By Albert L. Lingelbach & Edward W. Greason
According to surveys, nearly 55% of adult Americans do not have a written will to assist their heirs and the legal system in ensuring that their wishes are respected following their deaths; they may be surprised to learn that the state has written a will for them. But even the 45% fortunate enough to have expressed their wishes before witnesses in a way that the law recognizes must remain vigilant. Here are twelve reasons you ought to update your existing will or estate plan, whether it expresses your wishes or what the state thinks you should do.
A marriage brings many changes to your life. You now have to share your home with a new person. However, you are sharing more than the pots and pans. You are also agreeing to share your estate. In the United States it is a general principle of law that you must include your spouse as a beneficiary of your estate. You do not have to give your entire estate to your spouse, but you cannot disinherit your spouse. A surviving spouse is always entitled to a minimum (called an elective share) of a deceased spouse’s estate, unless both spouses agreed to alter their respective rights by means of a marital contract such a prenuptial agreement. Often this marital or elective share can be satisfied by designating certain assets or amounts to the survivor, for instance by naming the survivor as beneficiary of life insurance.
Following a divorce, your estate plan should be reviewed to make sure that the former spouse is not an unintended beneficiary. The divorce decree may require that assets are to be split certain ways, or that a former spouse is to receive a certain amount upon the first death. Another possibility is that assets may be titled in joint name or structured in such a way that even after a divorce, the former spouses are still tied together financially. The estate plan should be reviewed to ensure, first, that the provisions of the decree have been satisfied, and second, that the ex-spouse is not benefitting in an unintended way.
The birth of a new child is undoubtedly life changing. But with all that new joy come new responsibilities. While you worry about your children while they are growing, you also need to worry about them in the event of your unexpected death while they are minors. Who will raise your children? Generally state law provides for family members to step in to care for and raise your children. But will it be the family member you and your spouse would prefer? And what if there are no close family members? Do you have a close family friend that you and your spouse would prefer to your disreputable second cousin? Naming a guardian to raise your children provides assurance that a person you trust and chose will protect your children.
4. Growing Up.
As children grow and come of age, new questions arise. Will the children inherit from your estate? Should the property passing to them be held in a trust for their benefit? Who will be the trustee with power to manage their money, and until what age? Should the child receive his inheritance all at once, or should it be spread over several years and installments?
5. Deaths of Friends and Family.
Any discussion of guardians, trustees and executors must include the consideration of successors. Who would you want to handle your estate or trusts in case your first choice cannot act for some reason? People invariably choose family and friends, but such persons are usually close to their own ages. In making choices about guardians, trustees and other fiduciaries, thought should be given to whether that person will be able to fulfill their duties for the duration. If a trust for your child is to last for another 25 years, should you nominate your 80 year old father as trustee? Or if your married sister lives in San Francisco, is it reasonable to expect her to move to New York just because you want her to be guardian of your child? A successor or alternate choice should be named, in case your first choice cannot carry out the task you are asking of them. What if a named fiduciary (a guardian, trustee or executor) dies or becomes incapacitated? Is a successor or alternate named? If so, what about further successors or alternates? If you have created trusts that may last for decades (such as for grandchildren), consider if a bank or trust company should be named since a corporate fiduciary will outlive the individual fiduciaries.
Children grow up and start having lives of their own. Just as their lives change, so must your estate plan. Once they are adults, they will not need a guardian. And if you provided for them to receive their inheritance in a trust that was to end at a certain age, should that age be revised, or do you even need a trust for their benefit any longer? Does your estate plan include a provision for grandchildren? Do the grandchildren inherit if their parent (your child) predeceased you? Have you considered the lifestyles and careers of your children? If one child is an investment banker making a zillion dollars a year and the second works for a charity, do you want them to share in your estate equally, or do you want to provide more to the child who will need and probably appreciate it more?
7. Medical Issues.
Family members sometimes have medical problems that require long term care. Such problems could be medical, such as dementia, or the result of an accident. Careful planning is often necessary to set up specialized trusts to provide for the needs of these family members without causing a reduction in any other benefits they may be entitled to receive.
8. Substance Abuse.
A family member may have a substance abuse problem. While they may be just as impaired as someone with a medical condition, the legal system may consider them competent. Rather than seeing such a person drink or snort their inheritance away, it may be advisable to try to protect them from themselves by putting their inheritance in a trust, with limitations on access to income and principal. Alternatively, conditions could be imposed on distributions, such as passing a drug test each month.
