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Your Estate Plan: New Laws

Figuring out how to pass assets on to heirs is an integral part of the estate planning process. But it’s not always easy to determine the wisest path, given the many options available as well as changing tax laws.

Beneficiary designations on life insurance policies and retirement plans are one way to avoid sending assets through probate, an arduous legal process where a court oversees distribution of an estate when the deceased’s intent is unclear. Homes and autos are usually jointly owned, so the distribution of those assets is pretty simple. But if an individual is single or the asset is held in just one name, the estate will go through probate.

The revocable grantor trust is one tool to help people avoid probate, and many people chose that option. Here, you as the grantor (the person making the gift) convey assets to yourself as the trustee in charge of the trust. As trustee, you have control of the assets during your lifetime. You have the power to alter the trust or revoke it. When you die, your successor as trustee conveys to proceeds to the beneficiaries.

Taxes from investments and income flow through the normal tax return. By putting the assets into the trust, individuals have control and use of the assets and ownership is structured in a way that avoids probate. It is important for individuals to fund the trust with everything they can, with the notable exception of individual retirement accounts and other such investment vehicles.

Under previous laws, you would spend inordinate amounts of time deciding whose trust would be funded with what assets. There would typically be two trusts set up from the beginning for married couples, so they can pass along double the amount of tax-free proceeds to their kids or other beneficiaries – now $5.43 million per person, known as the “exclusion.” Thus the two parents could pass along $10.86 to the children.

The problem comes when, typically, one spouse dies and that person’s trust goes to the surviving spouse. When spouse No. 2 dies, the $5.43 ceiling applies for the combined amount.

But then the Internal Revenue Service eased the rules, allowing for what’s called “portability.” Under portability, the surviving spouse’s trust can use any unexercised portion of the dead partner’s exclusion, a plus for heirs. The law change is prompting many individuals to redo their trust and fund a single trust. Though this may seem simpler on paper, it does come with disadvantages.

Before making any changes to these documents, individuals should have a discussion with their estate planning attorney.  Recent changes to both state and federal laws have rendered many documents outdated. Wording that was perfectly acceptable in recent years may undermine what an individual would like to happen upon his or her passing.

It is easy to pit off making estate decisions – no one likes to think about dying. The repercussions from poor planning, however, can undermine people’s investment and tax preparations, not to mention leaving a headache for survivors to address.

Understanding how assets are owned, who receives them and the tax break implications are all critical decisions that should be a key part of the planning process.

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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He is the host of Consider This with Big Joe Clark, found on WQME and iTunes. Big Joe can be reached at [email protected], or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at

Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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