When to Update your Estate Plan?

Waiting too long to update an estate plan may lead to bad plans and hurt families. Here are some milestones when you should consider changes.

Many people say that they’ve been meaning to update their estate plan for years but never got around to doing it.   Our office is located near the hospital system, so we get a lot of calls for last minute changes, which is difficult, and sometimes not possible.  Worst of all, we occasionally have to probate out of date wills or administer old trusts that left complicated, unnecessary tax planning, unsuitable executors or trustees, or in some cases, beneficiaries the client meant to change, but never did.

As a way to avoid those scenarios, this blog will talk about when you need to review your estate plan.  This isn’t exhaustive and the best approach is to review the plan every few years, but these major life events often indicate a need to change your plan.  The list as follows comes from Kiplinger’s article entitled “12 Different Times When You Should Update Your Will” and gives us a dozen times you should think about changing your estate plan, as well as a few more of my own:

  1. You’re expecting your first child. The birth or adoption of a first child is typically when many people draft their first estate plan. In Texas the designation of a guardian for the child happens outside a will, but it is still important to provide a trust and trustee for that child in your estate plan as well.
  2. You may divorce. Update your estate plan before you file for divorce, because once you file for divorce, your estate plan and assets may not be able to change until the divorce is finalized. Doing this before you file for divorce ensures that your spouse won’t get all of your money if you die before the divorce is final.
  3. You just divorced. After your divorce, your ex no longer has any rights to your estate (unless it’s part of the terms of the divorce). However, even if you don’t change your estate plan, most states have laws that invalidate any distributive provisions to your ex-spouse in that old will. Nonetheless, update your estate plan as soon as you can, so your new beneficiaries are clearly identified and that any obligations created in the divorce are fulfilled.
  4. Your child gets married. Your current estate plan may speak to issues that applied when your child was a minor, so it may not address your child’s possible divorce. You may be able to ease the lack of a prenuptial agreement by creating a trust for your child in your estate plan to keep those assets out of the marriage.
  5. A beneficiary has issues. Estate plans frequently leave money directly to a beneficiary. However, if that person has an addiction or credit issues, update your estate plan to include a trust that allows a trustee to only distribute funds under specific circumstances.  It is often a good idea to create such a trust anyway in case issues arise in the future.
  6. Your executor or a beneficiary die or are incapacitated. If your estate plan named individuals to manage your estate or receive any remaining funds, but they’re no longer alive or suffering bad health, you should update your entire estate plan (especially powers of attorney).
  7. Your child turns 18. Your current estate plan may designate your spouse or a parent as your executor, trustee or other fiduciary, but years later, these people may be gone or not suitable. Consider naming a younger family member to handle your estate affairs.
  8. A new tax or probate law is enacted. Congress may pass a bill that wrecks your estate plan. Review your plan with an experienced estate planning attorney every few years to see if there have been any new laws relevant to your estate planning.  It is also a good idea to keep reading blogs like this one as we try to address significant changes that might affect you.
  9. You receive a financial windfall or loss. If you finally get a big lottery win or inherit money from a distant relative, update your estate plan so you can address the right tax planning. You also may want to change when and the amount of money you leave to certain individuals or charities.  Similarly, a significant financial loss may mean you can jettison unnecessary tax planning and can simplify your plan.  I find many people change their minds on beneficiaries if they think they will leave less money as well.
  10. You can’t find your original estate plan. This happens more than people realize.  If you cannot find your original Will or other estate planning documents, you should consider executing a new one.  First, if you can’t find it that typically indicates it’s so old it needs updating anyway, but in the case of wills you should probate the original.  It is sometimes possible to probate a copy, but that isn’t a given and you should avoid that scenario.
  11. You purchase property in another country or move overseas. Some countries have treaties with the U.S. that permit reciprocity of wills, but how well that works is another matter.  Transferring property in one country may be delayed, if the will must be probated in the other country first. Ask your estate planning attorney about how to address property in multiple counties.
  12. You relocate to a new state.  Estate plans don’t always need to change when you relocate, but there are nuances to each state’s estate and tax laws, so you should consult with a local attorney after you move.  For example, Texas is a community property state that changes how property is owned going forward for married couples and has no estate tax.  A new resident coming from a common law property state with a state estate tax like New York might benefit from a new plan.
  13. Your feelings change for someone in your estate plan. If there’s animosity between people named in your estate plan, you may want to disinherit someone or change your estate plan. You might ask your estate planning attorney about a No Contest Clause that will disinherit the aggressive family member, if he or she attempts to question your intentions in the estate plan.
  14. You get married (or remarried).  One milestone I like to point out that a surprising number of people don’t consider, is updating your estate plan after you get married or in the event you remarry.  Many people assume that their spouse becomes an automatic beneficiary of their estate plan, which isn’t true, although all states give some rights to the new spouse.  It is far better, especially in a second marriage where step children are involved, to update your estate plan to exactly what you want for you and your loved ones.
  15. Your own bad health.  One milestone I’m particularly sensitive to is your own bad health, especially cognitive health such as dementia or Alzheimer’s.  Many clients prepare plans when they are young that aren’t considering long term care, Medicaid or other planning, so that should be complete before incapacity prevents it.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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Estate Planning after Divorce

Divorce changes your estate plan, so make sure to update it and your beneficiary designations after the divorce.

