A primary purpose of an estate plan is to protect you, your loved ones and your assets in the event of death or incapacity. An estate plan can be useful to avoid court, minimize taxes, provide asset protection and avoid family conflict. Unfortunately, while every adult needs some level of an estate plan, only 1 in 4 adults have any form of estate plan. More concerning is that those who spend the time and money to create an estate plan often fail to update their estate plan. The unfortunate result of failing to update your estate plan is that, when the time comes to implement the estate plan, the plan is ineffective and/or fails to meet your needs and wishes.
Because your wishes, goals and assets and the law are constantly changing, you should, at a minimum, review your estate plan annually to determine if you need to visit your attorney to adjust your estate plan. You are probably organizing your life and finances in preparation for filing your annual income tax returns. This is also a perfect time to assess whether your estate plan still works for you. The following are some important questions to ask yourself to determine whether your estate plan still works for you and whether to visit your attorney:
- Have you been divorced or married? Marriage and divorce can have a significant impact on your estate plan. Laws protecting spouses can thwart your actual intent. Most individuals in the process of divorce do not want their soon to be ex-spouse to inherit their estate if they die before the divorce is final. Also, newlyweds generally do not want their new spouse omitted from the estate plan. You may need to make changes to your estate plan to ensure your intent is preserved.
- Has one of your beneficiaries died? On the death of a beneficiary it is important to determine what will happen to the gift that you had provided to the deceased beneficiary. Often the estate plan will contain a contingency plan in the event of the death of a beneficiary. However, it is still important to confirm that the plan contains a contingency plan and that the contingency plan properly sets forth your intent.
- Has your trustee, executor or agent on your durable power of attorney died or become incapacitated? Most estate plans will list successor trustees, executors or agents on your durable power of attorney. You may, however, want to ensure that the successors that you appointed are in fact appropriate. Check the estate plan to determine if you are still comfortable with your appointed successors.
- Has a new member been born or added to your family? Your estate plan may or may not provide for unborn members of your family or adopted family members. An estate plan will often contain language to include new family members. However, you do not want to omit a loved one. Check your plan to ensure that your new family members are in fact included.
- Too often, in creating an estate plan, the attorney will focus primarily on what will happen to the assets when an individual dies. However, it is equally, if not more, important to include an incapacity and illness plan in the estate plan. Have you or a family member developed any new disabilities or chronic illnesses? Is conservatorship a possibility? Are you concerned about undue influence? Will a gift to your disabled loved one disqualify him or her from receiving needed government benefits? If you are incapacitated, where do you want to live? Who will take care of you? Do you have sufficient assets to support your intended incapacity plan? Look at the estate plan to ensure that it properly addresses incapacity and illness.
- Generally, while we care about how our assets are distributed on our death, we care more about family harmony, we do not want our family to fight over our estate or issues surrounding our care and incapacity. Has a dispute arisen amongst family members and does the estate plan need modification to avoid further disputes on your death or disability? When family disputes arise, the best course of action is to review the estate plan to ensure that nothing in the estate plan will worsen the family dispute. An estate plan should always, when possible, be drafted in a manner to avoid potential conflicts. If you are concerned about your family dynamics, it is essential to check in with your attorney.
- Do you still trust the persons that you have chosen to act as trustees, executors and agents on your powers of attorney? Are you still in contact with the individuals that you have appointed as trustees, executors and agents? Do you now prefer to see your mature adult children act as trustees, executors and agents in lieu of a third party? If you think that your appointed trustees, executors and agents need to be changed, you should check in with your estate planner.
- Are your assets still owned by your Trust? Real estate? Bank and brokerage accounts? Business interests? Was your property removed from your Trust when you refinanced? Did you acquire new assets that now need to be incorporated into your Trust? You likely paid good money to create your estate plan so that you can avoid probate and your wishes can be followed. However, if the assets are not properly incorporated into the estate plan, your wishes may be thwarted, and your loved ones may, nevertheless, end up in probate court. At a minimum, you should look at how all your assets are titled. Are the assets owned by the Trust or is the Trust named as the pay on death beneficiary of all your assets? Except for IRA’s, 401k’s and other retirement plans, all assets must be owned by the Trust or the Trust must be the pay on death beneficiary of the asset. Check in with your attorney to ensure that your assets are incorporated into the plan and that the estate plan does not fail.
