You have signed all of your estate planning documents and, if your plan includes trusts, completed their funding. You sit back, relax, and enjoy the peace of mind that comes with completing that task. But don’t bask in that feeling for too long—estate planning is an ongoing process, not a one-time event.
In this edition of The Life & Legacy Advisor, we will explain why your estate plan will need to evolve to keep pace with your life, family, and finances as they change, events that should prompt you to consider making changes, and planning opportunities that can arise along the way. As we near the end of 2012, an appropriate New Year’s resolution, one that will benefit your family and others you love more than many other resolutions that you can make, might be to review your estate plan on a regular basis, as we discuss below.
Why Your Estate Plan Will Need to Evolve
Your estate plan is designed in light of what is known at the time; a snapshot, if you will, of you, your family, your financial situation and the tax laws as they existed and were anticipated to change in the future at the time it was prepared. All of those things do change during your lifetime, and often in ways that were not anticipated. When the unanticipated happens, your estate plan will need to change, to adjust.
It is unreasonable to expect that a basic will-based plan created when you were a newlywed living in an apartment would still be all you need when you have children, a home, and a business. Life’s curve balls – such as a divorce, a loved one who has special needs, or changes in the tax laws can also make plan adjustments advisable.
Events that Trigger Changes to Your Estate Plan
Maintaining an estate plan has been compared to maintaining an automobile. Both need periodic attention if you expect them to perform the way you want when you need them. While a car will have time and mileage checkpoints for servicing, your estate plan will have event checkpoints and should be checked periodically, too.
Generally, any significant change in your personal, family, financial or health situation, a change in the tax laws or a change in state or federal trust or estate legislation should prompt an estate plan review. The following list can be used as a guide, but is by no means all-inclusive:
Personal and family changes:
- The marriage, separation or divorce of a family member, especially a beneficiary;
- A change in your or your spouse’s health;
- The death of a spouse;
- The birth or adoption of a child;
- A family member develops special needs or requires extra care;
- A minor becomes an adult;
- A beneficiary’s attitude toward you changes;
- A beneficiary develops a substance abuse problem;
- A beneficiary displays poor financial management skills;
- A parent’s or other beneficiary’s health declines;
- A family member dies.
Family finances changes:
- The value of your assets changes significantly;
- You anticipate the sale or transfer of a family business;
- You buy or refinance real estate in Illinois;
- You purchase real estate in another state;
- The value of a family member’s assets changes dramatically;
- A beneficiary gets into financial difficulties;
- A parent or other relative becomes financially dependent upon you.
- Federal or state (income, gift or estate) tax laws change;
- You contemplate a move to a different state;
- Successor Trustee, Executor, Guardian or Agent under a Power of Attorney moves, becomes ill, or changes their mind about serving;
- You change your mind about the identity of your Trustee, Executor, Guardian or Agent acting under your Power of Attorney for Property or Power of Attorney for HealthCare.
Changes Your Estate Plan Might Need
What changes your estate plan needs will vary according to the circumstances in which you find yourself at the time. As before, the following can be used as a guide to stir your thoughts, but it is by no means a complete list:
- When you begin to have a family, you will need to name a Guardian and Trustee for your minor children and plan for their future. If you don’t take proactive steps to decide who should act in those capacities, the court may name that person and will pay out each child’s inheritance to them at age 18.
- You may want to change a beneficiary or the share a beneficiary is to receive.
- Beneficiary designations, especially for IRAs and other tax-deferred plans, may need to be updated. As your tax-deferred plan grows, you may want to consider a “stand-alone retirement trust” to ensure maximum tax-deferred growth for these assets.
- You and other family members may want to set up a special trust (Supplemental Needs Trust) to provide for a family member who was born disabled or has become disabled, such as a child, parent or irresponsible adult, without jeopardizing their eligibility for valuable government benefits.
- You may want to change a Trustee, successor Trustee, Guardian or Executor, or replace one who is no longer able or willing to serve.
