The purpose of estate planning is relatively straightforward: to make sure your assets pass to those individuals and/or charities that you want to receive them, in the appropriate manner (outright or in trust), and that the right fiduciaries (executors, trustees and guardians for minor children) are appointed to administer your estate and carry out your wishes after your death.
People and their lifestyles aren’t static, and the success of a plan depends on how well it aligns with individual circumstances and goals, as these may evolve and change over time. As a rule of thumb, it makes sense to review an estate plan: (1) at least every five years, (2) any time there are significant tax law changes, and (3) any time there is a life-changing event (e.g., birth, marriage, divorce or death of a family member or someone appointed as a fiduciary). In this column, I provide a quick look at developments that could affect your estate plan and note some basic estate-planning documents that are important to have in place.
Events and Issues That May Trigger a Review
Marriage. Just as a wedding may change your overall financial picture (see “Planning in Your 20s and 30s”), it will also likely alter how you deal with your assets upon your death. You should update your will, revocable trust and any beneficiary designation forms (e.g., for life insurance policies and retirement benefits) to effectuate your intent. In addition, you should review any accounts and assets that are owned jointly with rights of survivorship to see if that ownership structure is still appropriate. Your will and revocable trust will avoid state intestacy laws that would otherwise dictate the disposition of your assets upon your death and who is responsible for administering your estate. You and your spouse may wish to leave all, or just a portion, of your assets to each other. If this is your second marriage, you may opt for planning techniques that provide for your new spouse as well as children from a prior marriage.
Children. If marriage doesn’t trigger a thorough vetting of estate-planning documents, then starting a family should. Regardless of your overall planning approach, you will need a will to designate guardians for your minor children, and choose trustees to manage any assets that you leave to your children in trust. The birth of a child is also an appropriate time to determine if life insurance, and possibly a life insurance trust, is appropriate for your family.
Divorce. In most cases, you will want to make sure that your former spouse does not unintentionally remain a beneficiary or a designated trustee or executor in your documents. More broadly, the nature and financial terms of your divorce may affect your planning choices and how the disposition of your assets is structured. In some situations, your estate planning may be affected by whether there was a prenuptial agreement—which, in the case of second marriages, should be considered, especially if there are children from a prior marriage.
Financial capabilities. As your children grow older, you will know more about their potential to live independently and manage their finances effectively. If any have special needs, it may be important that they avoid receiving any direct transfers at your death to maintain eligibility for government services. Special needs trusts are a common vehicle for this purpose. If the issue is an inability to manage their financial affairs (whether they have special needs or not), then leaving assets in a trust for them may be appropriate. In more challenging situations, you may wish to become (or designate) a guardian or conservator for the adult child, which typically involves a court proceeding.
Division among children. The most common, and less stressful, approach to estate planning when you have children is to leave an equal share of your wealth to each. However, in some cases, varying financial success and other considerations may lead you to provide more for one child than another. While this approach can make sense, it also entails substantial risk of negatively impacting your children’s relationship with each other. It is vital to communicate your intentions to your children beforehand to limit misunderstandings or hard feelings among your children after your death.
Fiduciary changes. Although certain individuals may initially seem perfectly suited to be a guardian, trustee or executor, their or your circumstances may change, leading you to reassess the fiduciaries named in your documents. Geography, aptitude, health concerns or friendship may be considerations. Although updating your documents to make these changes may not seem critical, your fiduciaries play a key role in ensuring the efficient and proper administration of your estate. Having the right people, bank or trust company in place is very important.
Sale of business. The sale of a business or related assets is a seminal event that is worthy of a magazine article of its own. Proper planning includes the structure of the sale, the amount of consideration to be received, the timing of payments, and whether heirs are to receive some or all of the business, serve as management/employees or benefit from the liquidity event. There are many estate-planning techniques that should be considered and, if appropriate, implemented, prior to a sale that could provide substantial estate-, gift- and capital-gains-tax savings. Broad assessment of potential impacts—financial and emotional—are highly important.
