When Should I Review My Estate Plan?
In our last article we talked about the importance of communicating your estate plan to your loved ones. In that article I stressed the necessity of having important documents like a will, a financial power of attorney, a health care proxy, a HIPAA authorization, a living will, and possibly even a living trust and/or more complex estate planning documents. After that, I told you that, even after getting these documents, your work was still not done, and that you still had to talk to your proxies and beneficiaries in order to:
Make sure that the wishes you expressed in your documents were followed;
Avoid misunderstandings leading to hard feelings in beneficiaries;
Make sure your documents could be found and given to the proper people;
Make sure proxies were ready, willing and able to handle the responsibilities that you are entrusting them with.
Unfortunately, even after having these documents drafted, and communicating your plans with loved ones, it is still likely that there will still be more for you to do. The reason for this is simple: your life is not static. Over time many things change, your relationships may change, you may have new children or grandchildren, you may move, there may be major changes in your finances, your goals may change, etc. Your estate planning documents will attempt to be flexible enough to account for many of life’s changes, but they still reflect the time in your life when you had them drafted. It is a good idea to meet with your estate planning attorney regularly in order to keep your documents up to date, so they can continue to reflect your wishes. The typical recommendation is to review your estate plan every three to five years. For more complex estate plans, it is a good idea to do small yearly reviews to discuss changes in law and major life events, and a full review every three to five years. Besides your scheduled meetings, you should also speak with your estate planning attorney shortly after a major life event so your attorney can adjust your documents to reflect the life event. In this article, we will go through some of the changes that can have a major effect on estate planning documents, precipitating a need to update your documents.
Changes in the Law
When we talk about documents that we want to last for a long time, there is always the possibility that the law will change, making your current documents ineffective. This is more of a concern if you are using your estate plan to minimize estate taxes, or to qualify for government benefits.
When you gift away an asset to remove it from your estate, the IRS will determine if you have, for all intents and purposes, actually maintained some element of ownership over the asset. We say in these cases that you hold strings that tie the asset to your estate. For example, if you gift your home under the condition that you can live there until you die; you have maintained a string that pulls the entire value of the home back into the estate for tax purposes. IRC §2036 is a section of the tax code that deals with this specific situation. Basically, you cannot maintain possession, or right to income from a property and you can’t directly determine who can possess or get income from the property.
There are ways around these rules, but there are frequently cases in which the IRS will use theories based on §2036 or other code sections to challenge common estate planning techniques. Sometimes these cases show that there is more room under these code sections, allowing an estate planner to safely be a bit more aggressive in getting you tax savings, but sometimes these cases establish precedent which closes down some loopholes, or forces more conservative planning.
For example, over the last ten years, the IRS has used §2036 to try and get assets transferred to Family Limited Partnerships included in the transferor’s taxable estate. The IRS has tried these cases over the years to mixed success, but the court opinions have given valuable guidelines to follow when planning using this technique. Particularly, these cases have shown that when using this technique, you need a strong business purpose, and that you shouldn’t have the family transfer so much of their assets into the partnership that they will need cash distributions to maintain their lifestyle.
While this is a very specific example, courts decide cases every day, and legislators and administrative agencies come up with new laws and regulations all the time. It is important to check with your attorney every few years to make sure everything is still valid, and if there are new protections or opportunities those changes in the law have created for you.
Major Life Events
New Child or Grandchild
A new child can greatly affect how your estate plan will work. If you do not include the new child in your documents, a future court will assume that you forgot to include them and will give them an equal share in your estate. This could become a complicated, messy process, needlessly costing your loved ones time and money as well as possibly causing disagreements between them.
With a new grandchild, you may want to modify your estate plan in order to care for the child, provide for their education, or some other purpose. A court could determine, depending on how you word your documents, that you mistakenly left the child out of your plans and change how your estate distributes your assets.
Marriage and Divorce
Marriages and divorces can have a major effect on how your estate plan works. There are rules that prevent a married person from disinheriting their spouse, and exchanges of assets between married people are gift and estate tax free. Where people have children from outside the marriage, they may want to create plans that specifically provide for those children, while still providing for their spouse. You may also want to change beneficiary designations on bank accounts, IRAs, life insurance, etc. after either a marriage or divorce. There are laws that disinherit a spouse after a divorce, but relying on these laws will make your estate plan very unpredictable. Both a marriage and a divorce may also have a major effect on your assets, so you may need to change what your estate plan will eventually distribute.
It is not only your marriage or divorce that can affect your estate plan. Your children or grandchildren’s marriages and divorces change the size of your family. You may want to remove a bequest to a child’s ex-spouse, or you may want to create a trust that will make sure that the assets that you give to your beneficiary will not be available to their divorcing spouse in the future. If a future heir marries someone who is well off, or who has a low salary career, that may cause you to rebalance how you want your estate plan to eventually distribute your assets.
