Estate planning strategy: Legislative changes you need to know
The uncertainty during the COVID-19 pandemic has made the need for effective estate planning more apparent than ever. Additionally, the Biden Administration has proposed significant tax changes which, if enacted into law, could significantly reduce the estate tax and gift tax exemptions, and eliminate the step-up basis of a person’s assets at death for income tax purposes. Given what we have all experienced through the pandemic and the anticipated changes to the gift and estate tax landscape, now is an ideal time to review or create estate planning documents (wills, revocable trusts, powers of attorney and health care advance directives). These documents need to be current, accurately reflect the creator’s wishes and flexible enough to take advantage of the current laws while taking into consideration potential changes.
Although it is uncertain what legislative changes will be enacted by Congress that will impact estate planning strategies from a tax standpoint, the Indiana General Assembly has already made changes to the law that governs health care decisions by individuals. It is important to understand the enforcement of no contest provisions in wills and trusts when updating or creating estate plan documents, regardless of potential changes to gift and estate tax laws.
Indiana Health Care Advance Directives
Advance directive documents are one or more documents that list an individual’s health care instructions and are defined by Indiana law as a written declaration of a declarant who gives instructions or expresses preferences or desires concerning any aspect of the declarant’s health care or health information, including designation of a health care representative, a living will declaration or anatomical gift. An advance directive may name a person of choice to make health care decisions for an individual when he or she no longer can make these decisions. Effective July 2, 2021, legislation was enacted that creates major changes to Indiana law governing health care decisions by individuals and their agents. As a rule, an advance directive must be witnessed by two adults or a notary public, and one of the adult witnesses must not be a spouse or other relative. Indiana appointments of health care representatives executed before January 1, 2023 continue to be effective. Any such documents executed after December 31, 2022 will be void. Another change is that powers of attorney that cover both financial and health care matters which are signed after December 31, 2022 are void concerning health care matters. In other words, Indiana will no longer allow financial and health care powers to be combined in one instrument.
No Contest Provision
An “in terrorem provision”, or more commonly known as a “no contest provision”, refers to a provision of a will or trust instrument that, if given effect, would reduce or eliminate the interest of a beneficiary who, directly or indirectly, initiates or otherwise pursues an action to contest the validity of or terms of the instrument. Simply put, a no contest provision is language that is included in a will or trust that states that a person who contests a will or trust risks losing whatever property was left to him or her. The most common reason cited for allowing a no contest provision to be enforced is to reduce the chances that a disgruntled beneficiary will file expensive and time-consuming litigation. In other words, if someone risks losing his or her right to inherit any property from the will or trust, he or she will be less likely to file a lawsuit. Prior to 2018, Indiana was one of two states that prohibited no contest provisions in both wills and trusts. Effective July 1, 2018, Indiana law now allows for the enforcement of no contest provisions in both wills and trusts, subject to certain exceptions, including exceptions for actions brought for “good cause” and clarification or interpretation of the instrument. A no contest provision is not required, it is simply a new option that is available to be used in Indiana wills or trusts.
Even before the pandemic, I found that working with clients and their attorney to update or create estate plan documents that memorialize their desire to transfer assets and provide for their family in a tax advantaged manner, creates a tremendous sense of accomplishment and stability about the future. Now, in these uncertain times, creating an effective and comprehensive estate plan is a proactive and positive measure that anyone can achieve.
This information was prepared from sources believed to be reliable; it is for informational purposes only and does not provide recommendations based on the objectives, financial situation, or needs of any individual or entity and is not a comprehensive statement of the matters discussed. Unless specifically indicated otherwise, this is not an offer to sell or a solicitation of any investment products or other financial product or service. If you have questions about this information, please contact your trust administrator at 1st Source Bank Wealth Advisory Services or call 800 882-6935.
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