Introduction:
Creating a good estate plan is an involved process requiring long hours and concentrates on the unpleasant topics of death and decay. It can also be an expensive process which requires good legal advice and contributions from a good certified public accountant. It normally takes months to complete, involves a living trust and durable powers of attorney in addition to a Will, and is finished with a mental sigh by most people who are glad it is over.
But it is not over. No matter how well thought out and how difficult it was to create, an appropriate estate plan must be reviewed and often amended over the years. An outdated estate plan can be worse than no estate plan at all. Our office has seen family members coming in after the death of a mother or father who are shocked to discover that an estate plan created a decade before failed to consider changes in the family, such as divorce, or changes in the tax law, such as the level of exemption. One father, hoping to please his children, put property that was in the trust into joint tenancy, without legal advice, and radically increased the taxes having to be paid by his children.
This article shall discuss the events that should give notice to a person to update his or her estate plan and discusses how such changes can be made in a relatively efficient manner.
The Basic Criteria:
Life is change and family life changes as much as any other aspect of life. A wise person will consider his or her estate plan when the following events occur:
Death and Divorce in the Family: While a good estate plan will have backup beneficiaries or heirs in the event a named heir predeceases the testator, those backup heirs may have to be carefully reconsidered once a death occurs. Sometimes the backup heirs no longer need the inheritance or are minors who must have some adult to handle the inheritance. Sometimes the backup heirs have demonstrated that they no longer should receive the sums. Sometimes other heirs may seem more appropriate than the backup heirs. Such events as a disabling illness or injury may make one heir more in need than another or a marriage to a wealthy spouse may eliminate any likely need for that person inheriting anything.
Divorce is even more disruptive of previous plans. Such issues as the livelihood of the children of divorced parents or the need to protect those children from a divorced parent who may seek to obtain the monies, and the need to eliminate a divorced son or daughter in law from the trust or will, must be considered. It is common to set up new trusts just for the children of a divorced couple so that the divorced parent will not have unfettered control over the inheritance. As one client put it in an e mail, “The divorce of my son requires me to divorce myself from my prior plans in the trust...”
Divorce or death can radically increase the death taxes faced by the deceased family since the marital deduction is eliminated and the taxable estate is, essentially, doubled. This can cost the family millions.
Changes in Needs of the Testator: Life changes for the person making the Will or Trust (“Testator”) as well. Such changes in needs and wants include health care costs, the need to go into assisted living facility with the attendant costs, the death, disability or divorce of a spouse or child, or a desire to spend the money to enjoy life right now, even if the estate is depleted are all such issues must be addressed.
One client was in a wheelchair after an accident and his spouse had predeceased him. His daughter came to care for him, and this disrupted both her working life and her family life. He concluded it was only right to increase her share of his trust to make up for the changes his challenges were imposing upon her.
Another client found to her dismay that none of her children were willing to help her after she broke her hip, but a niece was there to protect her and care for her. Again, the distributions from the trust were altered.
Good events can lead to the need for change as well. One elderly man was delighted that his two children were well off, better than he, and had started college funds for their children, owned their own home and needed nothing from him. He still left them some of his estate, “Enough to waste some money on things they otherwise would not buy,” he wrote to me. But the bulk of his estate was divided among several charities he supported, and the entire family was named in the endowment so his grandchildren would realize the value of helping others.
Changes in the Tax Regime: Estate tax can be significant as can the stepped-up basis on appreciated property that is inherited. The exemption (what is transferred tax free to the next generation) has radically altered over the years, sometimes going up and sometimes going down. The typical estate plan of a middle-class couple faced significant estate taxes just twenty years ago which required hard thinking about how to transfer wealth using the marital deduction and the use of a Qualified Marital Deduction Plan (“QTIP”).
While at times still useful, the typical estate plan no longer requires the QTIP with the 2025 exemption at $13.99 million and the annual gift tax exemption at $19,000. These sums change annually, and Congress has a habit of altering them substantially every decade or so. One wise attorney said that most estate plans are 60% tax planning. If so, that aspect often is no longer needed, but that can alter from year to year.
Moving Locale: Apart from Federal Estate Tax and Gift Tax, estate law is state law and the law between regimes alters significantly. This is true in terms of inheritance tax (which is state tax on inheritance) and the law of trusts, wills, and fiduciary duty. If you move out of state, it is time to consult local counsel who is likely to advise you to create a new estate plan entirely. This is even more true if one moves abroad since the law on estates can differ significantly.
