grasp the essentials of trust updates for 2024. Share it with your friends and family so they can have all this important information at their fingertips.

2024 Trust & Estate Planning Updates – PDF – Infographic