Updates in Estate Planning for 2025

A lot has happened in 2024 in the world of estate planning, and as we get ready to turn the calendar to 2025, now is a good time to remind our clients of the importance of having periodic update meetings to review their estate planning documents.  Review meetings allow the opportunity for you to ensure that your estate plan satisfies your current desires since, as you know, situations and laws change as you age, and what made sense years ago, may not necessarily make the same sense today.  One example is rethinking whether your trustees, agents and/or guardians for minor children are still appropriate.  Another example is reevaluating how your estate should pass at death to your designated beneficiaries, for example in a way that ensures their inheritance is protected from the reach of potential creditors, divorce and future estate tax. 

The balance of this newsletter summarizes several of the very important 2024 newsworthy events that likely impact your estate planning documents.  If it has been three or more years since your last estate planning update meeting, or if you would like to learn more about any of the below topics, we would recommend that you consider scheduling an update meeting at your nearest opportunity to discuss how changes in the law, in your financial situation, and/or in your personal situation may impact your estate planning documents.

MISSOURI LEGISLATURE PASSES AMENDMENT TO QUALIFIED SPOUSAL TRUST LAW PROVIDING INCREASED ASSET PROTECTION FOR SURVIVING SPOUSES

On August 28, 2024, an amendment to Missouri’s Qualified Spousal Trust (“QST”) statute (RSMo §456.950) went into effect changing the course of how estate planning attorneys should advise their married couple clients with regard to the funding of qualified spousal trusts.

As a refresher, prior to the recent amendment, a Missouri QST (which has existed in the law since 2012) has provided excellent protection against lawsuits (such as in the event of a significant automobile accident involving only one spouse or a malpractice lawsuit against one spouse) for a married couple while both spouses are alive.  This is the same protection a married couple is afforded for any assets they own in their joint names, which is known as “tenants by the entirety” ownership.  However, in both instances the asset protection would no longer exist for the surviving spouse at the death of the first spouse to die.

The difference now, as a result of the recent amendment, is that any assets or accounts owned by one’s QST at the time the first spouse dies will, with certain exceptions, continue to remain protected for the surviving spouse as if both spouses were still alive and married.  The key, again, is that the QST must be funded during the couple’s joint lifetime in order to receive this new and significant benefit for the surviving spouse.

In the past we would typically not fund a single-share QST (except when out-of-state real property was involved), because funding provided no additional asset protection, and could only complicate the couple’s life, e.g., by making it more difficult to sell or refinance the couple’s home, or otherwise to access the trust’s assets. For similar reasons we would usually also not fund a multiple-share QST with the couple’s home.  With the advent of this new law, however, we are now recommending that married couple clients consider fully funding their QST (even with life insurance policies in most instances), and that they also make certain other minor changes to their trust document to ensure that they are in compliance with the new law.

SECURE ACT FINAL REGULATIONS ON REQUIRED MINIMUM DISTRIBUTIONS ISSUED BY IRS

In August, we finally saw the IRS issue its long-awaited final regulations to the SECURE Act, which for estate planning purposes, clarified some important issues on how IRA and 401k account owners can maximize the income tax deferral of such accounts for their beneficiaries while still designating that the shares of such beneficiaries be held in trusts.  Because of the SECURE Act and its requirement that most IRA accounts have to be fully distributed to the designated beneficiary or beneficiaries within a ten year span following the death of the account owner, utilization of trusts for the beneficiaries within the account owner’s revocable trust are a strategic way to fully protect the beneficiary’s share of the IRA from the reach of potential creditors, divorce rights and estate tax. 

Furthermore, by including special provisions in the trusts for the beneficiaries (i.e. an IRC Section 678 power of withdrawal over income), it is possible to cause all of the trust’s income (which would include 100% of the IRA distributions) to be taxed at the beneficiary’s income tax bracket instead of at the higher trust income tax bracket, which also has the added benefit of simple and streamlined tax return preparation and reporting. And what’s more is that this income tax savings strategy does not require unnecessary distributions to be made to the beneficiary, but rather the trust’s income can accumulate and be added to the principal to grow inside the protected trust for the benefit of the beneficiary.  This strategy is especially applicable and of benefit during that ten year span of required IRA distributions because IRA distributions are 100% taxable as ordinary income and would otherwise be taxed at the high trust income tax rates.

NOVEMBER ELECTION’S IMPACT ON FUTURE OF ESTATE TAX EXEMPTION

With the results of November’s election bringing Donald Trump back to the White House and giving Republicans control of both the Senate and the House of Representatives, it appears very likely that the currently large federal estate and gift tax exemption ($13.99 million per person in 2025) will remain in effect and continue to enjoy inflationary increases each year.  Even though the law establishing this high exemption level is still currently set to expire at the end of 2025 causing the estate tax exemption level to be cut nearly in half (scholars have previously estimated it to be at or around a $7 million exemption level after inflationary adjustments), President-elect Trump campaigned on the promise to extend or make permanent the tax breaks (including the estate tax exemption) which he enacted during his first term and are supposed to expire at the end of 2025.  It has been said that this will be addressed in the first 100 days of the new administration. 

Although the anticipated extension of the federal estate and gift tax exemption levels means that there is no longer a rush for clients to explore options for “grandfathering” the larger exemption amount before it were to be reduced (unless by some chance [as is always a possibility with Congress] the exemption is not extended), advanced estate planning strategies may still be important topics to discuss and explore with clients having an estate of more than $13 million in assets as a means of ensuring estate taxes will not be owed at death.  At a minimum, planning for a married couple in a fashion which utilizes a two-share qualified spousal trust and proper balancing of the two estates is a no-brainer for Missouri residents in order to ensure that the surviving spouse will benefit from an estate and generation skipping transfer tax exempt trust that is as fully funded as possible at the death of the first spouse to die.  A similar but even more pressing analysis applies to residents of states which impose a separate estate tax. For residents of Illinois, for example, this type of “two-trust” planning for a married couple is necessary if the couple anticipates that their total estate will be only $4 million or more.