Cleaning out your attic is one of those unpleasant projects that is typically delayed, deferred, and dodged as long as possible. Not much fun. The benefit to biting the clean-up bullet on your attic is similar conceptually to cleaning up your estate and related planning. In both your attic and estate planning clean-up projects you’ll stir up a bunch of dust, find things you had completely forgotten, discover some hidden gems. In all cases, you’ll get stuff organized, get rid of lots of stuff that has not served any useful purpose for a long time, and those are good results.
What does estate planning clean-up entail? You have to first identify every document related to your planning and get them organized. When you’re organized, then you have to ask: what purpose does this particular document, account or planning technique serve me now? Often you’ll find that what made sense years (or decades) ago, has little benefit today. In more extreme cases, some of the old stuff in your estate planning attic might actually create negative results that you want to address. While wine may improve with age, many estate planning documents just don’t.
How and Why to Organize
Many people have a random collection of estate planning documents and materials going back to pre-historic times. They’ve never organized anything and never discarded anything. The first step in the “get organized” process is to identify and safeguard original documents. You should be sure all originals are kept in a fireproof, waterproof and secure location that you and those you count on can access easily. A bank safe deposit box is secure but it may be closed on death and difficult for the persons in charge of your estate to get access to. Perhaps a fire-rated safe in your home, with documents stored in fire retardant and waterproof pouches inside (to enhance the fire protection and provide water protection) may be the way to go. Find an approach that makes sense for you.
Once you’ve safeguarded the originals be sure you have a scanned copy of every original since you can then concentrate your efforts on organizing the scanned documents. Don’t be shy to ask your estate planner, wealth adviser or a professional organizer or personal inventory expert to help. If you have not been getting this done it may be smarter to pay someone to do this, then to leave it ignored. Some estate planners actually do this as part of their planning process. Just ask.
Organize all the documents in logical folders on your computer. Be sure it is both encrypted and backed-up securely in one or more ways.
Organize all estate planning documents by type: will, revocable trusts, irrevocable trusts, financial document, etc. Within each category have a separate folder for each irrevocable trust, for example. Within each irrevocable trust folder organize the trust document, funding documents, bank and brokerage firm records, gift tax returns, etc.
Be careful relying on generic document organizational tools as they are typically limited in scope and may be designed for an “average” person and you might not fit the bill. If standard stuff works, great! But if not be sure to create an organizational approach (or get help doing so) that makes sense for you.
Why It May Be Bad to Keep No Longer Useful Estate Planning “Stuff” In Place
There are lots of reasons to revisit old estate planning documents, techniques, and accounts. Here’s a few general examples. We’ll explore lots of specifics in the discussions below.
· If you have a trust or entity (e.g., a limited liability company) that no longer serves a valuable purpose, you might be paying a CPA to prepare annual tax returns, annual filing fees, legal fees, etc. that are just a waste. Getting rid of these no longer useful structures might save significant annual costs and hassle.
· Your ex-brother-in-law who you hate is named as a trustee. Yes, when you organize you can then review documents, accounts, etc. and often the really bad stuff will stick out like a sore thumb. Overtime people who once were besties may now be worsties and you need to get the documents or accounts updated to remove them and replace them with more appropriate people. This is one of the simplest to identify and most important steps to take. Cleaning out your estate planning attic will help you identify these.
· Tax laws change, like all the time! So what made sense from a tax planning perspective when you set up a document, plan or account, might no longer make sense today. You need to regularly review all your planning to see whether and how to modify it for tax law changes.
· Having a box of mostly superseded estate planning documents, e.g., every power of attorney you have signed over decades, can be confusing. If there is an emergency situation one of your fiduciaries might find themselves going through all those documents, wasting precious time when action is advisable, trying to figure out which documents are relevant so that they can act. Getting rid of irrelevant documents will streamline the process and make it easier for someone to figure out what is relevant.
· Your circumstances might change. Frequently people have wills that are so old that they name guardians for their children who now have their own wills which name guardians for your grandchildren. Insurance coverage that was critical years ago, may no longer be needed. Or perhaps more coverage is needed now but for different reasons.
Look Before You Jump: Don’t Unravel Old Stuff Before Confirming It Won’t Create Worse Greif
Don’t be rash in dumping all documents, plans or accounts.
· You might have an old irrevocable trust that doesn’t really serve much current purpose, and may no longer provide any tax benefit, so perhaps unraveling it might at first blush make sense. But be careful. Terminating a lousy no longer useful trust might still be a mistake. If the assets of a trust are distributed out to a beneficiary and the trust terminated, what if the recipient is sued, or ends up in a nursing home. Those assets might be lost. It ma be better to keep a lousy trust than to lose everything. So, take careful assessment of all potential consequences, especially negative ones, before taking any action.
