Twelve Reasons to Update your Estate Plan

Clients know they are supposed to review their estate plans, but don’t know when to do it. Here are twelve times when it makes sense to review your plan.

Estate planning lawyers hear it all the time—people meaning to update their estate plan, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will or trust is so out-of-date that it creates a world of problems for a grieving family.  For the purposes of this article I’ll focus on property planning, meaning wills and trusts, but there are lots of other reasons to review and update your entire estate plan.

There are some wills and trusts that do stand the test of time, but they are far and few between. An obvious example is that some people shift from wills to trusts as their primary estate planning vehicle.  Families also undergo all kinds of changes, and those changes should be reflected in the will or trust. Here are twelve times in life when wills and trusts need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will and trust should be flexible to accommodate additional children in the future.  In some cases, a new child may disrupt the estate plan if no provisions are made for them.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your estate plan, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your estate plan now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts for your beneficiary, so anything you leave your child will be protected in the case of their divorce.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your estate plan to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance for both themselves and for later beneficiaries.

Named executor, trustee or beneficiary dies. Your old will or trust may have a contingency plan for what should happen if a beneficiary, executor or trustee dies, but you should probably revisit the plan. Many times, clients have one answer for what happens if a fiduciary or beneficiary die while it is hypothetical, but feel differently once it happens.  If a named executor or trustee dies and you don’t update the estate plan, then what happens if the second dies?

A young family member grows up. Most people name a parent as their executor or trustee, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.  This is one of the most obvious and common reasons for a younger client to update their estate plan.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.  It is also a great idea to subscribe to legal blogs (like this one) to stay up to date on changes.

An inheritance, windfall or downfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will and/or trust? If you can’t find the original documents, especially with the will, then you need new documents. Copies of wills may only be probated with extra steps, so it is far better to redo the documents which will also serve to update it legally.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.  It is also worth considering changes if you acquire real property in a new state which may require probating in two states.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

In all cases, it is important to review your estate plan every few years, but looking for these reasons to update our estate plan will help.  Changing your estate plan is also not as involved as one might think.  Changes to wills often require a new will, changes to trusts take a variety of forms (see here https://galligan-law.com/amending-a-trust-what-are-your-options/) but are often not very involved.

If you haven’t reviewed your estate plan recently or need assistance with a review or updates, please call our office today.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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Trust-owned Life Insurance in your Estate Plan

Trust-owned life insurance is a useful tool to accomplish estate tax and long term care planning, but requires a sophisticated trustee to handle it.

Trusts are frequently used in the estate planning process. They help with in the distribution of assets, incapacity planning and probate avoidance, making certain that everything is distributed to the right people and entities, provide creditor protection and more.  Many people don’t know that you can even place a life insurance policy within a trust.  Some trusts, typically those designed to reduce estate taxes or perform long term care planning, use trust-owned life insurance (TOLI) to accomplish those goals.

Investopedia’s recent article entitled “Can You Trust Your Trustee?” explains that life insurance in a trust is called trust-owned life insurance (TOLI). A TOLI is like bank-owned and company-owned life insurance. Trustees often do a good job of completing basic tasks, but conflicts and problems can pop up when trustees don’t understand where their loyalties should be and how to deal with complex financial issues.  A trustee has a fiduciary responsibility to the beneficiaries of a trust. The trustee is required to manage the trust assets pursuant to the instructions of the trust for the beneficiaries.

The trustee must, therefore, actively manage the insurance policy, or policies, that are owned by the trust. This includes ensuring the trust’s purposes are being served, such as providing notice to beneficiaries of withdraw rights.  It also includes determining if the policy is performing up to the projections reflected in the original life insurance illustration and identifying alternatives more in line with the goals of the trust.  New life insurance products have made some policies sold in the past obsolete and an old under-performing policy can often be replaced. However, some trustees don’t possess the skills necessary to oversee trust-owned life insurance. A trustee should understand and be aware of:

  • The policy’s performance relative to expectations
  • The last time the life insurance policy was reviewed
  • If there are other policies that may do a better job of meeting wishes and stipulations expressed in the trust document
  • Whether the credit rating of the insurance company that issued the policy has decreased and
  • If the allocation of the sub-accounts is still aligned with the investment policy statement.

