Funding and Other Life Changes

In the previous post, we discussed reasons why estate plans need to be monitored and periodically updated. Here, we look at two common reasons to take a quick peek at your estate plan to make sure everything is working as designed.

Funding

For your trust to work as designed, assets need to either be presently titled in the name of the trust or the trust needs to be named as the beneficiary of life insurance policies or the pay-on-death beneficiary of certain retirement accounts. The trust agreement does not give the trustee the power to deal with assets that are not in the trust.

Some clients think that they can just rely on the Pour-Over Will to make sure everything gets transferred into the trust. This strategy is flawed, because it will require a probate to be opened.

Avoiding probate is one of the most important reasons to create a trust in the first place since probate is exponentially more expensive and takes many more months to complete than a trust administration. It is a very good practice to periodically review your balance sheet and confirm that each asset is properly titled and that each beneficiary designation form is completed correctly.

Other Life Changes

As we grow older each year, things change. Our parents and children grow older. Friends and other family come in and out of our lives to various degrees. As mentioned above, our personal financial situation fluctuates up and down. With all of this constant change, it is good practice to periodically review your estate plan to make sure the one you have in place meets your current life situation.

For example, imagine you executed your original estate plan five years ago. At that time, your parents happened to be the best option for caring for your minor children as their legal guardians in case something happened to you. Now, your parents are older, their mental acuity is slipping a little bit and they just don’t get around very well any more. However, your younger sibling has grown up, is reasonably successful, mature and you share the same core values. It would make sense that you would now lean more toward your sibling as being a better choice as legal guardian for your minor children. In such cases, your will needs updated. To ensure that it complies with California law, an attorney should help you with this.

As another example, maybe when you first executed your original estate plan, you thought all of your children were perfect angels and mature enough to handle receiving a large lump sum inheritance from you when you died. Since that time, perhaps one of your children has fallen off course, and you suspect that he or she may have a serious problem that a large sum of money may actually make worse. It may be wise to consider holding his or her inheritance back in trust for their benefit to make sure that only basic needs are covered while incentivizing or waiting for them to mature to the point where they can handle receiving larger distributions from the trust.

While only three main reasons are highlighted here, there are many other events that would warrant a periodic review your estate plan. There’s no magic timeframe to review since everyone’s situation is different. Just always be aware of significant changes in your life, including changes in your personal financial situation. As a general guideline, it makes sense to sit down with an estate-planning attorney about every three years to discuss your current situation and see how it compares to what is reflected in your current estate planning documents. Whether you sit down with me or another estate planning attorney, it is well worth the investment in the long run.

Change in Assets/Estate Taxes

Needless to say, if your financial situation has changed substantially since you last met your estate planning lawyer, it may be well worth your time to sit down with him or her to discuss how your balance sheet has changed, for better or for worse.

Years ago, our estate tax exemption amounts were much lower (e.g. $1.5 million per person in 2004) and many more people here in California had taxable estates. Estate planning lawyers drafted trusts with various provisions to counter this federal estate tax regime in order to minimize or entirely eliminate estate taxes for their clients. Specifically, these lawyers created A-B Trusts, which utilized the estate tax exemptions of each spouse.

While a thorough description of how an A-B Trust works is beyond the scope of this article, it is important to understand that certain restrictions are placed on the surviving spouse in order to qualify for the aforementioned estate tax benefits – restrictions that most surviving spouses didn’t really want, but put up with to get the tax benefits.

In 2014, where we currently enjoy estate tax exemptions of $5.34 million per person, the vast majority of estates are not taxable, yet these trusts still contain unnecessary restrictions that can have a big impact on how you will be able to spend your assets after the death of your spouse. It’s worth reviewing, whether or not your trust should be restated to a more simple trust structure.

Updating Your Estate Plan

After deciding to implement an estate plan, many people procrastinate for months (even years) before they finally reach out to an attorney to have one prepared for them. Add that to the fact that, despite my best efforts to make the process as painless as possible, it can be an unpleasant conversation for most people. After all, who wants to contemplate their own death?

After finally completing their estate plan, clients often feel relieved since they’ve now checked that task off of their to-do list and have a definite plan. Unfortunately, though, most estate plans do not go through periodic reviews, which jeopardizes the effectiveness of the entire plan. Documents tend to be forgotten about. Estate plan, binders either get placed in a home safe or safe deposit box (best practice), or they are stored in a random drawer or on shelf somewhere in the home where they sit and collect dust.

But while life continues evolving – years go by, kids grow older, assets are accumulated, and people come in and out of your life – estate plans remain the same unless they are reviewed and updated according to your life as it is presently (not how it was when the plan was originally executed).