· Don’t simply destroy superseded documents as there are situations where they may be relevant. For example, if a current will be overturned, the prior will may be reinstated as valid. So, it may be advisable to retain old original wills. Other older documents may be useful to show a pattern of your decisions. Letters and memorandum, even really old ones, may be useful to explain what was done and why. So, it may be preferable to organize currently relevant documents in one manner, and to save selected older documents but organized in a secondary manner and clearly labeled as such. To know what to save or not it might be worth meeting with your estate planning attorney and have them help you decide.
· If you (or the person you’re helping) have cognitive issues, caution should be exercised destroying any documents. If there are questions about the validity of new documents, perhaps because of the uncertainty over capacity, perhaps the old original documents should be retained.
Bypass, Credit Shelter or “Family” Trusts
So, what is a bypass trust and why might it no longer be a winner? Some years ago, if say the husband died if he gave all his assets to his wife, on her death a greater estate tax would be due to the extent the combined estate exceeded the amount the wife could pass on estate tax free (called the estate tax exemption). So, the dilemma was how could husband make sure wife could benefit from his assets but try to avoid an estate tax on her death? The answer was to create a trust that she could benefit from, but which would not be included in or taxed in her estate. In essence the trust would be available to her but would bypass her estate. Hence, the name “bypass trust.” It was also commonly called a “credit shelter trust” since it used the estate tax credit to shelter assets from taxes. Back then the estate tax exemption may have only been $1 million. Today it is $12,920,000. Millions of surviving spouses have in place bypass trusts that remain from that prior law environment.
So, in the current tax environment, there may be no estate tax benefit from keeping a bypass trust. Worse than no estate tax benefits the assets in that trust won’t get the step-up in income tax basis on the wife’s death. Assets in the wife’s estate will get a basis step up on her death. This can be illustrated as follows. Assume wife bought an investment for $300,000 and it is worth $500,000 on her death the tax basis on which capital gains is calculated is adjusted to the $500,000 value. Since assets in the bypass trust are not in her estate they don’t qualify. So, the current reality is that a trust that could have saved a lot of estate tax when it was created now may save no estate tax, lose a valuable income tax benefit, and requires that the surviving wife pay her CPA every year to file an income tax return for the trust. Lousy deal.
What can the wife do? Assuming no risks of lawsuits, a new spouse divorcing her, or Medicaid risk, she might explore with her estate planner terminating the trust and distributing the assets to herself. The ability to do that will depend on the terms of state law, the trust (her late husband’s will), and perhaps the willingness of the heirs to agree to it. But, getting rid of an old trust may be a tax winner, provide cost savings ever year, and eliminate complexity.
Old Irrevocable Life Insurance Trusts (ILITs)
Life insurance trusts are common estate planning tools and often make sense for people who are not even uber-wealthy. The typical life insurance trust owns life insurance policies on your life and its purpose is to protect those funds from taxes, creditors, predators, to benefit your loved ones, e.g., a spouse and children. In many cases even an old life insurance trust might still make sense as the insurance may still be useful and keeping it in trust might still make sense (although a lot of old insurance trusts are not well planned and can and should be improved by merging them into new and improved trusts, but that is a different article).
But many old life insurance trusts might no longer make any sense. For example, you purchased a $500,000 life insurance policy when your 2 kids were infants with the goal of providing financial protection for them if you died prematurely. Now your kids are in their 30’s, have secure jobs and families of their own. You’ve determined that the life insurance policy makes sense to keep, but is the trust worth keeping? It depends. The old trust, as many do, provides that at age 35 any money in the trust is paid out to the kids outright. So, if you die the trust will serve little purpose. Also, when you purchased that $500,000 policy it was a lot of money, but today, for $250,000 per child the figures aren’t that large so that perhaps simplifying everyone’s life by terminating the trust and having the trustee distribute the policy to the two adult children jointly might be a worthwhile simplification.
Survivorship Life Insurance that is Not Needed
Survivorship or last to die insurance is a type of life insurance that pays off when the last of a couple dies. The rationale for this is that for estate tax purposes the estate tax is only due when the second of two spouses die. That is because there is an unlimited marital deduction so that on the death of the first spouse an unlimited amount of wealth can be bequeathed to the survivor. Example, on husband’s death in 2003 he bequeathed $5 million to wife. On wife’s later death, when the estate tax exemption was $1 million as it was in 2003, a substantial estate tax would be due on the $4 million taxable estate. That amount could have been reduced by another $1 million if husband bequeathed $1 million to a credit shelter trust and the balance to wife. In either event, a big estate tax would be due on the second death. So, a common planning technique was to buy life insurance that only paid off when the second spouse died. That was less costly than buying life insurance on one spouse’s life, and it dovetailed perfectly with when the estate tax would be due. That plan may have been sensible when set up but 20 years later the estate tax exemption is close to $13 million and if it is cut in half in 2026 as it is scheduled to be, the estate may still not be taxable. If you have a survivorship life insurance policy that no longer serves an estate tax purpose, unless there is another use for which it makes sense or reason to keep it (e.g., health issues make it impossible to obtain any other insurance and your estate needs the liquidity for non-tax reasons). So, unless there is another reason for maintaining the life insurance, or financially you determine it is worthwhile, perhaps it may make sense to get rid of the policy. Before you do so, however, explore the option of possibly selling the policy into the secondary market.