As one example, trusts do not normally exist outside of the United States while they form the average estate plan in California and New York. Further, estate tax can be extremely high in certain countries.
Third Party Claims: Not only the testator but members of the family may find themselves exposed to third party creditors due to errors in investments, taxes, or large judgments against them. “Spendthrift” trusts can be useful to protect assets that are to be inherited by such an heir, and irrevocable trusts can help a testator make some of his or her own assets likely exempt from execution. Such transfers into a trust are often dependent on timing. Transfer after a judgment may be considered a transfer to defraud creditors and void, so movement on this issue may be best before any final judgment is obtained.
Changes in the World: World events can alter your own plans and the plans for your family. A son who is in Lebanon today needs a very different plan than one who lived there a decade ago and anyone with relatives in the Ukraine must think long and hard as to how, and if, to leave that heir significant assets that might be seized by a hostile government. Those subject to persecution, minorities in certain locale, and those subject to governments prone to seek portions of an inheritance, need wise planning. One client put it well when his daughter married an Iranian who wished to return home: “It’s up to me to be the wise head, here. Up to me to make it so she is not forced to stay even if she wants to leave.”
And countries once safe can become dangerous and hostile. Iran is a good example, but Russia, China, Syria, Iraq, Hungary, the Baltic States, and many others alter in their outlooks and rapacity. The testator may have to alter personal estate plans due to decisions taken by a dictator half a world away.
The Process:
Sadly, some people simply think they can add in additional language or cross out a paragraph or name, initial same, and they have achieved their goal. What they have actually achieved is usually a will contest down the road since precise wording and methodology is needed to alter an estate plan.
If the reader learns one lesson from this article, it should be this: get professional advice as to how to alter your estate plan. It will take time and cost money: but attorneys make far, far more money in court contests about estate plans than in drafting them. Just as a car maintained is cheaper than a car repaired, so an estate plan professionally altered is cheaper than a do it yourself change.
The wise testator will also bring in his or her own tax advisor to understand the full ramifications of each change. For example, moving property to joint tenancy rather than letting it be inherited after death can cost the estate millions of dollars. Get tax advice before any move.
There are two basic methods to alter one’s estate plan. One can create a brand new will and trust, revoking the prior wills and trusts in the new document. Alternatively, one can amend the trust or amend the will (an amendment to a will is called a “codicil,”) and those are equally effective.
Relatively minor changes can easily be accomplished by an amendment to the trust, costing less than a full restatement of the trust, and some people have had a dozen amendments to the wills and trusts over the years. Major changes require a new estate plan, as does a plan based on moving to another state or country. Further, it becomes extremely complex once a trust has had a dozen amendments, each one having to be referred to when deciding on the next draft.
Just as the first time around, the formalities must be adhered to. A notary is required for any amendment to the trust, and two witnesses (in California) for the codicil. If one is moving to a new legal jurisdiction, local counsel and tax advice is vital.
Any good attorney will want to see your existing estate plan and discuss with you the pros and cons of altering it.
Danger:
As one ages, one may feel that one is unappreciated and as one’s physical abilities decline, the feeling can arise that one’s estate is the major power one has left to influence family and friends. At times, a care giver or friend will make comments that can lead to suspicion and resentment against family and friends. Words that once would have had little effect can rankle and lead to brooding and feelings of wanting revenge.
All too often clients will want to alter their estate plans not to adjust to new realities but to punish and influence the family to give more love and respect. That seldom works, and the most mercenary relatives can use those feelings to seek more of the estate.
If you find yourself changing your estate plan often and “rewarding” certain relatives and punishing others, take time to carefully consider whether such use of your wealth is what you want to do and whether your moods and fears are overcoming common sense. Your estate is not a weapon or a trophy, and you can seldom trust those who seek to manipulate your giving.
One elderly client told the writer that she had a new “golden rule:” never change a will in anger and never do it due to received gossip about others. She was wise.
Conclusion:
No one likes spending time and money planning for death and that is true for the original estate plan and any alterations to it. But it is a duty imposed on all of us if we want to maximize the good, we can do after death and the same criteria that led you to create the first estate plan should compel you to update it when and if needed.
This necessarily means you must pull it out and read it, stay attuned to changes in the law and taxes and remember that changes among those you love may require you to revisit the plan already existing. Like medical check ups that become more necessary as one ages, legal checkups are equally vital.