March 22, 2023

Identifying Red Flags for Reviewing and Updating Your Estate Plan

In Estate Planning, Wealth Strategy

Contributions from: Jay Winston, CFP®

Having a proper estate plan in place is the guiding hand you leave behind to ensure things go smoothly for your loved ones after you’re gone, and that all your last wishes are carried out accordingly. But with all things in life, we experience change. As such, you should periodically review your estate plan and update it to ensure that it functions as intended. As a general rule of thumb, you should review your plan every three to five years, or after any major life changing event. If there is misalignment in your plan, or aspects that are out of date with your current circumstances, you may be leaving behind more headaches than help.

Here are some common red flags to watch for when reviewing your estate plan that may prompt the need for an update:

1. Your family situation has changed

Family dynamics often change over time, and it’s important to ensure that your estate plan reflects the material changes in your family’s circumstances. This could be the birth or adoption of a new child or grandchild, the education needs of those children, or those children becoming adults. Other common changes include marriage or divorce, a family rift, death, or changes in guardianship of children. Family structures can change a lot over the years, so be sure your estate plan remains relevant to your current situation.

2. Your financial situation has changed

Have you or your spouse changed careers or received a big promotion, or come into an inheritance? Have you purchased a new home or other assets? Have you started or closed a business? Any shifts in your financial situation should flag a consideration to review your estate plan – from new assets or liabilities, to evolving financial goals.

It’s common for people to leave assets out of their estate plan initially, or acquire new assets and forget to include them. Other times the assets are accounted for but are left exposed by an ineffective disbursement strategy. If you are leaving assets outright to beneficiaries, consider if those beneficiaries have any risks such as lawsuits, divorcing spouses, creditors that may try to claim them once inherited, or if receiving the assets directly would impact their ability to receive needs-based government program funds. These are situations in which trust strategies may be advantageous to ensuring your wishes are carried out, and transition smoothly.

3. Changing tax laws

Tax laws are constantly changing, and unless it’s part of your profession or personal passion in life, most people are not completely up to date on the most recent changes. When changes occur related to the estate tax exemption, it could mean that your estate plan is no longer structured in the most tax-efficient manner, or new state laws on investments could alter the optimal approach to your planning. For example, will Washington State‘s new capital gains tax, or the federal estate exemption reduction scheduled for 2026 impact you and your estate plan? If you’re unsure, and it has been some time since your plan was updated, this might be a good time to consult with a qualified estate planning attorney.

4. Health changes have occurred

If you or your spouse have been diagnosed with a serious illness or became incapacitated since your last update to your estate plan, this is an essential time to review. It’s likely your time horizons and priorities have shifted with this news and it’s important to double check that your wishes will be met. For those that don’t have an estate plan in place, this is a key prompt to establish a plan.

If you or your spouse are at an increased risk of losing mental capacity due to a family history of Alzheimer’s, for example, it’s imperative to establish your plan as soon as possible. There may also be a new need to ensure lasting care for a family member or loved one who has become ill or would need care after your passing.

5. Personal relationships and beneficiaries

Take a look at the key players in your plan – the power of attorney (POA) for medical and financial affairs, as well as guardians, beneficiaries, and trustees. Are the people you picked back when you created your plan still the best choice? Does it still make sense to have the same person who is your medical power of attorney be your financial power of attorney? You may have a new close relationship with someone you’d now like to include, or a family member or friend who you’ve named in your estate plan may no longer be willing or able to serve.

Keeping beneficiaries up to date is a common issue, but it’s just as important that the beneficiary designations of your retirement and investment accounts do not undermine the distributive scheme you’ve outlined in your will and/or trust. There could be issues if you have an estate plan crafted beautifully with the best intentions, but it never gets funded because all your accounts transfer on death to individuals instead of the trust, leading to confusion of your actual intentions. A careful review of account beneficiaries is an essential step in following the creation or update of an estate plan to avoid such pitfalls.

Another question to ask here – is there a proper successor trustee in place who is as equally qualified as the original trustee, both with interpersonal relationships to the beneficiaries and in their ability to manage disbursement of the estate? Confusion or conflict could lead to inheritors stuck in court battles, or family rifts occurring after you’re gone, which is likely not the legacy you are hoping to leave behind.

6. You have moved or purchased property in a new state

Estate planning laws vary state by state and country to country. If you have decided to snowbird fulltime or move closer to the grandkids, your new legal residence serves as a prompt to have your plan reviewed by an attorney who practices in your new jurisdiction. Having an estate plan that does not meet the local legal standards can leave your intentions ineffective or invalid.

Purchasing a vacation or rental home in another state would also be a warning flag to review your estate plan. If your trust does not account for interstate property, it can lead to a lot of headaches for your family members after you’re gone, including probate in two states, and increased legal costs and time to sort things out.

7. Is the plan properly funded?

If your plan involves trusts, it’s important to remember that trusts only have control of the assets that are held in them. Meaning, if you are directing things such as real estate, a business, or intellectual property into a trust, there may be additional planning necessary to ensure there is funding in place to support those assets once held. You can alleviate funding issues for your beneficiaries when the plan takes effect by making sure that some liquid assets go to the trust, or that it is funded with life insurance.

It’s also important to consider what impact long term care may pose. If you or your spouse need long term care, are you able to properly fund that or do you have insurance in place? If your goal is to pass on the family homestead or business to your loved ones, those beloved assets may have to be sold in the event you are in need of extended medical assistance later in life, and have not planned for this coverage in advance.

8. There is a lack of understanding or awareness

Having an estate plan in place is great, but are you able explain in simple terms what exactly will happen when it takes effect? Estate documents can be complicated, causing issues when it comes time for implementation.

Additionally, it’s important that relevant parties are aware and up to date on your estate plan. Do your family members and loved ones understand the plan and what needs to happen? Are they aware of what your end-of-life wishes are? Are the named fiduciaries in your estate plan prepared for all the responsibilities they will be taking on? It’s important that your executor/trustee, accountant, and financial planner all have access to your will and estate documents and they know who the estate planning attorney is well in advance.

Reviewing your estate plan regularly is an important part of ensuring your wishes are carried out after your death, and that your financial and medical affairs are managed appropriately if you become incapacitated. These red flags can be helpful indicators to review your estate plan and prompt the need to consult with a qualified estate planning attorney, ensuring your plan remains up-to-date and effective. Your Coldstream advisory team is available to help guide you in this process and refer you to an attorney to answer any detailed legal questions.

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