Pretty much everything you own of value needs to be cared for or serviced from time to time.
Your car needs to be maintained to keep it running. After a certain number of miles, you change the oil, replace the brake pads or rotate the tires. Your home needs to be winterized. When something unexpected happens, you make repairs, like fixing a roof. Sometimes you need to completely replace things that just don't work anymore, like an air conditioner or dishwasher.
Like a car or house, your estate plan is also valuable. After all, it protects everything you own and everyone you love. And just like a car or house, your estate plan needs servicing if it is going to perform the way you want it to when you need it.
Think of your estate plan as a snapshot of your life which consists of you, your family, your assets and the laws in effect at the time you created your estate plan. All of these things can change over time. Assets go up or down in value. New assets are acquired. Children are born and grow up. Friends and family members appointed to serve a role in your estate plan may become distant or you may become closer to new friends or other family members. The laws can change. The list goes on and on.
If you stop and think, it's simply not reasonable to assume that your estate plan will continue to perform the way you would want it to when the underlying assumptions on which your estate plan was based have changed. Over the course of your lifetime, your estate plan needs check-ups, maintenance, tweaking or maybe even replacing, just like other important assets you own.
The purpose of this issue of e-Counsel is to provide an overview of when you should review your estate plan and what things can happen that should tip you off that it is time to at least look at your estate plan to determine if changes are needed.
Is There a Rule of Thumb as to When a Person Should Review Their Estate Plan?
Unfortunately, there is really no rule of thumb that dictates when a person should review his or her estate plan. Different lawyers will have different opinions. And no opinion is either right or wrong. After all, an estate plan is not like your car where you have mileage checkpoints that alert you to change your oil or that obnoxious "Check Engine" light comes on.
Although there is no hard and fast rule as to when you should review your estate plan, I recommend and believe it is good practice to review your estate plan every year. It doesn't take long. Think about setting aside a specific time each year to do it. Otherwise, it will be too easy to put off. The specific time you set aside is obviously up to you, but I think it makes a lot of sense to do it when you engage in year-end income tax planning or when you put your tax information together at the beginning of each year. Reviewing your estate plan at this time is beneficial because you should have a good handle of your income, assets (and asset titling) and net worth which can affect your estate plan.
What Events Can Happen That Can Cause an Estate Plan to Need Revision?
So how should you go about reviewing your estate plan? The focus should be on what your estate plan says and whether anything has happened to cause it to be outdated, incomplete, wrong or in need of revision. There are a number of things that can occur which can cause your estate plan to require servicing. In general, changes are caused by two major events - personal changes that affect your life and economic or law changes that affect your overall estate plan.
What follows is a sample list of things that can happen that can create a need to amend or update your estate plan:
- Personal Changes for You or Your Spouse
- You marry or divorce;
- You or your spouse's health declines or one of you has a disability;
- Your spouse dies;
- You or your spouse's estate planning goals and objectives change; or
- You move to another state.
- Personal Changes for Your Family
- A child, grandchild or other close relative is born;
- A child, grandchild or other close relative gets married or divorced;
- A child, grandchild or other close relative dies;
- A child, grandchild or other close relative's health declines or they have a disability;
- An attitude change toward a child, grandchild or other close relative; or
- Friends or relatives who you have named as guardians for minor children, trustees for trusts, personal representatives of your estate or attorneys-in-fact under powers of attorney need to be changed.
- Economic Changes
- The value of your assets changes dramatically (up or down);
- You buy or sell a business;
- You acquire assets (including real estate);
- You change jobs.
- Federal or State Law Changes (Including Tax Laws)
The above list is not exclusive, but if any of these events do occur, even if it is in between the normal time for your estate plan review, it is a good idea to think about that event and determine if it creates a need to amend or revise your estate plan. Some of the events set forth above will not necessitate a change. Others will. Some changes will be minor, while others will require more extensive revisions or even a complete restatement of your estate plan.
Lets take a look at each of these events in a little more detail to see how it can affect an estate plan.
1. Personal Changes for You and Your Spouse.
a. Marriage or Divorce. If there is a change in your marital status, it should be a red flag that it is time to take a look at your estate plan. If you recently married, how does your spouse impact your overall estate plan? A whole new set of rules and estate tax planning opportunities are opened up for married couples, but you first need to decide how you want to treat your new spouse in the event of your death or disability.