Estate planning after divorce takes careful consideration.  Without a spouse as the center of an estate plan, the executors, trustees, guardians or agents under a power of attorney and health care proxies will have to be chosen from a more diverse pool of those that are connected to you.

Wealth Advisor’s recent article entitled “How to Revise Your Estate Plan After Divorce” explains that beneficiary forms tied to an IRA, 401(k), 403(b) and life insurance will need to be updated to show the dissolution of the marriage.

There are usually estate planning terms that are included in agreements created during the separation and divorce. These may call for the removal of both spouses from each other’s estate planning documents, assets, bank and retirement accounts. For example, in Texas, bequests to an ex-spouse in a will prepared during the marriage are voided after the divorce. Even though the old will is still valid, a new will has the benefit of realigning the estate assets with the intended recipients and avoiding difficulties in probating the will.

However, any trust created while married is treated differently. Revocable trusts can be revoked, and the assets held by those trusts can be part of the divorce. Irrevocable trusts involving marital property are less likely to be dissolved, and after the death of the grantor, distributions may be made to an ex-spouse as directed by the trust.

A big task in the post-divorce estate planning process is changing beneficiaries. Ask for change of beneficiary forms for all retirement accounts. Without a stipulation in the divorce decree ending their interest, an ex-spouse still listed as beneficiary of an IRA or life insurance policy may still receive the proceeds at your death.  Sometimes beneficiary designations or retitling of assets occur during the divorce process, but often they occur after resolving the divorce and aren’t complete by the time an estate planning attorney needs to be involved.

Divorce makes children assume responsibility at an earlier age. Adult children in their 20s or early 30s typically assume the place of the ex-spouse as fiduciaries and health care proxies, as well as agents under powers of attorney, executors and trustees.  Many clients often try to coordinate their estate plans with their ex-spouses to ensure their mutual children are provided for.

If the divorcing parents have minor children, they must choose a guardian to care for the children, in the event that both parents pass away.  This was always true, but the need for it is heightened if parents aren’t on the same page.

Ask an experienced estate planning attorney to help you with the issues that are involved in estate planning after a divorce.

Reference: Wealth Advisor (July 7, 2020) “How to Revise Your Estate Plan After Divorce”

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Common Mistakes Made on Beneficiary Designations

Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations.
Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations which override your will.

Many accounts and other assets are governed by beneficiary designations. Examples include life insurance, 401(k)s, IRAs, and annuities. These assets rely on contractual provisions with the financial institution to designate who receives the benefits upon the death of the owner.

Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” describes several mistakes that people make with beneficiary designations and some ideas on how to avoid problems for you and your family members.

Believing that Your Will is More Powerful Than It Really Is. Many people mistakenly think that their will takes precedence over a beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will because they pass outside of probate. That is why you need to review your beneficiary designations whenever you review your estate plan.

Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which could be a former spouse.

Not Having a Contingency Plan. Another thing people don’t think about is that a beneficiary may predecease them. It is important to name a contingent or secondary beneficiary in the event the first beneficiary is not survivig.

Not Paying Attention to a Per Stirpes Election. If a person names several beneficiaries (such as children) as primary beneficiaries to share equally in the account or life insurance policy at the owner’s death, what happens if one of the beneficiaries is not surviving? Some beneficiary designation forms state that the deceased beneficiary’s share automatically goes to the other surviving beneficiaries. Other beneficiary designation forms give the owner the option to state that the deceased beneficiary’s share should pass to the deceased beneficiary’s children. This is known as a per stirpes election. Many times people are unaware as to which option they have chosen on the beneficiary designation form.

Naming a Minor or Incapacitated Person as a Beneficiary. If a minor or incapacitated person is named as beneficiary, unless the beneficiary designation form allows for the appointment of a custodian or trustee to accept the benefits on behalf of the minor or incapacitated person, a court-appointed guardian may be necessary for the minor or incapaciated person to receive the benefits. Also keep in mind that if an incapaciated person you’ve named as beneficiary is receiving government benefits, distributions from a retirement account, annuity, or life insurance policy, may jeopardize his or her eligiblity to receive the government benefits.

It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.

Remember that you should review your estate plan and beneficiary designations every few years to make sure that they are coordinated and that they say what your really want.

You may also be interested in https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/.

Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”

 

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