- As the size of your estate changes, or as you acquire additional assets, such as a home, you may want to change from a will-based plan to a living trust-based plan.
- As your wealth increases, you may want to establish a gifting program so you can see the results of your gifts while you are living and, at the same time, take advantage of the tax benefits such gifts can provide.
- With more assets to pass on, you may want to change the way your beneficiaries will inherit from you. In fact, it is often advisable to keep inheritances in a trust to protect the assets from creditors, predators (including divorcing or ex-spouses), irresponsible spending and future estate taxes.
- With more disposable income and accumulated wealth, you may want to increase the amount of your life insurance as a hedge against estate taxes, create a dynasty trust for future generations or fund a private foundation.
- You may want to use your estate plan as a way to further your legacy, passing on your values (religion, charity, education, hard work, etc.) in addition to your financial assets.
- Your health care documents should be reviewed regularly, as your health situation changes and your attitudes toward health care, including long-term care, evolve. You may also want to change who will make health care decisions for you if you are unable to make them.
- With more accumulated wealth, you may want to add a charitable beneficiary, such as your church or synagogue, hospital, university, or other favorite cause.
- You may want to plan for the smooth transfer of a family business before your retirement, disability or death.
- You may have accumulated items of personal property, collections, works of art, wines or other valuables that you want certain people to have.
Tax Law Changes Can Affect Your Estate Plan
Proper estate planning should always consider estate, gift and income tax rules. In recent years, we have seen the federal estate, gift and generation skipping transfer (GST) tax exemptions rise from a stable $600,000 to $5 million ($5.12 million in 2012 when adjusted for inflation). As those changes took place, Illinois enacted its own estate tax laws, in addition to, and separate (decoupled) from, the federal tax. Income tax rules can affect taxation of assets in the hands of your beneficiaries after your death, especially distributions from IRAs, 401(k) plans and other retirement accounts. In fact, the rules governing distributions from retirement plans have undergone substantial changes in the last dozen or so years. The IRS issued final regulations regarding distributions from retirement plans in the early 2000s, so if your beneficiary designation was done before those regulations went into effect, your beneficiaries may suffer substantial income tax hardships resulting from distributions from the retirement plans they inherit from you.
If your estate plan does not keep up with these and other changes in the tax laws, it may not work the way you intended when it was established. That could cause your estate or your beneficiaries to pay too much in taxes and leave less to your beneficiaries than you had planned or have your estate distributed in ways you did not anticipate. In addition, it may create excess administration expenses.
Other Laws Affecting Wills and Trusts Undergo Constant Changes
In just the last several years, we have seen a myriad of Illinois state law changes affecting estates. Effective July 1, 2011, the Illinois Power of Attorney Act was amended. That amendment changed the statutory form of Power of Attorney for both the Power of Attorney for Property and the Power of Attorney for Health Care. Regardless of that change in the law, we are seeing financial institutions refuse to honor Powers of Attorney for Property on a regular basis because they are “too old.” We recommend that Power of Attorney be “renewed” at least every five years.
Illinois passed several other laws within the past year of which you may well want to take advantage. Earlier in 2012, the Illinois legislature passed a Decanting Statute and a Directed Trust Statute, both of which add a great deal of flexibility to the trusts that we are now able to draft. The Illinois legislature also changed the asset protection of life insurance policies, based upon the named beneficiary of the policy, which provides flexibility and security to the ownership of that asset class.
Planning Tip: Since Huck & Brisske, LLC concentrates its practice solely in the areas of Estate Planning, Disability Planning and Guardianships, Elder Law, VA Pension Planning and Estate Administration, we keep abreast of the changes that occur in our state and federal laws, and in court cases affecting those areas. Our attorneys have the background and expertise to apply the applicable legal principals to your specific situation.
What Can We Expect in 2013?
