Having an outdated estate plan can be as bad or worse than having no plan at all. It is impossible to give a set number of years in between updating estate planning because everyone’s situation is different. Some plans can last fifteen years while other plans never make it through a couple of years. Below are some examples of how estate plans become outdated and when you should devote time and attention to your estate planning.
Check all beneficiary designations.
This one seems obvious, but it is surprising how many times the last designation on file is out of date or produces less than optimal income tax results. First, every few years check to make sure the person named as the primary beneficiary is still living and is not an ex-spouse unless required by a court order. Also make sure that there is a contingent beneficiary named in case the primary beneficiary is no longer living. Second, for retirement assets such as 401(k) plans and IRAs, there are income tax benefits for naming individuals. A trust should only be the beneficiary if there is clear, recent legal advice that the trust as beneficiary is the best solution in the particular situation.
Check the ownership of assets.
If an estate plan includes a revocable living trust, then assets that do not have a beneficiary designation are generally titled in the name of the trustee of the particular trust. For example, rather that just “John Smith,” the title would read “John Smith as trustee of the John Smith Trust under agreement dated March 3, 2009." Over time, a new account may be opened or a certificate of deposit purchased that is titled in the individual’s name. A probate may then be required when that person dies, depending on the value of such assets. The whole idea of paying for the additional cost of a revocable living trust is to avoid the cost of and time required for probate.
Have you said “I do” since you signed your will?
My clients are regularly surprised that their recent marriage has revoked their will and they now revert to Oregon’s plan on passing assets at death. The Oregon plan is that assets in your own name pass one-half to your new spouse and one-half to your children. If this is not what you want, you need to revisit your estate plan. Better yet, you might want to discuss a Prenuptial Agreement before the marriage. A prenuptial does not have to be of the Hollywood variety in which the spouse gets nothing upon divorce, but it can reflect your wishes about what should happen to your assets upon your death. Without a Prenuptial Agreement, your choices may be limited by the elective share statute, an Oregon law which allows a spouse to take a share of your estate no matter what you put in your documents. A new elective share statute will be effective January 1, 2011, so any prior advice on this topic is most likely outdated.
Has there been a change in family circumstances or assets?
Wills or trusts that specify that certain property passes to one child and other property passes to another can quickly become out of date if the assets change or the children’s desire or use of the assets changes. If specifically devised property is not owned by the decedent at his death, then the child designated to receive it usually receives nothing pursuant to that provision. This could create an uneven distribution if another asset specifically given to a different child is still owned by the decedent. Also, if property is given to some children early, but not to others, a provision dividing everything equally may no longer be intended. Thinking that the children will be fair with each other as the solution can cause tax problems for them. Even if a child is willing to share, he or she may have to make taxable gifts to redistribute the assets. With IRA and 401(k) assets, the named person has to pay the income tax, which really complicates matters.
Durable General Power of Attorney, Advance Directive, and HIPAA authorization forms.
The Durable General Power of Attorney gives an agent authority to handle financial affairs. The Advance Directive allows a health care representative to make health care decisions (Part B) and to specify a person’s desires on life support and tube feeding (Part C). Either part may be used without signing the other part. The HIPAA authorization allows designated parties to obtain your health care information. If you have these forms, are the persons you named still appropriate? Can you find the originals?
The reason I most often hear for not planning for incapacity is that the person has no trusted family member or friend to name in the documents. Unfortunately, without these documents, anyone can step forward to petition the court to take charge of an incapacitated person’s affairs. Even if the person going to court is the least trustworthy person, the individual may still get appointed because there is no one to object. Other, more trusted family and friends may let the petitioning individual serve rather than spend time and money fighting in court.
To avoid this scenario, professional trust departments are available to provide financial management services even if you do not have a trust. They have experienced investors and are knowledgeable about care options in the community. A bank’s trust officers will visit with you to explain their services and fees without any obligation. This is an excellent alternative to seeing a nest egg quickly lost by a family member or friend (well-meaning or not) at the time a person needs it most. Therefore, whether there are trusted family members or not, there is no excuse for not planning.
Saving Estate and Inheritance Taxes.
Many estate plans were drafted at a time when only $600,000 could pass tax free at death (provided that amount was not given during life). The federal exemption amount has been increasing, and it is currently $3,500,000. Unless Congress acts, this exemption will decrease in 2011 to $1,000,000. The state of Oregon has its own inheritance tax structure with an exemption of $1,000,000. If a resident of Oregon owns real property in another state, that state’s laws will apply and many states have adopted an inheritance tax like Oregon.
The estate planning called marital deduction planning for taxable estates creates an irrevocable trust at the first death. This trust is often called the credit shelter trust, bypass trust, or Trust "B" of an AB Trust. If the credit shelter trust saves estate or inheritance tax, the costs associated with it, such as an additional tax return and legal advice to fund it properly, are worth it. If the size of a married couple’s estate no longer warrants such planning, fees and complexity for the survivor can be eliminated by revising the will or trust.
For those without any estate planning documents, Oregon law provides the plan. Therefore, there is no escaping having an outdated plan, even if you thought you never had one in the first place.