Do you want your spouse to get some or all of your property if you pass away? If you become incapacitated, do you want your spouse to make financial or medical decisions for you? Are you and your spouse going to own property together or separately? Did you sign a prenuptial agreement which may affect your estate plan? There are a lot of issues which need to be addressed.
It should be noted that it is not enough to just decide what property you want to leave your new spouse in the event of your death. This is because the public policy of most states, including Missouri, grant surviving spouses legal rights. These rights can be waived with a prenuptial agreement, but absent a valid and enforceable prenuptial agreement, a surviving spouse is entitled to a share of their deceased spouse's estate.
For example, if you die without an estate plan, a large portion of your property will go to your spouse. If you die with a Last Will and Testament, but don't leave your spouse a certain amount of your property, your spouse can receive a forced share by electing to take against your Will. For more information on what a spouse is entitled to at death, read our archived newsletter titled "What Really Happens if I Die Without a Will or Other Estate Planning Documents."
At the other end of the spectrum, if you divorce, it is also important to analyze the impact of that event on your estate plan. Chances are your former spouse is a primary beneficiary of your assets. You may have left your property by way of a Last Will and Testament or Revocable Living Trust to your former spouse. You may have named your former spouse as a beneficiary under a qualified retirement plan or a life insurance policy. Or you may have named your spouse as a trustee under a Revocable Living Trust or an attorney-in-fact under a Durable Power of Attorney. In all likelihood, these type of provisions will need to be changed unless you are closer to your former spouse then almost anyone else I know.
b. Declining Health or Other Disability. If you or your spouse's health declines, you need to gauge the impact of that event on your estate plan. Is your Living Will and Power of Attorney for financial and health care matters up to date and do these documents still accomplish their intended purposes? Are the people you appointed to make financial and health care decisions still the right people?
c. Death of a Spouse. If your spouse dies, it is essential to review your estate plan. Most estate plans are drafted to take into account a number of contingent events which may occur, such as what happens if you die and your spouse survives or what happens if you die and your spouse predeceased you. Is this still what you want?
If your spouse dies, you should also revisit your overall estate plan to determine what, if any, estate tax planning you should consider. From a tax and public policy perspective, the estate tax law treats a married couple as a single unit, meaning property left to a surviving spouse is not subject to estate tax. Instead, the tax is at least deferred until the death of the surviving spouse. If your spouse dies and you have not previously engaged in tax planning, an estate tax may now be due and payable upon your death. It is wise to consider planning that could avoid or defer that estate tax in the future.
d. Changes in Estate Planning Goals and Objectives. An estate plan is personal. It is based on your goals and objectives at the time you sign your documents. Obviously, if your goals and objectives change, your estate plan may need to change as well.
For example, maybe you left property outright to a child upon your death, but you now feel that child is not responsible enough to administer that property. You might want to consider keeping property in trust for your child after your death. Or maybe you want to promote or discourage a specific behavior for a beneficiary. Estate planning documents can condition bequests on passing a drug test (discourage drug use), having a job (promoting work ethic) or graduating from college (promoting knowledge and education). This is typically accomplished by using a document called an incentive trust.
Depending on your goals and objectives, a lot of different things can be accomplished in an estate plan. Therefore you need to periodically review your goals and objectives because they formed the foundation on which your entire estate plan was based.
e. Move to Another State. If you move to another state you should have your estate plan reviewed. Why? Because Wills, Trusts, Powers of Attorney and most other estate planning documents are governed by state law. State law dictates what estate planning documents need to include and how they need to be signed (number of witnesses, notary, etc.). The last thing you want is for your estate plan to be ineffective or invalid simply because you moved to another state. In addition, if you move from a state that imposes an estate tax to one that doesn't, or vice versa, then your plan may need to be updated to take into consideration this change in the taxable status of your estate.
Most states have reciprocity laws which generally provide that a new state will recognize a Will as valid if it was valid when executed in another state. However, these reciprocity laws are not as universal when it comes to Trusts, Durable Powers of Attorney or Living Wills and Health Care Directives.