Death or Incapacity of a Proxy, Beneficiary, or Proposed Guardian
When a person listed in your estate planning documents passes away then it is a good idea to update your documents to choose new proxies or proposed guardians. If a beneficiary passes away, depending on the wording that you use in your documents, the assets that you wanted to go to them may go to their heirs, other members of their group, e.g. if a child dies, the assets that were supposed to go to them may be distributed to your other children.
Disability of a Family Member
If a loved one develops a disability, you may want to rebalance your estate plan so that they will be cared for when you are gone. Depending on the disability, you may have to appoint a guardian to look after them. Special needs trust are often very valuable in these situations in order to provide money to the disabled person in a way that does not interfere with their ability to qualify for government benefits. If you listed the disabled person as a proxy, guardian or executor in your estate planning documents, they may be unwilling, unable, or otherwise not the best choice for these positions anymore.
New Job, Career Change, Opening a New Business
Changes in your career can create changes in your assets, new pensions and retirement accounts. Some careers are more dangerous than others, facilitating the need for incapacity planning and life insurance. A new business may create asset protection issues that you can address using trusts, family limited partnerships, insurance and other techniques.
New House or Other Major Purchase
Purchasing new piece of real property or any other major purchase can be a major change in your asset mix. You may want to put the asset into a trust or specify who would receive them in your will. There are a number of estate planning strategies that can be used on specific assets to create a more favorable tax treatment, or change how government agencies will treat the assets for the purpose of determining benefits.
Move to a New State
When you move to a new state, or buy real property in a new state, you may become subject to the different laws of that state. Different states have different financial thresholds for estate tax, they treat some trusts differently, and they have different probate processes. Your main probate process will take place in the state where you reside. If you have a valid will from a different state, the court will accept it and treat it as a “foreign will”. Your estate will be required to go through the probate process in every state where you own real property.
Change in Health
If you become ill, injured, or disabled, your needs will change. You may want to make sure you understand how your estate plan documents will operate should your situation get worse. You may want to make sure there is a plan in place for possible further sickness or incapacity in the future. Your estate planning goals may change, you may want to create a plan that will qualify you for government benefits, or make sure you protected your home or other major assets, or make sure that you will be able to pay for future medical care.
Change in Financial Situation
Your asset mix may constantly change or fluctuate in value. Both large gains and large drops in value create opportunities to create positive tax treatments, either now or in the future. For instance, if a piece of property has gone down in value but you feel that it will greatly increase in value in the future, it might be a good time to move it out of your estate, either by outright gift or by putting it into a trust. This fixes the value of the asset at its low current value for the purposes of calculating estate tax. If the value of an asset has gone up, it might be a good idea to keep the asset in your estate so that it gets a step-up in basis.
Change in Estate Planning Goals
In the above discussion of major life events that should trigger a meeting with your estate planning attorney, we mentioned multiple times that the reason to meet is that these life events might change your estate planning goals. When you make your estate plan, you will want something that conforms to your wishes. Make sure that you go through all of the documents with your attorney so that you know how they will work together in different situations, and what the eventual outcomes will be. There are a large number of different estate planning documents and techniques, and many of them are very flexible. For this reason, you should be able to find something to fit your goals. Because your attorney will closely tailor your estate plan to fit your goals, as those goals change, the plan may need adjustments. While major life changes are often the cause of changes in estate planning goals, that is not always the case. Changes in relationships, world events, and any number of other causes can change what you’d like done.
Change in Opinion on Funeral Arrangement, Health Care
Much like changes in estate planning goals, you may also have a change in opinion on end of life care, funeral arrangements or other items in your estate plan. This could be due to a change in religious convictions or for a multitude of other reasons. If you change your opinions on these matters, you may need to change your living will, will and health care proxy, among other documents. You will also need to speak to your loved ones to let them know the changes in your wishes.
When you create an estate plan, you are taking a major step in protecting your family. You are creating a plan that goes into effect should you pass away or become incapacitated. This planning can take away a lot of confusion and fighting amongst your loved ones, it can protect your assets, it can avoid costly and time consuming court proceedings, and it can reduce your taxes and qualify you for government benefits. An estate plan is not “set it and forget it” however. The more complex your estate plan, the more you will have to work to maintain it. As your life changes, your plan will have to grow and change to more closely reflect your situation. A more standard estate plan will include a will, living will, health care proxy, power of attorney HIPAA authorization and maybe a living trust. With this type of plan, a good rule of thumb is to talk to your attorney every three to five years and after major life events.
There are two main reasons to make these appointments:
To take an inventory of your situation to see if you need to make changes to your plan.
To remind yourself of the mechanics of your plan. This will allow you to remind your proxies, which will help ensure that, should something happen, your plan will go smoothly.
You have spent the time and money to create a good plan. Make sure you check in on it and do the upkeep to make sure it will still work well when you need it.