9. New Home.
A new home may be a reason to review your estate plan. How the home is titled or owned can have a major impact on your estate plan. For example, if the home is jointly owned with a right of survivorship, then the surviving owner will inherit it, even if your will directs otherwise. As a home is often one of your largest, if not the largest, assets by value, such a result can have a major impact on how the estate is distributed. Or is the new home a vacation residence in another state? Is it in another country? Owning assets, such as real property, in a second jurisdiction will usually necessitate a second, or ancillary, probate proceeding in the probate courts of that jurisdiction before the provisions of your will can take effect. Depending on the jurisdiction, this could cause the estate to incur more court fees, taxes and administrative costs. Consider whether the estate will be subject to estate or inheritance taxes in that jurisdiction simply because you owned a home there. And how are these estate taxes calculated? If the home is in a foreign country, there may be limitations on the amounts of exemptions and deductions available to your estate. For instance, some countries limit the amount of any marital deductions, especially if your surviving spouse is not a citizen of that country.
10. Increased Income.
A change in your net worth is a reason to review your estate plan. If you won the lottery, you ought to revise your will. Saving your money over time instead of winning it overnight is no less reason to review your will; you still should consider whether your estate plan will work as you intended when you had less. With more money, you can make a bequest to your favorite niece, the one who always remembers to call you on your birthday. Or perhaps you want to make a gift to your high school in honor of a favorite teacher. You need to consider how and when your estate will be distributed. When your estate was small you might have given everything outright to your spouse so that she or he had sufficient assets. But with greater wealth, perhaps a marital trust which ensures that some of your wealth will pass to your children might be more appropriate. Or would you want to create trusts for your grandchildren? Such generation skipping trusts may cause more taxes but may still be desirable in the long term.
11. Asset Sales or Purchases.
Has the nature of your assets changed? You have worked for years to build up your business. While you own the business its value is locked up in the shares of the company, but now you have decided to sell the business and retire so that you can enjoy the fruits of your labors. Before you had wealth but it was tied up in the shares of stock and your estate might have been able to claim discounts in value because the shares were illiquid, not being publicly traded. But after you sell the business you have cash, which is as liquid as it gets. Such changes necessitate a review of your will, so that the impact of the sale can be assessed. Previously you may have intended to give a greater share of the business and thus of your wealth to the child who was most involved so that they would have control, but with cash that may not be your intent, and you may want to distribute your estate equally among all your children. Or have you been collecting stamps and coins, antique cars, or Chinese ceramics for years, and your collection is now worth more than the rest of your estate? You may have a significant net worth, but you are probably cash poor and illiquid. How will your estate raise the cash to pay any estate taxes? Selling assets is an option but taxes may be due before a sale can take place. Giving or selling your collection to a charity may be an option. Your estate would be entitled to a charitable deduction for any value passing to a charity.
12. Changes in Tax Laws.
Unfortunately, it has become a fact that estate tax laws are continuously being changed. It seems as though there is a new tax rate or exemption every year, with tax changes occurring on the state level as well as on the federal. Estate taxes are often the biggest expense your estate will have to pay. You should consider where the burden of these taxes will fall. Should taxes be paid from the estate residue before any distributions to the beneficiaries, or should taxes be apportioned among the beneficiaries according to the benefit each receives? Should some beneficiaries be exempted from paying any taxes? To complicate matters, some jurisdictions do not impose an estate tax but instead tax the people who inherit from you. While estate taxes are generally based on the size or value of the total estate, inheritance tax rates are usually imposed based on how closely related the individual beneficiary is to the deceased. For example, a cousin will typically pay a higher tax rate than a sibling.
This is an overview of a few reasons you should prepare or revise your estate plan and will. There are differences in the laws of each state that could be relevant to your estate. As with most rules, there are exceptions, and there are many other factors, such as a spouse’s citizenship or gifts you have made during your lifetime, any of which could have a significant impact on your planning.
If you have any questions about this outline or would like to arrange to meet one of the members of our Estate Planning department, please call (212) 682-8811 or feel free to contact either of my colleagues directly via email.
Albert L. Lingelbach (firstname.lastname@example.org) is a partner in Dunnington’s Estates, Trusts and Private Clients and Charitable, Not-For-Profit and Religious Institutions practice areas.
Edward W. Greason (email@example.com) is a fellow member of the Estates, Trusts and Private Clients practice area who has significant experience in matters of probate and trust administration.