Certain landmark events should trigger a review of your estate plan, and maybe a revision
By Alan G. Orlowsky, J.D., C.P.A.
Contrary to what many people believe about their estate plan, they are not meant to be signed, witnessed, notarized, placed in a drawer, and forgotten about. Rather, they occasionally need to be reviewed and possibly amended — sometimes totally rewritten.
The typical estate plan includes a will, one or more trusts, powers of attorney, life insurance, and a program of gifts and charitable donations. I rarely prepare an estate plan that is not revised at least once. Commonly they are amended several times over a period of years, as a result of either change in circumstances or changes of heart (or both).
There are no circumstances in which you are required by law to review your estate plan. But here are the landmark events in a person’s life when reviewing your plan is strongly advisable.
The most common reason for people wanting to revise their estate plans is the feeling that they’re getting old. There comes an epiphanic moment in many people’s lives when they realize that their family members won’t have them around a whole lot longer, and they feel a sense of urgency about reviewing their estate plans to make sure their loved ones are taken care of. The age at which this awakening takes place varies; for some, it may occur around age 65, for others at 75 or even 85.
For some people, their primary motivation is to change who they name as their heirs and beneficiaries, as well as the size of their inheritances because over the years their relationships have changed — some family members and friends have become dearer, some have fallen out of favor. They feel this is their “last chance to put it right” and express their true feelings.
The desire to minimize estate tax and avoid probate are also motivators. If it’s been several years since your last review, there are probably new laws and regulations that you can take advantage of to hold certain assets outside of the estate or otherwise reduce estate-tax liability. Often this involves establishing new trusts or revising old ones.
A serious illness or disability also motivates individuals to confront their mortality and review their estate plans, especially powers of attorney. A power of attorney for property, coupled with the appropriate language in your will or trust, lets your designated agent (usually a trusted family member) make transactions on your behalf if you become incapacitated.
Recently one of our clients — we’ll call him George — was diagnosed with a terminal disease. George came in and asked us to add an institutional successor trustee to his living trust documents because he feared that soon he would be unable to manage his financial affairs competently. An institution, such as a bank or corporate trustee, has the expertise to manage an investment portfolio, trust distributions, and other trust assets; and it will be there for the long haul (some estates must be managed through two or three generations).
George is one of the smart ones. Many people put off these reviews until it’s too late, and their children have to go through the agony of deciding how to handle an incompetent or incapacitated parent, where there are no clear instructions or updated powers of attorney.
If a family member becomes seriously ill or disabled, you should review your plan documents to ensure that your stricken loved one will be properly cared for should something happen to you. You may be advised to substitute a corporate trustee instead of your spouse if he or she is incapable of managing the estate after your death.
If one of your descendants has a chronic illness or disability, you may want to set up a “special needs trust” to make sure he or she is taken care of. The advantage of this kind of trust is that a person who is incapacitated might be eligible for government aid if it were not for the money that the person inherits from you. The trust keeps the money shielded from the eligibility process so that the state will not cut off aid for that individual.
It may take a while to recover from the tragic death of a loved one, but eventually the survivors must address financial issues to ensure that family members are provided for. There are a few kinds of changes that people often make after a spouse has died. One is repositioning assets, which involves taking assets out of the deceased spouse’s trust (or marital trust) and putting them into the surviving spouse’s trust (or into a family trust). Repositioning assets achieves not only savings in estate taxes, but also simplifies the administration of the surviving spouse’s estate.
The surviving spouse may need to designate new trustees, beneficiaries, executors, and attorneys-in-fact to replace the deceased spouse, where applicable.
Another kind of change is more emotional than financial. Often a surviving spouse will revise an estate plan to include provisions or beneficiaries that the deceased spouse had argued against (and prevailed) during his or her lifetime. Now the surviving spouse is free to follow his or her own sensibilities and sense of fairness.
Getting hitched is a landmark event that calls for a complete makeover of your estate plan. You’ll probably want to make your new spouse your primary beneficiary in your will, trusts, and life insurance policies, taking into account the provisions of a prenuptial agreement if there is one. If your spouse has an estate and an estate plan already, you may want to integrate the two estates and/or plans so that they are at least complementary, if not combined.
You will also need to make special provisions for ex-spouses and/or children from previous marriages. Estate planning for blended families can get complicated. For example, you may want to provide for children from a previous marriage as well as children from your current marriage (and your spouse’s children from a previous marriage — whew!). In that case, you can use trusts to make sure your wishes are followed regarding the distribution of assets from your estate. Another common example: You might not trust your ex-spouse with funds that are left to your minor children from that previous marriage. You can set up a trust for the children that is administered by a third-party trustee, and keep the money out of the grasp of your ex.
By its nature, divorce is likely to change which assets you own and to whom you want them to be distributed upon your death. Naturally, you’ll want to disinherit the ex-spouse to some extent, if not entirely. Sometimes children will take sides after a divorce and reject one of the parents. It isn’t uncommon for rejected parents to impulsively cut those children out of their wills. This is something you should think through carefully before you act.
A new or revised estate plan will have to take into account the provisions of your divorce settlement agreement. For example, the agreement might say that the spouse who is getting alimony or child support (typically the wife) will be the beneficiary of a term life insurance policy on the life of the other spouse. That ensures that if the supporting (insured) spouse dies, the other spouse and the children will continue to receive needed support for the term. It also ensures that loan payments will continue to be made.
The ultimate objective of most estate plans is to provide for descendants and maximize their inheritance by minimizing their estate tax liability. Especially if your children are minors, they must be protected in case something should happen to you and/or your spouse. That involves making sure they are provided for in your wills, trusts, and life insurance policies. Your trustees should be someone who is sensitive to the children’s needs. You’ll also want to appoint a guardian for young children — if you don’t, the state will appoint one, and you may not agree with its choice.
Grandparents may want to start making planned gifts of $15,000 per year for each grandchild, to take advantage of the annual gift-tax exclusion. Grandparents can also leave assets directly to grandchildren and avoid the onerous generation-skipping tax (GST) by using GST trusts and other generation-skipping strategies.
Other events that should trigger a review and possibly a revision of your estate plan include the following:
This discussion of landmark events is not exhaustive. There may be other reasons for you to review your estate plan, depending on your situation. If in doubt, call your attorney and ask. That call may be worth thousands of dollars.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 35 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.