My law practice has been concentrated on estate planning since about 1992. I have had plenty of time to see clients five to ten years after the completion of their wills and other estate plan documents (e.g. powers of attorney, advance medical directives and trusts). I have detected a pattern during that time as to developments and events that necessitate an update of some or all those documents.
The most common developments are children getting older and wiser so that the cautious approach to delay outright distributions to them when there is no surviving spouse is no longer necessary. The flip side of that involves adult offspring who have become financially irresponsible or, even worse, addicted to drugs or alcohol. In such circumstances, the parents may dispense with a trust for their children or may tighten the rules for outright distribution to particular children.
The most dramatic development has been a series of tax reform bills in the past ten years that have permanently changed the threshold for the estate tax from $1 million per person in 2001 to $11.5 million per person in 2020. That means that 99% of the population no longer have to worry about the Federal Estate Tax.
Unfortunately, in the years just prior to 2001 that estate tax threshold was as low as $600,000. Many people back then used an estate tax oriented formula in their estate plan documents (i.e. wills and/or trusts). Those formulas required the surviving spouse to create a trust in the event of the death of a spouse to minimize estate taxes.
Even after a scheduled drop in the exemption in 2026 to about $6 million per person, the overwhelming majority of people with “old” wills that required creation of a trust for estate tax reasons have a problem that requires a revision. Under case law from many years ago, the formula used in those wills is not interpreted in accordance with the current tax law but in accordance with the then-existing tax law. The will’s provisions will require that the surviving spouse create a trust that does not obtain any tax savings.
Estate planning involves more than just wills and trusts. I have seen a pattern in recent years that many of my clients over 50 years of age have about 50% of the family wealth in life insurance and retirement accounts. Those assets are controlled by beneficiary designations. As noted in my previous blog post, the law on distributions from retirement accounts after the death of the account holder changed dramatically in December 2019. The new law will compel outright distribution to a non-spouse, adult beneficiary within ten years after the year of the death of the account holder. The entire account must be emptied and, except for Roth IRA’s and 401(k)’s, income taxes paid on it.
The immediate access by adult offspring to these assets may indicate a change in the timing of outright distributions from any trust created for their benefit.
In all cases a thorough review of all beneficiary designations, both primary and secondary, should be made every few years to make sure that they are still appropriate.
Finally, for senior citizens in their 80's and 90's updating the will could be less important than updating documents such as powers of attorney and revocable trusts that address the contingency of an incapacitating mental condition from illness or injury. Financial assets must be managed by the client or a designee and a current power of attorney or a trust document may be the best way to provide for a smooth transition from one to the other.