You finally took the plunge and created an estate plan. Wonderful. Awesome. High five. But now that you have a plan, how often do you need to revisit or update it?
Rather than updating your estate plan every X number of years, we recommend revisiting and (potentially) revising it whenever you experience a significant life change. A will or trust you signed years ago might no longer reflect what you care about.
Consider reviewing and/or updating your estate plan if you have experienced any of these changes:
1. Changes in the law.
The Tax Cuts and Jobs Act of 2017, the new tax law passed by Congress earlier this year, was the largest tax reform in the past 30 years. It affected a variety of income tax rates, brackets, and deductions.
Significantly, it also doubled the estate tax exemption to $11.2 million per person. In other words, if your estate is worth $11.2 million or less at the time of your death (or $22.4 million or less for married couples), your estate will owe no estate taxes.
If your estate plan was created back when the exemption was, say, $1 million, your plan may benefit from an update. For instance, you may have originally planned to give away or give up control of certain assets to get under the estate tax exemption when it was much lower. With the new tax law, that may no longer be necessary.
2. Financial setbacks.
The economy goes through ups and downs. Fortunately, we have been riding a big "up" for the past eight years. However, as the saying goes, what goes up must come down.
Whenever your net worth changes substantially (or if it has increased/decreased substantially since the time you last updated your estate plan), you should review your estate planning documents.
Suppose, for example, your estate was worth $1 million in 2000. You executed a trust that year which provided that you wanted to leave $50,000 to your church, and then the remainder of your estate would be split equally between your sons, James and John.
Back in 2000, your sons were in line to inherit $475,000 apiece. Not too shabby.
But what if you fell on hard times and your estate is worth only $50,001 today? If you died tomorrow, your church would get $50,000 and James and John could each get only $0.50.
3. Financial windfalls.
On the flip side, maybe your estate has increased in value. Perhaps you made a promising investment or inherited a large estate from a relative. You may not be bumping up against the estate tax exemption, but does your plan still reflect how your want your estate distributed?
If you are expecting to be subject to the estate tax in the future (e.g., you own a business and are planning a sale or an IPO or simply expect your net worth to steadily increase over time), talk to an attorney about estate tax planning. With enough foresight, you can shift some of your wealth to family members to minimize onerous estate taxes.
Even if you’re not worried about estate taxes, maybe you have collected personal property or heirlooms. If you have not provided who gets Aunt Sue’s special teapot or Grandpa Henry's family Bible, you could be spelling trouble for your heirs. Family members go to war just as often over these sentimental items as they do over money.
4. Changes in relationships.
If you get married or divorced, one of the first items on your to-do list should be to update your estate plan. Otherwise, you could leave your significant other less than you intended, or worse — you could accidentally leave your estate to your ex.
This rule does not just apply to traditional estate planning documents like a will or trust. You should also update beneficiaries on bank accounts, life insurance policies, retirement accounts, brokerage accounts, real estate, and other assets.
Whether it be formal documents or beneficiary designations, estate planning is crucial for newly married couples and for recently divorced individuals.
5. Becoming a parent.
Having a child changes everything. For many people, this is the first time they seriously think about estate planning. (Although, as we have written, estate planning is still important even when you don’t have kids.)
What will happen to your kid if you and your spouse die suddenly? Have you named a guardian for them? Will they have enough money to live on? Have your provided for their education?
Estate planning for couples with children involves considerations over and above estate planning for singles or for couples with no kids. As a result, we highly recommend you meet with an experienced estate planning attorney who can explain your options and help you provide for your children in the event of your untimely death or incapacity.
6. Becoming a grandparent.
Just like having children can dramatically affect your estate plan, so can having grandchildren.
Let’s say your will says you leave your estate equally to your two sons, James and John. At the time you made your will, both James and John were young with no children. But now, John has two kids. If John dies before you, what happens to his share of your estate? Does it go to his children, or to James?
Some estate plans provide for the potential of grandchildren who aren’t even alive yet. It is common for a will or trust to leave your estate, for example, “to my son John Doe, per stirpes, by right of representation.” That per stirpes phrase (Latin, of course) means that, if John dies before he receives his share of your estate, his share goes to his children (or if his children are deceased, to their children).
You can use language like this in a will or trust, but what about assets that do not pass through those documents? What about an IRA, a 401(k), or a life insurance policy? Update beneficiary designations after grandchildren come into your life. (See this excellent Forbes article about “Five Rules for Inherited IRAs” for more information on certain retirement accounts.)
Many people also fund 529 Accounts to provide for a grandchild’s college education. In particular, using IRA required minimum distributions to fund a 529 Account can be a great way to reduce your taxes and help your grandkids qualify for financial aid.
7. Children becoming adults.
You may have created your estate plan when your children were little, and your documents may include special provisions reflecting that. But now that they are adults, do you still want or need those provisions?
For instance, when your kids were young you may not have liked the idea of them receiving all their inheritance at once, so your trust provides that they get one-third of their inheritance at 25, one-third at 30, and one-third at 35. That makes sense when you are talking about children who may not have fully matured yet. However, does it still make sense now?
On the other hand, maybe you originally did not feel the need to space out your children’s inheritance, but as they have grown up they have made poor financial decisions. As children mature, you may want to change your estate plan to account for their habits and personalities.
8. Losing a spouse.
None of us like to consider the possibility of losing a spouse. Sadly, though, it is a fact of life for many people. And such a traumatic event can leave you feeling lost and unsure of what to do next.
One of your first steps should be to revisit your estate plan. Most married people list their spouse on their will or living trust, their power of attorney, and their advance directive for health care. When they are gone, who steps in to fill that role?
You ALWAYS want to make sure someone can act for you in the event of your incapacity or incompetence. When your primary representative passes away, you should discuss with your loved ones (and, of course, your estate planning attorney) to determine what, if any, additional representatives should be named to make sure you will be taken care of.
Other estate planning moves should be made as well. Revise beneficiary designations on any insurance policies, annuities, and retirement accounts, and name new beneficiaries for any assets you inherit from your deceased spouse. Otherwise, your own heirs could lose certain benefits associated with those accounts.
9. Bad health.
Getting diagnosed with a terminal illness or degenerative disease can be a traumatic event. At the same time, however, it is a wake-up call for many people to make sure their affairs are in order.
Have your updated your beneficiary designations? Does your will or trust leave your estate to the right people? Have you left an estate planning letter of instruction to let your representatives and loved ones know how to administer your estate?
Lastly, if estate taxes are a concern, you can use the annual gift tax exclusion and give up to $15,000 ($30,000 for a married couple) a year to as many individuals as you want without incurring any gift tax. Although this may not avoid estate taxes entirely, it can maximize the amount of money you leave to your heirs.
Talk to an attorney about your estate plan
Any significant life change serves as a good reminder to review and, potentially, update your estate plan. To make sure your estate plan is up to date, contact the experienced Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation.
David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, adoption, business law, and litigation.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]