Getting rid of a policy that doesn’t make sense may facilitate terminating an old insurance trust that will then have no assets (once the proceeds from the policy are distributed), it may avoid the need for annual payments that can be used for better purposes, and it simplifies your finances and eventual estate.
Power of Attorney with Inappropriate Gift Provision
A power of attorney is a legal document in which you name an agent to make tax, legal and financial decisions for you. A key provision in many powers of attorney is one that authorizes the agent to make gifts. Those provisions can be really important and really powerful and should be reviewed periodically. You may have an old power of attorney that authorized the person you designated as agent to make gifts. Some powers of attorney forms do so without limit. That is really a huge right that you might be uncomfortable with. Some limit the right of the agent to make gifts to your remaining estate tax exemption. When the exemption was say $1 million in 2003 and assuming you had already given away $600,000 in gifts, that would have meant that your agent could have given away about $400,000 of your assets. The exemption today is nearly $13 million so that same provision might authorize your agent to gift away more than $12 million. That may really be uncomfortable. So, talking to your estate planning attorney about getting a new power of attorney form that properly limits, or even prohibits, gifts, might make sense. Getting rid of those old documents (and you might not even remember what the gift provision had provided for!) may be important.
Trusts that are Too Small
So, years ago you set up a trust to hold college savings for each of your three children. That was in the day before 529 plans existed so trusts for children and grandchildren to cover college costs were common. Say you put $150,000 in each trust and during college and grad school those trusts were spent down to $20-$30,000 each. That means the trusts served their purpose then. But what about now? Having old trusts languishing with modest funds in them and paying a CPA every year to complete a tax return, etc. is likely not worth the bother. Perhaps, the trusts provided that all the assets had to be distributed outright to the child beneficiary when they reached age 35 and all your kids are in their 50’s now. Payout the money, terminate the trusts, stop paying for income tax returns, and simplify your financial life and estate. If this sounds odd, be assured it happens frequently. So many people get used to having “stuff” in their estate planning attic that no one ever asks, “what purpose does this serve?”
The Trust That Never Was
This one will sound really odd, but for almost no effort you can save a lot of headaches and costs down the road. When you become incapacitated and someone you name takes over your finances, or when you pass and someone has to serve as your executor, they have to get a handle on all of your finances. A common waste of time, effort and legal fees is often on determining what happened to a trust that never was. Say you spoke to your attorney about creating a life insurance trust, but you never signed it, or even if you signed it you erroneously purchased the insurance in your name instead of in the name of the trust. So, you have drafts or even signed copies of an insurance trust that was never funded, never registered with the IRS (i.e., a tax identification number was never obtained), etc. Years or decades from now when someone has to take over your finances during your disability or following your death, they have the responsibility to identify all assets. When they find an unsigned old trust, or even more confusingly a signed trust that may not have been used or was terminated, as discussed above, they’ll want to confirm that the trust was either never implemented, or if implemented was terminated. It is not easy to prove a negative. The time spent calling your prior lawyers, CPAs and wealth advisers to identify the status of that perhaps never used trust is a real waste of time. Create a document with the name of the trust, explain that it was never used, and so forth. Have any relevant people that were named in the trust sign that document (those you can get to). Put that document on top of a copy of the old trust and scan it. That way, if someone looks through your electronic files to determine what happened, if they search the name of the trust the most recent document will be this one that confirms it did not exist. That way, when someone “goes looking” there is something to easily find to confirm what occurred (or in this case what did not occur). If you have an old trust that was formed but either never used or ended, ask your estate planner if something more should be done to formally terminate the trust. If the trust was ever used there may be tax or other filings that are required to formally and properly close up. But cleaning up all these old loose ends can really simplify and clean up your estate planning attic.
