Has Your Estate Eclipsed Your Estate Plan?
Estate planning attorneys work hard to create estate plans that fit the client’s needs to ensure that everything works together for the client and their loved ones. Estate plans remain effective as long as they accurately reflect a client’s circumstances and current state and federal tax law. However, circumstances often change. So, too, should your estate plan.
Does your estate plan need to evolve?
Estate plans are not “once and done”. Plans can go stale simply by changing the law or your financial or family’s circumstances. An eclipsed estate plan not only jeopardizes the efficacy of your wishes and vision for the future, but may also negatively impact your loved ones and yourself. There can be unintended income or estate tax consequences, the disqualification of a special needs beneficiary from benefits, unanticipated fees and costs associated with settling an estate, necessitating court intervention when loved ones need to remediate a stale plan’s effects, and even an actual disinheriting of desired beneficiaries or creating unintended beneficiaries.
There are two basic estate planning structures using either a Will or a Revocable Living Trust (RLT). A Will-plan is actually implemented following your death with any period of mental disability prior to death relying upon agent-based documents like powers of attorney and healthcare directives. An RLT-plan is implemented at the time of signing the trust document and is operational even if you suffer a period of mental disability prior to death. The RLT-plan relies upon ownership of finances and assets. “Ownership” in the law is preferred over “agency” as a general principle, however, Maryland continues to strengthen its agency laws as the years go by.
Depending on when you originally created your estate plan, you may have chosen to create a last will and testament (otherwise known as a will) because you were young, single, and did not have much money and property. You understand the importance of having your wishes set out in a legally enforceable way, but you did not need any extensive planning at that time. Fast forward ten or more years, and your life may be vastly different. If you have accumulated more money and property, had children, or have gotten married or divorced, you may now need to consider some additional planning to ensure that your loved ones are protected. This may mean you are ready to have a revocable living trust as your foundational estate planning document instead of a will. With more money or minor children to protect, a trust will allow for more privacy and efficiency in handling your affairs during your life and at death.
Changes in the Law
When I began practice in the early 1990s, changes in this area of law were slow, if not glacial. Now, trust and estate laws are constantly evolving, and new legislation could impact your estate plan. For instance, in 2013 the Supreme Court informed us that an Inherited IRA (IRAs left to someone some way other than a spousal rollover) were not protected from the claims of the new beneficiary’s creditors. Another sea change in the law occurred December 2019 when Congress passed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act. The SECURE act rewrote IRA planning which had been in place for 25+ years. The new scheme works very hard at pushing inherited IRAs out of tax protection within 10 years. Also, there are more changes to come in the near future as Congress considers SECURE Act 2.0.
Another example is the federal estate tax exemption, which is scheduled to continue increasing until the end of 2025, when it will sunset and revert to a much smaller exemption level. Plans which were put in place assuming one federal estate tax exemption will likely suffer a profoundly negative interpretation if they are not revised.
Changes in Your Wealth
I hope your net worth increases to a point where it warrants tax planning (current federal estate tax exclusion is $12.92 million). The vast majority of people do not need tax planning at the beginning of their careers. There are many trust varieties which can leverage the federal estate tax exclusion available to you. An irrevocable life insurance trust may be beneficial to remove the value of an appreciated life insurance policy from your overall net worth to save on estate taxes payable on death as well as provide liquidity necessary to cover tax liabilities and not force asset the prediction. It is important to remember that in order for this strategy to work, it is prudent to work with an experienced estate planning attorney to ensure that the trust and transfer are executed properly and adhere to applicable laws. Creating a standalone retirement trust as the beneficiary or backup beneficiary for retirement account can make management of the retirement account easier at your death since it will be the only account that the trustee of that trust will have to manage.
You may also have acquired new assets—particularly digital assets. As of 2022, 16 percent of Americans have purchased digital assets.1 Digital assets may take many forms, such as music, photographs, documents, or contact information kept in cloud storage; log-ins to social media platforms; cryptocurrencies; and credit card or airline reward points, to name a few. Digital assets are typically more vulnerable to identity theft and hacking once their original owner has passed away.
Changes in Your Relationships
The agents helping you to implement your estate plan (trustees, personal representatives, attorney-in-fact, etc.) should be scrutinized from time to time. These trusted decision makers are legally bound to act in your best interests. Sometimes, those whom you originally chose may no longer be appropriate for the role. Maybe there was a falling out, or your chosen decision maker may have moved away or had other personal changes that make it difficult or impossible for them to fill the role now. Even a corporate fiduciary may decline to act if it requires that a minimum value of accounts and property be under their management before it will accept an appointment.
There are differing perspectives on how much scrutiny is “enough”. Personally, I am a fan of choosing trusted individuals and then giving them broad authority to abide by your wishes as communicated by you and your estate plan. A perfectly reasonable alternative can also be to make the effort to clearly define “guard rails” for your agents. This second alternative will likely require more effort in creating an estate plan, but it may also have a better opportunity for achieving your desired result. Your personal knowledge in this respect is critical to the success of your estate plan.
Changes in Beneficiary’s Needs
Lastly, how you have chosen to leave money and property to your loved ones may need to be updated. The broad brush strokes of your first estate plan when you’re beneficiaries were minors will likely improve in resolution with the passage of time and greater understanding of your beneficiary’s strengths and weaknesses. We often use a Beneficiary Controlled Trust (BCT) so that your beneficiaries can first learn how to manage a trust and then become their own trustee while enjoying the relative benefits of an inheritance protected in the BCT. However, not all beneficiaries are a good fit for a BCT. They may lack the understanding or self-restraint, or both, necessary to a BCT. Regardless, you will likely have a better idea as to your child’s unique personality, interests, struggles, and needs as time goes by. Updating this section of your estate plan can help ensure that you are creating a plan for your child’s inheritance that will truly meet their needs.
Let Us Help You Make the Necessary Changes
You should request an estate plan review if it has been more than two or three years since an attorney has looked at your documents. If there have been any changes (personal, financial, relational) which makes it prudent to review your plan, no matter how big or small, please schedule an appointment so we can confirm that your plan continues to meet the specific needs of you and your family.
1 White House, Fact Sheet: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets (Sep. 16, 2022), https://www.whitehouse.gov/briefingroom/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensiveframework-for-responsible-development-of-digital-assets/.