Now, not all insurance needs to be TOLI.  It is important to discuss this with your attorney to determined whether a trust which owns life a life insurance policy is beneficial to you, and whether to have your insurance owned by your trust.  See here for trust basics to address this topic.  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/

Trust-owned life insurance can have an important role in the estate plans of many people, but not all trustees have the bandwidth when it comes to insurance and estate planning to fulfill their fiduciary responsibilities. Ask an experienced estate planning attorney for assistance.

Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”

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Removing your House from your Trust

There are ways to remove your house from your trust, but work with an estate planning attorney to do so while preserving the trust benefits!

Occasionally clients ask for assistance in removing their house from their trust.  They do so to facilitate refinancing the house, the client wants to add a relative to the title, to ensure the home is considered a residence for Medicaid purposes or some other similar issue.  There are a number of issues to consider before doing so as the recent nj.com article entitled “I want to revoke a trust on my house. What do I do?”  points out.  Whether it is a good idea to remove your home from your trust and actually doing so will require the assistance of an experienced estate planning attorney.

The answer to a question about how to get a house out of your trust is going to be in the trust terms themselves. However, if the terms of the trust are silent, the answer may be found in the trust laws in the state statutes.  If answering the question in general terms, the primary concern is whether the trust is revocable or irrevocable.

The first step is to determine whether the trust is revocable.   Most clients use revocable trusts, so assuming it is a revocable trust, the trustor (person who set up the trust) has the right to remove the house from the trust.  The trustee (probably the same person) can execute a deed conveying the property from the trust to the trustor.  That takes the property out of the trust.

In the majority of cases, this will solve the problem.  Also, if the property was removed to refinance, you can safely convey it back to the trust once the refinance is done.  Similarly, if a client wants to add someone to title to change where the property goes at death, it is often better to just change the trust terms to leave the residence to the beneficiary.  This is often better for taxes as well.

If the trust is irrevocable, it means that the house can’t be removed from the trust unless the terms of the trust permit it.  There are exceptions, such as asking a Court’s permission to revoke the trust or remove the property, or in some cases, terminating the trust with agreement of the trustee and beneficiaries, but these are more difficult options and not guaranteed.

Next, let’s look at the reason why the home was initially put in a trust.  It is important to keep these ideas in mind as removing the property from the trust may negate important benefits.   See here for the benefits https://galligan-law.com/category/trusts/page/6/      There may be alternatives which accomplish the same goals as well.

If the purpose was to lower estate taxes, it may make sense to remove the house from the trust. This is especially the case if the property is in a state that doesn’t have state estate taxes.  Very few states still do.  An estate rarely meets the threshold for federal estate taxes, so clients actually save taxes by removing the property from trust.

If the property is owned by an irrevocable trust for asset protection in long-term care planning, it might make sense to keep the property in the trust.  However, if you are using a revocable trust and want to consider asset protection in long-term care planning, it is often better to keep the property in your name. This is because Medicaid may exempt your residence if you own it personally.  In our office, we prepare “Lady Bird deeds” for Texas residences which allow a client to own the residence personally, and transfer it to the trust automatically when they pass away.  This works with both asset protection planning and probate planning.

If the trust owned the property for probate avoidance, the property often will be put back into the trust or conveyed at death to the trust such as with the Lady Bird deed.

In sum, there are some reasons to remove property from a trust, but doing so should always involve an experienced estate planning to preserve the benefits of the trust and to ensure your goals are met.

Reference: nj.com (Feb. 4, 2020) “I want to revoke a trust on my house. What do I do?”

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