Early this morning as I stared in the refrigerator, patiently waiting for its secrets to be revealed to me, I saw the plastic carton of blueberry Chobani smirking at me: “Best By March 15, 2017.” Then my army of outdated condiments joined in. And let’s not even talk about the lurking Styrofoam containers holding restaurant leftovers from sometime around Christmas.
As I took a gamble on the yogurt, I started mulling over the idea of “freshness dating” in general – and considered how “Best By” tags could enhance other aspects of our lives. Perhaps careers could carry warnings: Best if New Job Search Started By __________. Is it time to move? Maybe neighborhoods could caution: Best if Relocated By: __________. Religion? Best if You Sort This All Out By: __________. And how useful would freshness dating be in relationships if your boyfriend came with this sticker: Best if Dumped By: __________.
Then I thought about applying freshness dating to our Wills and Trusts practice: when we send our clients out the door with their new Wills and Trusts, maybe the cover pages should carry this sticker: Best if Reviewed By: __________. This would certainly help answer a frequent client inquiry: “When should we update this?”
There are any number of “right” answers to this question . . . here’s a few obvious ones:
- Just Because. We typically recommend that clients blow the dust off their estate planning documents every 3 or 4 years to make sure that the basic information is still valid. Are there any changes in your beneficiaries, or their shares of the estate? Do your named executors and trustees still seem appropriate? Is it time to revisit the named guardians for your minor children?
- Relationship Status. A marriage or a divorce is an important time to revisit your planning – and not just changes to your Will or Trust. This is also a critical time to review your assets that pass outside of your Will or Trust (e.g., IRAs and retirement assets, life insurance, jointly titled financial accounts, brokerage accounts, and real estate). It might be time to change the beneficiary designations.
In some states (mostly community property states, such as Arizona, Texas, and Washington, among others), the law automatically provides at least some benefit to a surviving spouse – even if beneficiary designations were not changed. On the flip side, upon divorce, the law in most states – including Illinois – provides that a Will or Trust will be interpreted as if the ex-spouse died before the decedent (i.e., the law “cuts out” the divorced spouse). However, the same is not true for life insurance and other named-beneficiary assets in the majority of states. If you want to disinherit your ex, you must revisit the beneficiaries on those accounts.
- Relocating. The general rule is that is a Will or Trust that was valid in one state is perfectly valid in every other. That said, there are a couple reasons to think about a review when you move. First, while your Illinois Will and Trust might be valid in another state, there may be different inheritance tax or state estate tax regimes that can be planned for by knowledgeable local counsel.
Second, almost every state has some form of advanced medical directive protocol (e.g., Power of Attorney for Health Care, Appointment of Medical Surrogate, and so forth). We usually caution clients that when relocating they should consider adopting the local form of advanced directive so the health care community is presented with a familiar, comfortable form in a time-sensitive situation.
- Tax Law Changes. Currently, the federal estate tax law allows everyone to transfer up to $5.49 million during life or at death without estate or gift tax. This “exemption” is adjusted annually for inflation. Some Wills and Trusts have “formula” clauses that adjust bequests automatically with changes in the tax exemption . . . but not all do. If you haven't revised your Wills and Trusts during the past 5 to 10 years, they may no longer accomplish your goals about the division of your estate among your spouse, children, and grandchildren.
Remember that President Trump’s campaign positions included complete repeal of the estate tax. Since the election, there has been precious little attention paid to this as other issues take center stage. For estate planning under this “what if” scenario, see our recent article Estate Planning in the Trump Era.
- The Yin: Windfalls. So you won the lottery. Or you made a killing on the Snapchat IPO, or maybe you own a business that is poised for sale. Sometimes, consultation with your estate planning attorney about wealth transfer strategies early in the process can be useful. There may be opportunities – if deployed at the right time – to shift some of the upside potential to family members. Once the windfall is pocketed, any transfers to family will likely use up a chunk (or all) of your $5.49 million lifetime gift tax exemption, or require you to pay gift tax (@ 40%) on a larger transfer. At these times it may be appropriate to revisit how inheritances are being structured for children and other beneficiaries, and to determine if long-term trusts, or incentive trusts, might be a good fit in the family.
- The Yang: Financial Oops. Planning opportunities may also present themselves in adverse economic circumstances. The financial meltdown beginning around 2008 saw a combination of depressed asset values and a decline in interest rates. This combination allowed many families to look at wealth-transfer structures that drastically reduced the gift tax cost of making lifetime transfers. Granted, financial distress might not be the time that people focus on making wealth transfers, but as with many things a silver lining often exists.
- Mom-and-Pop-Hood. For many of our clients, the birth of a child drives the preparation of their first estate plan. Responsible young people realize that only a Will gives them the ability to name a legal guardian for their precious bundles. Protecting their children’s inheritance from their children’s own potential future irresponsibility, as well as from their potential future creditors (think: divorcing spouses) can be structured at this time.
- Grandparenthood. We meet frequently with clients who upon the birth of their first grandchild, want to revise their planning to provide for the new addition. Sometimes they want to set aside a fund for college, or set up a formal gift trust for the grandchild, or contribute to a 529 saving plan. Sometimes they want to be assured that in the unlikely case of a death of their own child before them, the deceased child’s share of their estate will flow to the grandchild. The same applies to assets that pass by virtue of beneficiary designations.
- Death of a Spouse. This wrenching event takes its toll in many ways, but it is an important for the surviving spouse to ensure that his or her affairs are in order. Clients should revise Wills and Trusts as appropriate, and should identify new beneficiaries for retirement assets that are inherited from the deceased spouse to avoid the loss of certain income tax benefits associated with these accounts.
A surviving spouse should also review any powers of attorney, and if the deceased spouse was the agent, then another trusted family member or friend should be appointed as agent to act in financial and legal matters if the surviving spouse becomes unable to because of illness or disability. At the same time, the surviving spouse should revisit any health care advanced directives.
The federal estate tax law allows for “portability” by which surviving spouses may, in some circumstances, take advantage of any unused estate tax exemptions of their deceased spouse. But this benefit isn’t automatic – the deceased spouse’s executor must file a federal estate tax return, even if no tax is owed. This filing is time-sensitive so attention should be paid to this early after the death of a spouse.
- Serious Illness. The unhappy diagnosis of a terminal illness or a degenerative disease often drives a review of planning documentation to ensure your estate plan is in order. This is especially true in the case of rapid degeneration, where making revisions to an estate plan while you still have the legal ability to do so is critical.
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To circle back to my opening conceit, next time you’re staring down the freshness date on your morning yogurt, think about whether it’s time to pull your Will and Trust out for a checkup!