estate planning, financial advisor

Knowing When to Update Your Estate Plan

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From the family tea set to the most complex estate, transferring wealth – of whatever size and definition – couldn’t be more common. What’s less common but just as important is outlining a specific plan and updating it as circumstances change.

We shouldn’t let our loved ones blow the dust off our original estate plan when needed – hopefully, years down the road. A “set it and forget it” perspective can create several problems for you and your loved ones when it comes to your legacy.

As long as you’re alive, your estate plan is a living document.

Families change, assets change, relationships change and legislation always seems to be in flux, so keeping your estate plan current is an ongoing priority. Let’s look at a few of the reasons to update your estate plan.

Reasons to Update Your Estate Plan: Have You Moved?

When putting together your estate plan, remember that state and federal laws both apply, and laws can differ from one state to the next. Essentially, if you move, parts of your already-established estate plan could be out of sync with local laws.

Here are three priorities to be aware of if you’re moving:

  • Taxes – Does your new home state have an estate/inheritance tax? How will that affect your overall plan? Are there other state tax laws that could affect your strategy?
  • New advisor – If you’re working with a new advisor, do they need to hold any other licenses or work with any other professionals to perform the duties required in the plan?
  • State interpretation – How will your new home state interpret your estate plan and documentation?

If I Move, Do I Need to Re-Draft Everything?

Typically your will is good from one state to the next so long as it was in good standing in the state where you first executed it with a qualified estate planning attorney.

However, references to the laws of your previous home state in your existing will can create complications. In that case, your heirs might need to rely on the laws of another state to establish the validity of your will and trusts and turn to the opinions from attorneys in two separate states. For this reason alone, it usually makes sense to update your estate plan documents when you move out of state.

Your living will, end-of-life health care choices, your powers of attorney in particular are state-specific so revisit these documents with an estate planning attorney when you relocate.

Reasons to Update Your Estate Plan: Will Legislation Affect Your Estate Plan?

A change in presidential administration can bring with it a fundamental change in economic philosophy, especially around taxes.

The biggest shift in estate planning in decades came from the Tax Cuts and Jobs Act, signed by former President Donald Trump in 2017. Specifically for estate planning, two provisions are of interest:

  • The annual gift tax exclusion was raised to $15,000.
  • The lifetime gift exclusion was raised and is currently $11.7 million.

The annual gift tax exclusion is important to know as you plan for the future and work on a tax-smart plan. You can gift this amount to each of your grandkids, for example, and start putting those gifts into a trust as soon as possible, potentially reducing your tax footprint when the estate is transferred.

The lifetime gift tax exclusion is the highest it’s ever been by far. This exclusion offers excellent opportunities to prepare for the transfer of properties, businesses and other large assets without losing large amounts to taxes. With estate taxes up to 40%, there could be a lot lost in the transfer, particularly without a high gift tax exclusion.

However, the Tax Cuts and Jobs Act is fairly high on the list of reforms President Joe Biden is discussing. He has floated the idea of dropping the lifetime exclusion to $3.5 million, which would be the first time it’s been lowered in our country’s history and substantially lower than the current exclusion.

Even without reform, the provisions of the Tax Cuts and Jobs Act are going to sunset in 2025, at which time the figures will revert to their previous levels. So at the very least, we’re looking at a change back to $5 million for the lifetime exemption if upcoming legislation doesn’t address the issue.

Regardless, Washington is essentially going to update your estate plan for you, so it would serve you well to beat them to it. Setting up trusts, accelerating transfers, gifting assets in advance and other strategies should be on your mind before these changes come to bear on your plan.

Reasons to Update Your Estate Plan: Have Your Relationships Changed?

Although human society has always been complex, relationships have become even more complicated in the last few generations. The stock answer in generations past was often that your spouse was the go-to person for questions of your estate, and your eldest son typically ended up as the default executor after your spouse’s death.

Now relationships are more complicated, and an explicit estate plan has never been more important. One common example in today’s world is divorce, which may even happen more than once during a person’s life. Blended families are becoming more the rule than the exception, so your beneficiaries could be a mix of biological and stepchildren.

Or your family could simply grow. If you establish your plan as a young adult, you might have a child, which means your plan needs revision. Later in life, grandkids who you want to include in your legacy might enter the picture. Your estate plan should reflect these big life moments.

A Recent Example

In a complex, mobile and sometimes litigious world, you need an estate plan that explicitly states your wishes.

One example is the 2016 death of Prince Rogers Nelson, who most of us know as the musician Prince. He died suddenly without an executor named or a will in place; he was not married at the time and didn’t have children. Since then, his estate has been in and out of the court system to determine how it will be distributed between his siblings and half-siblings.

More than five years after Prince’s death, his estate is still entangled in red tape. At one point, 29 people tried to claim parts of his estate!

We don’t know if Prince meant to give assets to a beloved niece and nephew or settle old debts with ex-spouses or give to charity. Because it was never explicitly stated in an updated estate plan, his substantial estate is at the mercy of the courts.

We can’t assume our estate will go to the right people if we’re not explicit in our legal documents. If you regularly update your estate plan, you can leave a legacy of clarity for your loved ones and get the assets where you want them to go.

Take the Time to Update Your Estate Plan

The best strategy is to be prepared. Your financial advisor can help connect you with the right professionals and help develop an estate plan strategy that works for you. Get in touch today.

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