How to Avoid Having An Obsolete Estate Planning Strategy

An Estate Planning Strategy needs regular maintenance, and sometimes an overhaul. Otherwise, a great plan can become obsolete or flawed, or even a clunker. Much like many types of property, if an estate plan is neglected, time and outside forces can cause it to decay or break down.

As much as we’d like to work on an estate plan once and then lock it away, that’s not a wise move. Things change, and your plan needs to be adjusted for the changes. On a regular basis, I read court cases and IRS rulings showing the sad consequences of estate plans that weren’t revised. There are times when an out-of-date plan is worse than not having a plan.

How do you know when an estate plan needs to be revised? Here are the key events that should be triggers to talk with your estate planner.

Estate Planning Strategy #1

The passage of time. When your plan is more than a couple of years old, you should at least touch base with your estate planner to see if updates are needed.

A lot can happen that affects your plan. As we go through this article, I’ll mention some specific events that often make revisions advisable. But there are many other changes that could occur that should result in an update to your estate plan. That’s one reason why you should meet with your planner every few years, even if one of the major events listed here hasn’t occurred.

In addition, events you aren’t aware of, but that the estate planner knows, could disrupt your plan. For example, there could be changes in the tax law or the many nontax laws that affect estate planning.

Estate planners also regularly study and review established strategies to determine if there are better ways to do things. Your plan might benefit from such changes and revisions. For example, it used to be commonplace for a surviving spouse or other primary beneficiary to receive only the income earned by a trust. Principal and capital gains were retained in the trust for the next generation or two. But with today’s low interest rates, investment income often isn’t enough to support a surviving spouse. The standard estate plan now has the trust pay the surviving spouse either a percentage of the trust or a fixed dollar amount annually, without regard to whether it is paid from income, capital gains or principal.

Estate Planning Strategy #2

Medical Powers of Attorney

Here’s another example. A few years back, the federal HIPAA law covering medical privacy was enacted. Medical powers of attorney and similar documents had to be revised to ensure that family members could receive medical information and participate in medical decisions.

Ideally, you touch base with your estate planner annually. The planner will review your file beforehand and identify any issues to raise with you. You’ll present any changes in your finances, family and anything you think might be related to your plan. Most people don’t want to do this annually. On the other hand, five years is too long a period between discussions with your estate planner. Most people should check with their estate planners at least every two to three years, even if there aren’t any known triggers for plan changes.

Estate Planning Strategy #3

Changes in your life and family. Of course, the most frequent reason to change an estate plan is a change in your life. Marriage, divorce and widowhood are important changes. A change in marital status of any beneficiary of your estate also should cause you to discuss the consequences with an estate planner.

Other family changes also can be important. Do you have a new child, or has a child grown into adulthood? What about grandchildren? When there are other relatives you support or have included in your estate plan with more than token bequests, changes in their lives also are worth discussing with your planner. Changes in your health or the health of a family member also can affect a plan. You might also have new or different charitable interests that should be reflected in your plan.

Estate Planning Strategy #4

Modifications in the value or composition of your estate. Your original estate plan should be set up so that it doesn’t have to be revised every time your estate’s value rises or falls, or when your assets and liabilities change. But there could come a point when the cumulative effects of changes in your personal balance sheet require a fresh look at your plan. It doesn’t matter if the changes are positive or negative.

Many people realize a change in their net worth should cause the plan to be reviewed. Often overlooked, however, is that significant changes in the composition or structure of your estate also require a review. Owning different types of assets, even if the value of the estate is relatively unchanged, might trigger changes in how your plan is structured. Even better, when you’re considering a major change, such as buying or selling a business or investing in real estate, it’s best to talk with the estate planner before you move too far forward with the plan. The planner might suggest ways to structure the change that would better accomplish your overall estate planning goals or reduce taxes.

When your debt level changes, estimates of the estate’s cash flow and liquidity need to be updated.

Estate Planning Strategy #5

Variations in where you spend time. Where you spend time determines the laws that govern your estate plan, and state laws vary on many estate planning issues. The state in which you are domiciled or resident is where your will is probated. Its law also applies to your financial power of attorney in most cases. The medical power of attorney and related documents have to be valid in the state in which you’re physically present when medical care is needed.

Your estate planner needs to know if you moved or are spending more time out of state than you used to (perhaps spending winter or summer in a more hospitable climate). Discuss your travels and residences with your estate planner. The planner will determine which state is considered your current legal residence and domicile. The planner also might recommend relatively small changes that can prove you are a resident or domiciled in the more desirable state for your estate. You also need to avoid the very undesirable position of having two or more states each considering you to be resident or domiciled there.

Estate Planning Strategy #6

Changes in where you own real estate. Real estate is subject to probate and related laws in the state in which it is located, regardless of where the owner lives. If you own real estate in more than one state, your estate will have to go through probate in at least two states. There are ways to avoid this expensive and time-consuming situation. Your planner might recommend putting the out-ofstate property in a trust, limited liability company, or some other entity.

Other property also might fall under the laws of a state other than your home state when the property is located in that other state. Plans to purchase property or a business located in another state should trigger a visit to your estate planner.

Estate Planning Strategy #7

Life events for your trustees, executors and agents. The people in charge of implementing your estate plan are vital to its success. Most people don’t give enough thought to the selection of trustees and executors, or the agents to whom they give powers of attorney. Failing to re-evaluate the choices also is a common mistake. Just as changes can occur in your life or circumstances, there can be changes in the people and institutions you selected to help with your estate plan.

The reliable relative, friend, professional, or employee you named to one of these roles might not be an ideal choice today. People grow older, develop health problems, move, overextend themselves, or are subject to a range of other changes in circumstances. Perhaps your relationship with the person changes. Your contacts with a person might not be as frequent as they once were, so the person isn’t as familiar with your situation as you’d like. Or perhaps your estate now is larger or more complicated, so the original choice isn’t suitable.

An institutional trustee or executor — such as a bank, trust company, or law firm — also can experience changes. The people you knew and worked with might no longer be there. Mergers and acquisitions might have changed the firm’s location, services, or fees. Or another firm might be a better fit now.

We’ve discussed the main triggers for reconsidering your estate plan. There’s no such thing as a buy-and-hold estate plan. Circumstances change, and those could require a change in your plan.