When considering whether to update their estate planning documents, most clients focus on the primary dispositive documents: their Will, and if applicable, Revocable Trust. While that indeed should be the primary focus, clients should be aware of other documents that may need updating as well, such as Living Will, Health Care Proxy and Power of Attorney.
I recommend that you review all of your estate planning documents at least every two years, or when there is what I consider a “Changed Circumstance.”
A Changed Circumstance would be the occurrence of one or more of the following events:
- The death or incapacity of a Beneficiary or Fiduciary. A Fiduciary is a person who serves in a representative capacity, such as a Trustee under a Trust, a Personal Representative (or an Executor) under a Will, a Guardian, or an Agent under a Power of Attorney, Living Will, or Health Care Proxy.
- The birth of a potential Beneficiary.
- A significant change in the life of a Beneficiary, such as unstable marriage, divorce, financial, drug or alcohol issues.
- A change in financial situation.
- A change in the laws applicable to your estate plan.
In most estate plans, contingencies will already be in place for many of the above matters. However, it is best that you look at your documents when a change occurs to make sure that the wishes you expressed when the document was signed match your wishes now.
If you have named an individual as a Fiduciary, you need to consider whether that person is still appropriate to serve. For example, a named Fiduciary of advancing age may no longer be appropriate if his or her mental capacity is diminishing. Even without diminishing of capacity, if you have named an elderly person as a Guardian for a minor child, he/she may no longer be physically capable of carrying out those duties. It is also possible that a named Fiduciary has become so busy with his or her own personal life that he or she does not have the time to properly serve as your Fiduciary.
If a named Beneficiary or Fiduciary has died, you should review your documents to determine if the Contingent Beneficiary or Fiduciary is in line with your current wishes. Again, most documents will have already contemplated the death of a Beneficiary or Fiduciary, but reviewing it in the present time cannot be emphasized enough.
If a Beneficiary has a change of circumstance, you may wish to modify how you are providing for that Beneficiary.
For example, if a Beneficiary is in an unstable relationship, or is having financial problems, you may choose to leave that Beneficiary’s assets in a Trust rather than leaving the assets outright to that Beneficiary. By utilizing a Trust, significantly more protection can be provided so that the assets would not be dissipated by the Beneficiary’s divorce or creditor issues.
In the same vein, if a Beneficiary is not able to properly handle a significant bequest because of any of a myriad of issues, such as a drug or alcohol problem, the influence of another person in their life, or the Beneficiary’s lack of financial responsibility, you should again consider leaving that Beneficiary’s assets in Trust.
If your financial situation has changed significantly, for the better or worse, you should also be considering how this would affect your estate plan.
If you are leaving large specific bequests to select individuals, and the remainder of your assets to other beneficiaries, if your net worth decreases significantly, you could end up with the unintended result of those specific devisees getting the bulk of your assets, as the specific bequests will in almost all cases be paid before the Residual Beneficiaries.
Consider an example of a person whose Will is drafted at a time when his net worth is $1,000,000, and he chose to leave $200,000 to be divided among his nieces and nephews, and the balance to his children. A number of years later, that person has had to dip into their assets for his own care, and his remaining assets are $300,000. Unless he were to update his estate plan, the nieces and nephews would now be getting two-thirds of the estate, rather than the 20% that they were intended to get when the document was drafted.
Changes in the law, especially tax law, is another reason to review your estate plan.
There have been numerous changes in the Federal Estate Tax during the last 15 years.
In 2001, the Estate Tax exemption amount was $675,000. For a person dying in 2015, the exemption amount is $5,430,000.
The Federal Estate Tax law now also includes what are known as portability provisions, which makes it much easier for a married couple to utilize both spouses’ exemption amounts. The definition of married couple has also changed, as same-sex marriages are now recognized for Federal tax purposes.
As a result of the above changes, the estate plan that you have in place may no longer be the most appropriate way to structure things. In many situations, especially those involving a second marriage, the drastic increase in the estate tax exemption amount can result in undesired consequences. For example, an estate plan established in 2003 for a man with a net worth of $4,000,000 may have provided, by formula (utilizing the maximum estate tax exemption), that $3,000,000 would go into a Marital Trust for the benefit of the wife from a second marriage, with $1,000,000 (the maximum 2003 estate tax exemption amount) going outright to the children of the first marriage. This plan would have eliminated any estate tax at the first death, and still provided significant assets to support the surviving spouse. However, if that man were to die in 2015, all of the assets would go to the children (due to the higher exemption amount), and the surviving spouse would receive nothing under the Trust.