Why Your Will May Be Out Of Date

  • Not only does your family change over time, so do tax laws.
  • Key dates can make a difference to your estate planning documents.

Why dates matter

Do you need to update your will or trust? The first question is: “When was it created?”

If it was 10 to 15 years ago or longer, it may not be current any more. Your family and personal situation has probably changed a lot since then. Perhaps your will or trust was created when your children were in high school, but now they’re married with kids. Tax laws have changed a lot over the years, too.

Even if your estate planning documents are still valid, they may no longer work the way you intended.

If your will or trust predates these four key “freshness dates”, it may be time to visit your attorney for a review.

So how do you know if your estate plan is out–of–date? If your will or trust predates these four key “freshness dates,” it may be time to visit your attorney for a review.

April 14, 2003

This date relates to the required compliance date of the privacy regulations under the Health Insurance Portability and Accountability Act (HIPAA). This law was enacted in 1996.

The HIPAA privacy rule imposed strict guidelines on the disclosure of “protected health information” without the patient’s explicit permission.

While these privacy protections are a good thing, they can also become problematic. Your executor, trustee or agent (under a durable power of attorney) may need to deal with your employer, insurer or medical providers such as doctors, clinics and hospitals.

Due to this rule, in order to act on your behalf, an authorized person must have a written document executed by you, with very specific language mandated by HIPAA.

If your will, revocable trust, durable power of attorney or health care power of attorney was executed before April 14, 2003, your executor, trustee or agent may not be able to work effectively with your medical providers and insurers. To fix this problem, have an attorney update your documents to include the language required by HIPAA.

January 1, 2005

This date is important if you live in a state that imposes its own state–level estate or inheritance tax.

Before 2001, there was a federal credit for state death taxes (the size of the credit varied with the size of the estate). Back then, there was not much incentive to make plans for avoiding state death taxes because those taxes were fully offset by the federal credit.

The Economic Growth and Tax Relief Act of 2001 (EGTRA) phased out the credit between 2002 and 2004. As a result, since January 1, 2005, state estate or inheritance taxes apply on top of any federal estate tax. Today a number of states impose their own state estate tax, and many states have an inheritance tax.

Visit your attorney to start planning for state taxes if they’re a concern for you.

If you live in a state that imposes its own estate tax and your will or revocable trust was executed before 2005, visit your attorney to start planning for state taxes if they’re a concern for you.

December 17, 2010

This is the date of enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (often called “TRA 2010”). This increased the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million.

Before 2010, the threshold for owing federal estate taxes was much lower. The exclusion was just $600,000 in 1996, and $1 million in 2001. TRA 2010 effectively eliminated the federal estate tax for thousands of people, regardless of marital status.

If your estate plan was created before December 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Your attorney might be able to recommend an alternative plan now.

An infographic that says does your will or trust predate these key dates? April 14, 2003, January 1, 2005, December 17, 2010, January 2, 2013

In other situations, however, your estate plan may need to become more complex. For example, if you live in one of the 20 states that impose a state estate tax or inheritance tax, your attorney might favor new strategies to deal with state estate taxes, which often begin at a much lower threshold.

The key point to remember is tax laws are different today. Documents drafted before December 17, 2010 may produce unexpected or unfavorable results.

January 2, 2013

This date is important for married couples with a combined taxable estate exceeding $5.43 million. The American Taxpayer Relief Act of 2012 (ATRA) became law on January 2, 2013. It made the “portability election” a regular feature of federal estate tax planning. This election lets an executor transfer a deceased spouse’s unused federal estate tax exclusion to a surviving spouse. This can be an important estate-planning tool.

In effect, the surviving spouse can “stack up” the deceased spouse’s exclusion on top of his or her own exclusion.

If you are married and your will or trust was drafted before January 2, 2013, you could be missing some valuable tax planning opportunities.

Traditional estate tax planning strategies for married couples relied on creating a “credit shelter” or “bypass” trust that would not be part of the surviving spouse’s taxable estate. However, assets in this trust are not eligible for what’s known as a “step up” in cost basis at the death of the surviving spouse. (A “step-up” means no capital gains taxes will be due upon your death on the assets that grew while you held them. If the assets were sold in the future, taxes would be due only on the gain since the inheritance).

Today, your attorney might recommend a different type of trust that would be part of the surviving spouse’s taxable estate (but could be sheltered from tax by the portability election), and that would allow assets to receive a “step-up” in cost basis at the second death.

These newer strategies could help heirs save considerable amounts of capital gains taxes, but they don’t apply to everyone. The key point to remember is, if you are married, have a combined estate above $5.43 million and have wills or trusts created before January 2, 2013, talk to your estate planning attorney.

Next steps

  • Review your estate planning documents to determine when each was created.
  • Talk to your attorney about each of your estate planning documents.

Special Reports

A collection of the most recent thematic reports from Wells Fargo Investment Institute that cover varying topics of interest and importance to investors.

Read Our Insights
CAR0116-02423
CEX1707