- Have you named the proper beneficiaries on your life insurance policies, IRA’s, 401k’s, pension plans etc.? The decision surrounding whether your Trust should or should not be named as a beneficiary on your IRA’s, 401k’s, retirement plans, and pension plans is complex and requires the assistance of your estate planner. If you are uncertain whether you have properly designated beneficiaries on your retirement assets, call your attorney to determine the proper designation.
- Has your net worth changed significantly such that your estate may now be subject to estate tax on your death? When we make gifts, we always potentially trigger a 40% federal transfer tax. If the gift is made during life, the tax is referred to as the Gift tax. If the gift is made at death, the tax is referred to as the Estate tax. However, the IRS permits us to gift a certain amount before the 40% tax kicks in. Previously the amount that a person could exempt from Gift and Estate tax was $5.6 million (or $11.2 million for a married couple). Under the new tax law, the exemption amount increased from $5.6 million per person to $11.2 million per person ($22.4 million for a married couple). To be clear, under the new law, an individual does not have an exemption of $11.2 million to gift during life and $11.2 million to gift at death. Rather, this is a unified Gift and Estate tax credit. Therefore, if, under the new law, an individual made a gift of $6 million during life, the individual would only have $5.2 million left to give at death before the 40% tax kicks in.
For those individuals with a net worth below the original $5.6 million exemption amount, this tax is not a great concern. For those individuals with a net worth between $5.6 million and $11.2 million (married between $11.2 million and $22.4 million), the question is what, if any planning you should do under the current law? Unfortunately, with the current political environment, we do not know how long the new law will remain in place. Specifically, a change in political power could once again reduce the exemption amount. If you were already considering making gifts and transferring wealth to your family, this may be a great time to take advantage of the larger gift tax exemption. Alternatively, if gifting was not on your radar and does not sound desirable, the best course of action may be to do nothing. If you are in doubt about whether to do gifting right now or you are unsure how the estate and gift tax will affect you, check with your attorney.
- Have you planned for the succession of your business and can you take advantage of the current tax laws to implement a more effective business exit strategy? Your business is generally your most valuable asset. Yet most estate planners fail to properly provide for the succession of the business in a manner that will ensure its continuity, avoid family conflicts, and avoid unnecessary taxes. Conversely, most business attorneys will implement buy sell agreements and partnership agreements without considering the personal and family dynamics of the owners and the family’s estate plan. In creating an effective business succession plan, it is critical to engage an attorney that can address both the business and estate planning issues that are involved. Check both your business plan and your estate plan to ensure that they are coordinated and provide an effective strategy for the succession of your business.
Further, when devising a business succession plan, business owners are faced with trying to determine how to transfer a business without paying unnecessary gift and estate taxes, income taxes, capital gains taxes, and real property taxes. With the increase in the estate and gift exemption amounts, this may be an excellent time to consider your business succession plan. With the removal of the estate and gift tax hurdle for estates below the new exemption amount, opportunities arise to implement a business succession plan that is more tax advantageous.
- Have you or one of your beneficiaries, trustees, agents on your powers of attorney or executors been the subject of a lawsuit or creditor claim? Is one of your beneficiaries, trustees, agents in the middle of a divorce? This is a time to look at your estate plan to determine whether your estate plan protects the assets from claims by creditors and prior spouses.
- Have you or one of your beneficiaries, trustees, agents on your powers of attorney or executors started receiving needs-based government assistance? If so, you should visit your attorney to determine if your plan will result in a disqualification of benefits for this individual and/or will cause the government entity to question this individual’s eligibility.
- Are your estate documents customized to fulfill your wishes and avoid unintended consequences? Have your wishes changed since you last updated your estate plan. Perhaps you want your assets distributed in a different manner or you want to now exclude a beneficiary. You would need to update your estate plan in order to effectuate changes in your intent.
These are just a few reasons to review and possibly update your estate plan. In reviewing with an attorney, you may find that your plan no longer meets all your needs or that your plan never did meet your needs. On the other hand, when you meet with a professional, you may find that your estate plan does in fact accomplish all your wishes and goals.
We welcome you to make an appointment with us to review your estate plan to ensure that ensure that it still works for you. If nothing else, you will gain piece of mind that you, your loved ones, and your assets are in fact protected.
Very truly yours,