The simple answer is that nobody knows. The exemptions from estate, gift and GST taxes and tax rates are ultimately political issues. What will happen in 2013, therefore, will depend upon the outcome of current negotiations by politicians in Washington on ways to avoid the “fiscal cliff.” Income tax rates, likewise, are subject to the whims of politicians in Washington and in Springfield. There are a number of proposals circulating in Washington that could substantially change income taxation of capital gains, for instance. Finally, some strategies that have been used by estate planning professionals for decades are being threatened by various revenue proposals, so there are no longer any “sacred cows.” Examples of these “threatened” estate planning strategies include short-term GRATs (Grantor Retained Annuity Trusts) and valuation discount planning.
When Should You Review Your Estate Plan
It is a good idea to review your estate plan every year. To make that happen, set aside a specific time each year (such as a birthday, anniversary, family gathering) as your reminder to review it. Having a plan in place and then reviewing it regularly will maximize the probability that it will work the way that it was intended on that unknowable future date when it will be called upon to perform its function.
When you do your annual plan review, it is important to take time to also update and organize your financial records. That way, when the unexpected happens, your family members will not be doubly stressed by having to search for insurance policies, bank records, etc., like so many are forced to do, following a death or disability event. Instead, your family or Trustee will have the comfort of knowing that you planned for this event.
Planning Tip: We strongly believe that, in order to ensure that your plan will work the way that it was designed, it is important to review and update your estate plan on a regular basis. To that end, we encourage our clients to participate in a plan that we have designed for that purpose: our FAMILY LEGACY PLAN™. The FAMILY LEGACY PLAN™, with its attendant annual meetings, allows us to share with our clients the legal changes that affect their plan, and gives them an opportunity to allow us to catch up on changes in their families and finances. Our attorneys and staff also track assets, review life insurance, annuity and retirement plan beneficiary designations, and conduct a comprehensive review all estate planning documents. This keeps our clients organized and aware of their finances. Finally, we make participants in the plan aware of any and all legislative, tax and other changes affecting their plan. Members of our FAMILY LEGACY PLAN+™, are also entitled to have their Revocable Living Trusts and Pour-Over Wills restated at any time that federal or state legislation changes how their plan will be interpreted or implemented.
Planning Tip: Depending on your relationship with your adult children and your fiduciaries, it can be a good idea to let them know the general provisions of your estate plan. Without sharing the details of the size of your estate, it can be very helpful for them to understand the structure of your plan and why you have planned it this way. We offer you the opportunity to have a Family Legacy meeting, at which your adult children and fiduciaries have the opportunity to learn about your estate plan, the role they play in it, and their responsibilities if they are called upon to act.
What if Your Estate Plan Needs Changes?
You need an estate planning attorney’s advice to create an estate plan and you need the same kind of legal advice and assistance to change one. Trying to make a change yourself by writing on your original plan documents is a sure-fire recipe for disaster. Your changes may not be valid or the changes you make may actually void your plan documents altogether. Those changes may lead to confusion that will result in litigation, leaving it up to a judge and/or jury to figure out what you attempted to do. The changes may have tax consequences that you didn’t anticipate.
Planning Tip: The attorneys at Huck & Brisske, LLC will be able to provide the critical guidance you need to make the appropriate changes to your plan, thus giving you peace of mind that everything has been done correctly.
Which now puts you back where you were when we started this conversation: sitting back, relaxing and basking in that peace of mind that comes with knowing that you have exactly the planning you need and that it is current and up-to-date . . . at least until the next change comes along.
Estate planning is an ongoing process. You wouldn’t mark “done for life” next to “dental check-up” or “annual physical” on your task list because your health demands that you have regular physical check-ups. Likewise, you can’t mark “plan estate” with the “done for life” notation. You spend your entire life accumulating assets; don’t fail to plan for their distribution to the people that you love or the charitable organizations that you support. Your estate plan needs to be changed, adjusted and adapted as you move through the events of your life. Keeping your estate plan up to date will give both you and your family the assurance that it will work the way you want whenever it is needed. That is one of the most thoughtful and considerate things you can do for yourself and for those you love.