Is Your Estate Plan In Order?

Because estate planning has no regular deadlines to meet, many people put it off until it is too late. Or they create a set of estate planning documents and fail to revise them regularly. But regular review is important to make sure that your estate planning documents are in order and will still accomplish what you intended them to.

Every year there is a specific deadline by which you have to file your income tax returns by and pay the tax due. Failing to meet that deadline generally results in the Internal Revenue Service charging interest and penalties. Therefore, almost all taxpayers in this country meet that deadline. In addition, because income tax relates to specific calendar years for individuals, planning for the mitigation of that tax must be done on an annual basis, again with specific deadlines.

Set an Estate Planning Deadline
In the estate tax area, however, the only deadline for tax planning is death. Since most people believe they are immortal, they tend to procrastinate with their estate planning. It is often not until a person’s mortality becomes evident that he or she takes action. This sometimes leaves only a short period of time to accomplish a lot of estate planning.

There are a surprising number of people who have not even executed a simple will. Many people with significant wealth, however, understand that certain documents are required in order to have their assets pass the way they would like them to. For that reason, at some point in time, most people have either visited with an estate planning attorney or attempted to prepare will and trust documents themselves. Even if you have visited your attorney and had a full set of documents prepared, it is not sufficient to merely file those documents and let them sit year after year without reviewing them.
 
Review Regularly
One of the more obvious reasons you need to review your estate planning documents on a regular basis is that the tax law changes from time to time. Happily, the changes in the estate tax area have been fewer than those in the income tax area, but there have been changes nonetheless.

Generally speaking, documents executed after 1981 (except those which leave assets to grandchildren and great grandchildren) comply with most of the current estate tax laws. Those documents dealing with transfers to individuals two or more generations below the transferor, however, must be looked at again because of retroactive changes in the generation skipping tax law. Because this is such a costly tax, it is imperative to reexamine those documents, even if they have been revised within the last several years.

Another reason to take a regular look at your documents is that people’s situations change. After someone has died, it is fairly common to find he or she has named someone who has predeceased them, or fallen out of their favor, as a trustee, executor or beneficiary. The named individual’s personal situation may have changed so that he or she is no longer in a position to act in a fiduciary capacity for estates or trusts, or he or she may have moved away and should be deleted from your documents.

It is also important not to overlook beneficiary designations on your retirement plans, annuities, deferred compensation arrangements, insurance policies and the like. Failure to change these beneficiary designations as the situation changes can lead to unintended results and litigation after your death.

Changes by the State
Recently, at least one state has made changes to laws related to living wills, healthcare powers of attorney, and the treatment of joint bank accounts and other joint ownership of property. You may have documents you think give people the authority to make healthcare decisions or attend to financial dealings for you if you are incapacitated. Those may now be obsolete. Joint accounts that you set up previously to pass assets to particular individuals may no longer do so.

If you have moved out of state, you may have moved from a noncommunity property state to a community property state. In this case, your documents should be updated to take into account the difference in these laws from one state to another. All of these are possibilities that require you to take a close look at your documents to be sure nothing has been missed.

Also, if all you have now is a simple will leaving everything you own to your spouse, you probably should talk to your estate planning attorney to see what other options may be available for you. A typical set of estate planning documents for someone having net worth of at least $625,000 (for 1998) — including life insurance — with a spouse and children includes a will and a living trust containing marital deduction and unified credit provisions. You should also include documents such as durable powers of attorney, healthcare powers of attorney, and living will declarations to cover all the situations that may arise if you become incapacitated. As you get older, you may wish to place assets into your living trust to avoid probate, reduce attorneys fees, facilitate the transition of managing your assets to a family member in the event you become incapacitated, and for other valid nontax reasons.

Make the Plan Reflect Reality
If you are like most people in the prime of your business life, your net worth is going up. If your net worth is increasing, your existing documents may not do the trick when it comes to reducing estate taxes. In this case, you need to see a competent estate planner to help you put your affairs in order while producing the best estate tax result you can for your family. Remember that for estates of more than $600,000, the estate tax brackets begin at 37% and go up as high as 55% on the value of your assets. This makes the federal government a significant partner in your wealth accumulation, and you need to make sure that the government isn’t paid most of your wealth upon your death. Finally, don’t forget charitable giving if you are so inclined. Charitable giving presents a significant opportunity to reduce your overall estate taxes and do some good for your community. Often, people name charities in their documents and later decide a different charity should get those assets. No matter what you intend, if those documents do not reflect the change, the intended charity will not receive the money you wanted to contribute. Working with your estate planner and the charity you have in mind can facilitate this type of planning.

Five Reasons to Update Your Estate Plan
1. Family Changes — Marriage, divorce, children and grandchildren can all lead to estate plan modifications.

2. Change in Financial Circumstances — What may have been an appropriate estate plan when your income and net worth were much lower may no longer be appropriate today.

3. Geographic Move — Different states have different estate planning ramifications. Anytime you move from one state to another, your estate plan should be reviewed.

4. Change in Tax Law — Anytime there is a change in the estate tax law, changes in your estate plan may be required. What might have been a great structure under the old tax law may no longer be appropriate.

5. Special Circumstances — Sometimes a child has special needs due to physical or mental limitations. Sometimes a surviving spouse’s ability to earn a living changes due to a disability. Such situations create special needs that often require special planning.

Make the Effort Now
We recommend you look at your estate planning documents every few years when there are no significant estate tax changes, and every year when there is a significant estate tax or personal situation change. The amount at stake is tremendous and with a little bit of effort you can save yourself a lot of time, money and grief.