Shell Entity No Longer Needed
This is similar conceptually to the previous topic of an old trust that was never used or was set up but then emptied of assets, but with one important twist (formal state and tax filings). You might have operated a small business or home-based business and had an S corporation, limited partnership or limited liability company (LLC) formed, perhaps by your business attorney, through which you operated the business. But you closed shop a decade ago but didn’t bother to formally terminate the entity which requires a filing with the Secretary of State of the state in which the entity was formed (in contrast there is no state level filing for a general partnership, perhaps though a county clerk filing was made). You might have invested in real estate and had your real estate attorney set up several LLCs, one for each property you bought. You’ve sold all the properties but there was one LLC set up, but it never owned any property as the deal you were considering fell through. So, you might have one or more entities that should have been formally terminated that weren’t. For these you should have a corporate or business attorney formally terminate them. That might require filing a certificate of termination or other documents with the Secretary of State. A prerequisite to that might be obtaining a tax clearance from the state confirming that all taxes have been paid. Thus, you may need a CPA to file a final income tax return to be sure that matters are concluded with the IRS and state tax authorities. With entities you may have the added issue that if you operated a business formally terminating it may have important implications to liability that may have pertained to the business (e.g., a hazardous waste issue on real estate your LLC owned). So, be sure to get professional guidance on these. Cleaning up old entities not only can simplify matters, but it might even have important legal consequences.
Joint, POD or TOD, Account
You were single into your 30’s or 40’s so you had bank accounts set up with your sister as a joint account owner. You thought that would be best so that if you ever got sick, she could legally help out, or if you died, she would inherit what you had. Apart from the fact that was probably not a wise move even then, now you are married, or your relationship with your sister is not so hottsie-tottsie, it may be long past time to get rid of these account titles. But you forgot about those old accounts. Or perhaps before you hired an estate planner you thought having every bank and brokerage account held in a Pay on Death (POD) or Transfer on Death (TOD) to a niece or nephew you named avoided the evils of probate. Apart from the fact that was probably a lousy idea from the get-go, it is time to clean these up. Frequently, people forget about how they set up accounts and the impact on their estate plan. Cleaning up these accounts can avoid a raft of issues. For example, if you set up an account as a joint account so the named person can help you if you become ill, that might give them the right to withdraw all the assets from the account. Think about it! If you have a fight with your kid-sister and she gets angry enough she might just take a revenge vacation using your savings account! In most cases, there are better and safer ways to handle these accounts and accomplishing your goals (like using a power of attorney to your sister instead). Cleaning up your estate planning attic is not only about legal documents but about being certain your financial assets are properly structured too.
Old Beneficiary Designation
Beneficiary designations raise similar issues to improper account titles. An example can illustrate. You were married to Bad Bob and after an acrimonious divorce you just, as most people, could not face another legal document or formality. So, you neglected to change the beneficiary on your pension plan or insurance policy which continued to list Bad Bob. You die. Bad Bob will get the dough unless state law provides that in the event of a divorce an ex-spouse is automatically removed. How often to people forget who they have listed as beneficiaries on every asset that has a beneficiary designation? While your financial adviser may review beneficiary designations on accounts you have with them, if you have not informed them of some of your assets (another common mistake) they cannot address those with you. So, cleaning up your estate planning attic must include reviewing every beneficiary designation form.
Outdated Letters of Instruction
It is important for many people, especially those with specific wishes, to write letters of instruction to inform agents, trustees, executors and others of your wishes. For example, if you have young children and would hope that they could be raised with a particular religious or cultural background it is often helpful, even vital, to explain some of the nuances of that in a letter of instruction. But as times change some of your personal instructions and wishes will change too. In some cases it might be best to destroy old letters of instructions mixed into your estate planning documents and only leave the most current personal letter. You want to avoid confusion, especially if the instructions from the various letters are different. Also, you want to avoid the risk of loved ones finding an old letter of instruction rather than the newer one.
Outdated Estate Planning Memoranda
Sometimes these can be really useful, other times sources of confusion. When you undertake estate and financial planning, or a new tax plan, your professional advisers often will send you letters and/or memorandum, checklists and other items discussing some of what you plan, options, decisions made and even how to administer and monitor the plan once implemented. These materials can be really helpful when new advisers are hired, or a loved one steps in to help if you fall ill. In some cases, if the planning were abandoned or superseded it could be more confusing then helpful to leave all of these old letters and memorandum. In some cases, all of this information is lost over time and only key documents retained. Try to identify, organize (e.g., chronologically) all of such records. Perhaps meet with your advisers and have them cull out documents that will be more confusing then helpful because of age. All of this can help set up a roadmap that can be really valuable to you when you review your planning, new advisers, and heirs and fiduciaries. Cleaning up your estate planning attic should be done with the perspective of laying out a table that is easy for others to quickly understand what was done and what they might need to do help.
Few people take the time to clean up and organize their estate planning attic. But creating an organized and relevant “library” of documents, terminating and cleaning up old accounts, trusts and entities, and so on, can provide tax savings, cost savings, simplify planning and create a roadmap for administering a plan and for those who may have to help you in the future.
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