2. Personal Changes for Your Family.
a. Child, Grandchild or Other Relative is Born. When a child is born (or adopted), it is important to make sure that child is included in your estate plan if that is your desire. Things that you should consider include:
- Who will serve as guardian for the child if you and your spouse die;
- What asset distributions will be made to the child if you and/or your spouse die;
- Should property be distributed to the child outright or held in trust for the child's benefit;
- If assets are held in trust for the child, what are the terms of the trust and who will be the trustee and successor trustees of the trust.
Most estate plans are drafted to include provisions for after-born children. This means that many of these questions may have already been addressed when you signed your estate plan. If that is the case, then there will be nothing to change provided your mindset has not changed since the time you originally signed your estate planing documents.
In addition to children, grandchildren or other relatives may be born. Think about whether you want to benefit them in your estate plan. Oftentimes, the answer will be "no," but it is worth thinking about and making a conscience decision.
b. Child, Grandchild or Other Close Relative's Health Declines or They Have a Disability. If a child, grandchild or other relative who is a beneficiary of your estate plan develops health, medical or disability issues, it is important to review your estate plan. It is possible that it may no longer make sense to leave property to a disabled beneficiary outright. If a beneficiary has special needs, you may want to accommodate the increased needs of that individual by creating a Special Needs Trust. A Special Needs Trust can allow assets to be protected for the disabled beneficiary without disqualifying him or her from receiving government benefits when you pass away.
c. Child, Grandchild or Other Close Relative Gets Married or Divorced. If a relative who is a beneficiary of your estate plan gets married or divorced, think about how that event affects your plan. Do you want to include your new son or daughter-in-law in your estate plan or do you want to make sure your assets are specifically protected from your new son or daughter-in-law in the event of a divorce?
d. Child, Grandchild or Other Close Relative Dies. If a child, grandchild or other relative who is a beneficiary of your estate plan dies before you, where will that deceased relatives share of your assets go? Does it go to the deceased relative's children or does it go to other relatives? You need to make sure your assets are distributed the way you want if named beneficiaries die before you.
e. Friends or Relatives Named as Guardians for Children, Trustees for Trusts or Personal Representatives of Estate Needs to be Changed. Sometimes the people you name to play important roles in your estate plan need to be changed. You may have named guardians for your children in the event of your death. You may have appointed people to act on your behalf in the event of a disability, whether as a trustee under a Revocable Living Trust or an attorney-in-fact under a Durable Power of Attorney. Usually when you name a person to fulfill a specific responsibility, you also appoint successors in the event the primary person is unable to serve.
A lot can happen to the people you name. They can die. They can become disabled or get too old to effectively act. Your relationship with them may change so you no longer want them to serve. Or maybe your relationship with them doesn't change, but you grow closer with other people who would just do a better job.
When you review your estate plan, it is important to review what people you have chosen to serve various positions (as well as their successors) and determine if they are still the best choice.
f. Attitude Change Toward a Child, Grandchild or Other Close Relative. Although it is unfortunate, sometimes you have a change of attitude regarding people you have named as beneficiaries. This attitude change can cause you to leave someone less or cut them out of your estate plan completely. Or maybe you want to leave someone more who you have become closer to over time. Whatever the reason, your assets are yours to leave as you want and any change in how you want to dispose of your assets will require a revision to your estate plan.
3. Economic Changes.
a. Value of Assets Change Dramatically. If your net worth goes significantly up or down, you should analyze how that increase or decrease may impact your estate plan. This is important for a number of reasons, including the following:
i. Estate Tax. First, our estate tax system is based on how much an individual is worth at the time of his or her death. In general, the more a person is worth, the more estate tax his or her estate will pay. With proper planning, this estate tax can typically be avoided or deferred. A detailed discussion of how the estate tax works is beyond the scope of this newsletter. If you have any questions as to how the estate tax may apply to you, please do not hesitate to contact us.
ii. Adjusting Specific Bequests. Second, amounts that you have left to beneficiaries may need to be reviewed if your net worth goes up or down. For example, leaving $25,000 to a family member, friend or charity may have made sense when you had a net worth of $250,000, but does it still make sense now that you are worth $1,500,000?
b. Purchase or Sell a Business. If you purchase or sell a business, you should review the structure of your estate plan to ensure that it is set up appropriately. If you start a business, how does this business acquisition effect your estate plan? What will happen to the business if you die or become disabled? Do you have a comprehensive business succession or exit plan? Are your children involved in the business, and if so, how is the business disposed of at your death? How are your children treated if some are involved in the business and others are not? Is the way the business is owned consistent with your estate plan? For example, if you have a Revocable Living Trust, is the business titled in the name of your trust so probate could be avoided?
