An estate plan, much like an automobile, requires regular maintenance to keep it running smoothly — or at least, to keep it from breaking down. The question is: how regular is “regular”?
Many estate planning attorneys agree that every 3-5 years is sufficient to get the oil changed and the tires rotated. They expect a client’s life to change significantly over that span, when the children have moved on to a different (hopefully more mature) stage of adolescence and the parents have correspondingly moved on to a different (hopefully more stable) stage of sanity.
However, there are some estate planning attorneys who point out (1) that such family changes can occur rapidly in the course of a single year and (2) that any changes to business ownership should be reflected in the owner’s estate plan that same year. To that end, these attorneys design maintenance plans with incentives to encourage estate plan updates annually.
Which of them is right? Should you update your estate plan every year or every five years? Well, neither of them is wrong. I recommend reviewing the estate plan every year with the understanding that updates may not be necessary after every review or even after most of them. But if it seems pointless to meet with your estate planner five times in as many years without significantly updating it, don’t feel like you’re being shortchanged. Estate planning attorneys push these maintenance plans not because they are especially lucrative (many offer to review for free) but because they know how suddenly a life can change.
I tell clients I can fix their estate plan after an unfortunate diagnosis; however, I can’t fix much after a fatal car crash. If you pass away and leave an estate plan that doesn’t reflect the latest changes to your family, your business, or to your applicable tax laws, the plain truth is that someone you care about will lose money that could otherwise have eased the financial burden of your passing, which adds weight to the emotional burden.
So now you know why you should review your estate plan regularly, but do you know what to look for? Your estate planner does, so don’t worry if you don’t, but here are some of the events that would catch your attorney’s attention in the review process.
1. Family marriages, births and adoptions.
Your estate plan should be updated if you want to establish inheritances or trust funds for new members of your family, such as newborns or newlyweds. This is especially true if you intend to bequeath certain heirlooms to a son- or daughter-in-law, if you intend to establish a college fund for a child or grandchild, or if you intend to set up a retirement account for you and your new spouse.
2. Family deaths, divorces and estrangements.
If you’ve had a falling-out with your family, you may wish to change your beneficiary designations so that your ex-spouse, deceased brother, or prodigal son do not inherit assets that could be used to provide relief to your family in the wake of your passing. Good estate plans include clauses that provide for such contingencies (which is why they’re so long), but that doesn’t mean they’re prepared to handle every a curveball. Exes and estrangements can pose a lot of difficulty here, and can potentially delay the estate’s distributions through costly and drawn out litigation if the plan is insufficiently updated.
3. Business acquisitions and investments, winning lottery tickets and inheritances.
Estate planners bother clients about this incessantly: properly funding their trusts. And for good reason! If you acquire or lose an ownership interest in a business, you may need to get that interest assigned in the name of your trust instead of your individual name. Otherwise, it could play havoc with your succession plan or your estate plan.
Furthermore, if you’ve made a savvy investment, acquired a winning lottery ticket, or expect an inheritance that could drastically increase your bottom line, you may want to consider certain certain trusts and frameworks that add asset protection and tax advantages. These could include self-settled spendthrift trusts, charitable remainder trusts, charitable lead trusts, and many others.
4. Disability and illness.
It’s natural to want to plan when you have concerns about your long-term health. If you have been diagnosed with an incurable illness or become disabled, you will want to make sure your health care documents are properly arranged. These include living wills/advanced healthcare directives, which carry out your wishes regarding end-of-life medical procedures, healthcare powers of attorney, which designate an agent to make healthcare decisions if you are unable to, and HIPAA release forms, which authorize friends and family to receive your medical information.
Upon diagnosis, you may also want to simply review your Will or Trust to ensure that everything is in order before the documents are needed by your heirs. Trusts or funds may also need to be allocated in your estate plan to accommodate care at an assisted living facility or hospice, and you may need to review your financial power of attorney in case you are unable to manage your financial affairs as your illness progresses.
5. Estate tax changes and Congressional whimsy.
Trying to predict how Congress will change the estate tax, gift tax, and generation-skipping tax requires a fortune teller, not an estate planner. We already know how these taxes will look for the next year but there is still a lot of uncertainty in Washington regarding the budget. And these taxes aren’t known for their consistency.
Since 2001, the federal estate tax has ranged from a $675,000 exemption with a 55% tax rate to a $5 million exemption with a 35% rate, and even one year when it was repealed altogether. The gift and generation-skipping taxes are similarly unpredictable, as they often share the same exemption amounts and rates as the estate tax. This means that in coming years, there could be a higher lifetime exemption, allowing you shield more assets from taxation. It also means that the rates could increase, incentivizing you to revisit your estate plan to ensure you are getting the most out of it. It seems anything could happen with these taxes, so don’t be shy about reviewing your estate plan annually.
This was, by no means, an exhaustive review of the events which may compel you to update your estate plan. But hopefully it’s a start. We’ll try to keep you updated of the tax and law changes, as well as the best planning strategies that emerge, but for everything else you’ll have to let us know. Remember, the mechanic can’t change the oil if you don’t bring him the car.
Good luck and good hunting.
- Postpone Estate Tax Payment to Save the Family Business
- The Wine Collector’s Estate: Planning for a Wine Cellar
- What the Fiscal Cliff Deal Means for Business Taxes
The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.