Will Your Estate Plan Still Work If You Move?

Before the pandemic, Americans were as mobile as ever. In the prior decade, millions of Americans moved each year.

Often, people wonder, “What happens to my estate plan if I move?” Well, it depends. If you move within the same state, your documents are valid and the planning will still be intact, as well. If you move from one state to another, your primary dispositive plan may still be valid, but some aspects might not work as well in your new state.

Let us look at an example. John and Mary went to an attorney in State A. A couple of years later, they moved to State B. There are so many things to do when you move, they did not update their estate plan when they moved to the new state.  This caused issues because the laws in State B were somewhat different. John had a stroke and when Mary went to use the Healthcare Power of Attorney, the hospital gave resistance because they had never before seen a document like the one John and Mary had which was similar to that typically used in State A. The form used in State A did not have many of the choices the hospital staff in State B typically saw.  Eventually, Mary was able to use the Power of Attorney, but the hospital’s resistance caused by not having a document familiar to them added stress when Mary was already near the breaking point. Later, after John died, Mary went to an attorney to settle things. The attorney opined that, while their estate plan made sense for State A, it did not do the tax planning which would have been wise to do in State B. You see, State B had a separate estate tax, while State A did not.  This is not an issue with the trusts that I prepare.  In each trust, there are three (3) sections that I call the “legislation savings” clauses.  These means that to whatever state you move, your trust provisions will comport with and automatically amend to conform with that state’s laws.  Every state has its own ‘form’ powers of attorney.  I have people moving out of Illinois all of the time.  The only thing we have to address is re-preparing their powers of attorney to be that of their new state of residence.

Going further, after John’s death, the bills from his final illness and funeral came in. Mary sold some stock to pay for the bills. When it came time to prepare her taxes for the year, her accountant asked her if the stocks had been community property before John died. When Mary told him they had not been, he said “That’s a shame.” She would owe tax on her gains. If the stocks had been community property at John’s death, even Mary’s part of the community property would have gotten a “step-up” in basis to fair market value. In other words, all the gain up until John’s death would have been wiped out.

If John and Mary had visited an estate planning attorney regarding their estate plan upon their move to the new state, they could have made plans more appropriate for the new state. This could have saved income tax on the stock sale after John’s death. Mary would not have encountered difficulty using the Power of Attorney. Mary could have saved money at her later death.

Whenever you have a significant life change, including a move to a different state, it’s best to check with an estate planning attorney to see if your estate plan should be updated or if you should make any other changes to take advantage of the laws of your new state of residence. That is the case whenever you move to a different state—even if it is only across a river or state line.

Planning for Incapacity

Every year, many people in the United States are unable to manage their own affairs due to incapacity. They might be young or old. They may have had a gradual decline or a sudden onset. They might have had a stroke, heart attack, or some disabling disease such as Parkinson’s, Alzheimer’s, or COVID-19.

If you are incapacitated without having prepared, it can be an ordeal for you and those who care for you. Your loved ones might need to go to court to have you declared incompetent and have a guardian appointed to manage your affairs.

Let’s look at an example. John was moving to be closer to his family. He was trying to sell his house. He was in an auto accident and was suddenly incapacitated and unable to manage his own affairs. His neighbor knew he wanted to sell his house and the neighbor’s sister was moving and made John an offer to buy his house. The offer was for more money than John had ever imagined the house was worth. Since John didn’t have the capacity to sell his house, his loved ones had to go to court and have him declared incompetent and have someone appointed as his guardian. Of course, this process was difficult in many ways. John’s family disagreed regarding who should be John’s guardian. Embarrassing information concerning John’s condition and behavior came to light. The family’s dirty laundry all came out in court. After all of this, the great offer on the house was lost due to the court delays. The neighbor’s sister couldn’t wait any longer. An economic downturn hit in the interim and another good offer wasn’t forthcoming.

John could have prepared in advance by naming an “agent” under a Power of Attorney. John could have had one agent to make health decisions for him and the same or a different agent to make financial decisions for him, such as regarding the sale of the house.

Often a home is funded into a revocable trust to avoid any delays, expense, and publicity of the probate process upon death. If John had funded the home into his revocable trust, his successor trustee could have had the authority to sell the home.

In fact, some title companies are reluctant to accept a Power of Attorney for real estate transactions, especially if the Power of Attorney was signed more than two years earlier. Properties in a revocable trust don’t face this same reluctance.

While planning for what happens to your assets after your death is important, planning for the management of your assets and your well-being during periods of your incapacity is even more important. Why not do the right thing, for yourself and those who love you and whom you love, by planning today. Now, more than ever, it’s important to plan for your own incapacity.

Use the Exclusion or Lose It

In 2020, each person can give away $11.58 million during life. Whatever portion they haven’t used during life, they can use it at death. However, that generous exclusion will be cut in half at the end of 2025. Beginning in 2026, the exclusion will be only $5 million adjusted for inflation from the 2011 base year. If you use the exclusion before it falls back, you won’t be penalized by a “clawback” upon your death in 2026 or later.

For example, let’s say Mary has $11.58 million and gives it all away in 2020. Let’s assume she lives off her social security and dies with nothing in 2026. She would not owe any estate tax, even though she had given away $11.58 million and the exclusion at her death in 2026 is half that amount.

In other words, if Mary uses her exclusion before 2026, she won’t have to worry about having to pay estate tax because of the gifting she did of an amount within the exclusion during her lifetime, even though that exclusion later decreases.

Does that mean Mary should wait until 2025 and then decide what to do? Unfortunately, not. Some voices in Congress have called for an earlier repeal of the law which included the doubling of the exclusion to its current level. Some voices have even called for the exclusion to be lowered even further, to $3.5 million per person, or less.

A shift in power in Washington after the 2020 elections could bring those voices to power and see their vision realized. Does that mean Mary could wait until legislation is passed by Congress and signed by the President to act? Again, unfortunately not. Legislation could be passed late in 2021 and could be retroactive to January 1, 2021. In other words, to be safe, you would need to act before the end of 2020.

For a married couple, perhaps the best way is for one of them to give their full exclusion into a trust for the benefit of their spouse and descendants. This is called a Spouse And Family Exclusion (“SAFE”) Trust (also sometimes called a Spousal Lifetime Access Trust (“SLAT”)). Let’s look at an example. John and Liz are married and have $15 million. John could give $11.58 million to a SAFE trust for the benefit of Liz and their children and grandchildren. Liz could be the trustee of the trust and decide how the assets are invested and distributed, within the ascertainable standard set in the trust (typically “health, education, maintenance, and support”). The assets in the SAFE trust are outside both John and Liz’s estates.

By doing this, John and Liz would have taken advantage of John’s $11.58 million exclusion and would not have an estate tax due even if the exclusion falls back to $3.5 million. Even better, Liz still has control of the money and can use it for her own benefit and that of their children and grandchildren.

Having planned now, John and Liz can rest easy and not worry about what legislative changes might be coming after the election in November.