Shifting charitable priorities. Over time, you may find that your philanthropic interests change or become more targeted. As part of an estate-planning review, you may wish to increase your allocation to charitable endeavors, or in some cases take a more structured approach to giving, whether through charitable trusts, donor-advised funds or the establishment of a private foundation at certain asset levels. Such structures not only can provide a means of planned giving, but can also involve family members in philanthropic efforts.
Change of circumstances. Circumstances often change, gradually or otherwise: For example, chronic illness may cause substantial medical costs and cut into your net worth; business or investment success may increase the extent of your assets; you may change your domicile (which is important because states can have different tax and other laws that may impact the structure and drafting of your estate-planning documents); or you may inherit money. These variables and others may require a fresh look at your estate-planning documents and require shifts in strategy.
Changes in Tax Laws
Beyond changes in your personal and financial life, changes in tax laws should trigger a review of your estate plan. The most prominent example today is the 2017 federal tax reform, which roughly doubled the lifetime exclusion from federal estate and gift taxes (to $11.4 million per individual or $22.8 million per married couple for 2019)1—a change that is set to unwind after 2025. Given that many estate and trust documents reference the old exclusion amount, documents should be examined and potentially revised to avoid unintended consequences.
More strategically, a key impact of the increase is that, for now, federal transfer taxes are not much of a worry for many families. In fact, rather than seek to move assets out of an estate, they may be more apt to keep assets in an estate to maximize the benefits of the step-up in tax basis at death.2 Still, state-level estate taxes remain quite onerous in some locales, making them an important planning issue. For more on the 2017 tax law, see our article, “Estate Planning Under the New Tax Law.“
Keep in mind that various presidential candidates have proposed estate-tax bills that, if enacted, would lead to a significant reduction in the lifetime exclusion and a restriction or elimination of several powerful estate-planning techniques. We will continue to watch these developments closely.
An Ongoing Effort
There is no single correct approach to estate planning. Some strategies may be right for tax savings but wrong for family dynamics. Some individuals may wish to use a traditional will to distribute assets while others may prefer to create a will that pours over into a revocable trust (see “Key Estate-Planning Documents” below). Charitable giving may be important in some cases, while maximizing family wealth may be center stage in others; sometimes individuals seek to accomplish both goals. Regardless, an estate plan that is coherent, practical and aligned with your needs is critical. Moreover, “set it and forget it” does not work. No matter how well drafted at the outset, estate-planning documents will usually need to be updated as your life changes and as the legal and tax environment for estate planning evolves.
Key Estate-Planning Documents
Power of Attorney: Authorizes another person (your “agent” or “attorney in fact”) to act in your place in financial transactions (e.g., paying bills and directing investments) during your lifetime. Typically, more than one agent can be appointed, and the power can be effective currently, or contingent on an event in the future (e.g., if you were to become incompetent).
Health-Care Proxy: Designates an agent to make health-care decisions for you in the event of your incapacity; in many states only one agent can act at a time, but you can name contingent agents to act if the primary agent is unavailable or declines to serve.
Living Will: Specifies your preferences for medical treatment in the event you are unable to communicate. For example, you may wish that artificial nutrition and hydration be withheld if there is no reasonable expectation that you will recover. Without a living will (or a health-care agent who knows your wishes), doctors may not be willing to withhold such treatment.
Will: Provides your instructions for the distribution of your assets at your death. It becomes effective through a court proceeding referred to as “probating” the will. It allows you to name guardians for minor children, as well as those responsible for administering your estate (executors or personal representatives) and trusts (trustees), all subject to court approval. Without a will, state law determines who receives your assets and who has priority to act as a fiduciary.
Revocable/Living Trust (optional): The trust can serve as a will substitute as well as a vehicle to manage your assets during your lifetime. You control, and can modify or revoke, the trust at any time. Although trust assets in revocable trusts are subject to estate tax, to the extent the revocable trust is funded during your lifetime, probate can generally be avoided and the funds in the trust can typically be accessed right after death to pay bills and other expenses (i.e., there is no need to wait for a court to approve your selection of fiduciaries).