On the other hand, if you recently sold a business, then you should confirm that your estate plan is structured in such a way so that estate taxes are reduced or eliminated and that the sale proceeds avoid probate.
c. Acquire Assets. Although acquiring assets will typically not necessitate a change in your estate plan, it is important to review how newly acquired assets are titled to make sure it is consistent with your overall estate plan.
If a Revocable Living Trust makes up part of your estate plan, you should ensure that assets are acquired in the name of the trust to avoid probate and provide for disability protection.
If you acquire rental property, it may not be enough to just have it titled in the name of your Revocable Living Trust if asset protection is important to you. This is because rental property is generally considered a hot asset, meaning liability can be associated with the property because it is rented to others. Oftentimes, it makes sense to shield your other assets from this potential liability by putting rental property in a separate entity, such as a limited liability company. For more information on asset protection, read our archived newsletter titled "Understanding the Basics of Asset Protection Planning."
d. Change Jobs. Although changing a job does not usually require changes to your estate plan, think about the various employment benefits you may now be eligible for and make sure these benefits are consistent with your estate plan. If you are eligible to participate in an employer's retirement plan (like a 401(k)), is the primary and contingent beneficiaries that you named for the retirement plan consistent with your overall estate plan. Does your employer offer life insurance protection? If yes, is the beneficiary designation for your life insurance consistent with your estate plan?
4. Federal or State Law Changes (Including Tax Laws). It is not uncommon for the law to change which may necessitate a need to amend your estate plan. One of the most common examples is a change in the estate tax law. The estate tax law has consistently changed over the last ten years. These days, it seems like the one certainty in the estate tax law is its uncertainty. For example, some estates are not subject to an estate tax if they are valued at less then a certain amount. That certain amount is referred to as the "applicable exemption amount." The applicable exemption amount has fluctuated dramatically over the past ten years and its future is uncertain. In 2009, a person could leave up to $3,500,000 without having to pay an estate tax and in 2011 and 2012 the amount is $5,000,000 (assuming no lifetime taxable gifts). In 2013 the amount is set to decrease to $1,000,000 unless Congress acts to change the law.
What this means is because of changes in the law, some estates that were subject to estate tax may no longer be subject to that tax. If the applicable exemption amount does decrease in 2013, some estates will become subject to an estate tax that were not before. These changes in the law may necessitate a revision to a person's estate plan.
In addition to changes in the tax law, other federal or state laws may change to make it prudent to revise your estate plan. For example, in 2001, federal rules were put in place that makes it advisable for every Living Will or Health Care Directive to comply with the Health Insurance Portability and Accountability Act of 1996 (HIPPA). If your estate plan hasn't been updated since 2001, then your Living Will or Health Care Directive should in all likelihood be revised.
In addition, in August, 2011, Missouri changed its trust law to make it more beneficial for married couples to have one joint trust instead of two separate trusts in certain circumstances. By having one joint trust, a married couple could have additional asset protection benefits while still avoiding probate. For more information on this new Missouri law, read our archived newsletter titled "Asset Protection and Missouri's New Joint Trust Law."
Don't think of estate planning as a one-time event. There are a multitude of things that can happen that may make it necessary to update or revise your estate planning documents. We hope this newsletter gave you a basic understanding of some of those events. As always, if you have any questions or comments regarding the contents of this issue of e-Counsel, please do not hesitate to contact us.
CIRCULAR 230 DISCLOSURE
Under U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of Helfrey, Neiers & Jones, P.C. and the Law Office of Richard C. Petrofsky, (2) Helfrey, Neiers & Jones, P.C. and the Law Office of Richard C. Petrofsky imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to Helfrey, Neiers & Jones, P.C. or the Law Office of Richard C. Petrofsky in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein.