Updating your Estate Plan

Tom and Kathy thought they had their estate planning in order as they approached retirement. A few years ago, they worked with an attorney who created living trusts for them as well as other estate related documents. When they purchased a second home in Wisconsin, they didn’t give a thought to revisiting the plan. On their deaths, assets passed nicely with a minimum of complication and expense. All except the property in Wisconsin. Because the property was not funded into their living trust, the real estate had to go through probate, which meant significant additional expense and inconvenience to the family.

Most of our clients want to make sure that their plans take advantage of all lifetime benefits and also make estate administration as simple and cost effective as possible. The best way to do this that is to make sure you keep your plan and your documents up to date. Failure to keep things current can be very costly.

Estate planning is more than just planning for death. Let’s take a look at some of the life changing events that might cause you to schedule a review.

A Move to Another State

For many clients, a move to a new state should trigger an estate plan review. Will you be a permanent resident? Will you be part time? The answer to these questions and others will determine your legal residency and control such things as state income tax, inheritance tax and other issues about administration of your affairs if you become disabled or die. The rights of your spouse and the rights of your children may change along with a change of address. Assets may need to be retitled in order to make sure your wishes are accomplished. Important benefits may be lost as a result of a move to a new state.

Divorce or Remarriage

Most state laws have provisions for cancelling out bequests to ex-spouses after divorce. But that may just be the beginning. It is also important to check beneficiary designations on other assets such as:

- Life insurance, both individual and group policies,
- Retirement plans like IRAs, 401(K)’s, and
- Annuities

Divorce also means the loss of important tax deferral advantages which could mean a significant estate tax due at death. This is also a good time to re-think the overall distribution scheme of an estate plan. All good reasons for a review.

Of course, re-marriage triggers a similar need for review and updating.

Change in Employment

Many highly paid executives need to pay close attention to updating their estate plan when changing jobs. This is because new employment may bring new benefits, such as incentive plans, deferred compensation, restricted stock or stock option grants, and new life insurance. All of which should trigger a review of the existing estate plan.

Buying a Second Home

Buying a second home is another cause for an update. How you own the property (in trust, in an LLC, etc.) can affect issues such as state taxes and transfer costs. Liability protection may also be at issue if the property will be rented out from time to time. Also, thinking about how to pass the property to heirs becomes important. Do your children want to keep the second home after you die? If so, how will they deal with maintenance costs, repairs and use? Will you set up a separate fund? Will all of your children be able to afford their share of the costs? All of these issues can be explored and dealt with in a review.

Changes in the Tax Code

For larger estates, a changing tax code is reason enough to keep your plan updated. Over the last 10-12 years, there have been numerous tax changes. And now, it looks like the old estate tax will come back into play in 2011 and most clients with $1,000,000 or more in assets will need substantial review.

Selling or Buying a Business

In many ways, selling a business makes estate planning easier, since you now are dealing with a liquid asset (sales proceeds) as opposed to a non-liquid asset that may be hard to divide among family members. This means that current provisions concerning ongoing operations of the business may no longer be applicable and should be reviewed.
Buying a business will also trigger the need for a review. Depending on the type of business and the involvement of other family members, you may need to update your basic documents as well as deal with business succession and buy-sell issues. Lack of liquidity may now be an issue and you may want to consider adding life insurance to your estate planning picture in order to provide liquidity for estate equalization, debt repayment or estate tax. Finding the most tax efficient ownership structure for life insurance is another reason for an update or review.

Winning the Lottery

Of course winning only happens if you play. For those who do play and win, issues such as lump sum payouts versus lifetime payouts, estate taxation, privacy issues and investment analysis all now come into play. In most cases, a substantial lottery award will necessitate a complete restructure of your estate plan.

Changes in the Law

Sometimes laws change at the federal or state level which requires a review of your estate plan. Over the past several years, changes to HIPPA privacy laws have been enacted which impact your health care power of attorney documents. Various changes in laws at the state level affect estate taxation. All of these changes suggest a review.

Additions to your Family

In many cases, new additions to your family will be handled by your existing estate plan. In cases where you may have made special arrangements for children or grandchildren, you will want to set a review to make sure that all is being handled properly.

Death in your Family

Like divorce, the death of a spouse can mean a major change to your estate tax picture. In the event of the death of another family member, you will want to double check that your distribution scheme continues to work the way you want it to.

A Family Member has become Dependent on You

Numerous families are now dealing with the issue of aging parents. Some have taken over the role of key care-giver and need to make sure that if something happens to them, alternative plans are in place for looking after an aging or ailing parent. This could include things like a specific carve out of assets for parents or creation of a detailed successor care-giver structure.

A Substantial Change in the Value of your Assets

Successful business owners or real estate developers will see long term growth in their asset base. For others, this growth can occur overnight. Either way, changes in net worth should trigger a review to make sure that value is maximized and that assets go to the right place with a minimum of tax.

You Receive a Sizable Inheritance or Gift

Of course, another way your net worth can increase is as the result of a substantial gift or inheritance. Like a lottery winner, such increases tend to happen overnight and tend to make reviews and updates very important.

You are Retiring

Estate planning and financial planning are subjects that become particularly important at retirement. Beneficiary designations, decisions on withdrawals from retirement accounts as well as many other issues are key factors triggering the need for an update.

Purchase of Life Insurance or Changes in Insurance Coverage

Life insurance is one of the most effective tools available in estate planning today. As such, it is important to track the performance of these policies and make sure that items such as ownership and beneficiary designation stay current. Estate tax issues may also come into play. Life insurance changes can often be overlooked, especially when the change is due to a new job and a new benefits package.

Death or Change of an Executor/Trustee/Guardian

The people you name for these positions are most often chosen for their relationship, specific skills and abilities. A change in your relationship with them or in their ability to serve will mean a need to update.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.