Once an estate plan is created, in many estate planning attorneys’ experiences, clients tend to believe that their work is finished. For an estate plan to be guaranteed to work, however, an estate plan requires regular review and updating. Some of the forces that require updating include:
Birth. New children and grandchildren greatly affect the estate plan. While California provides certain protections for after-born children (called “pretermitted heirs”, those children can, with certain exceptions, only take their intestate shares – a problem that becomes especially apparent if the makers of the plans have intentionally made unequal distributions to other members of the family. Updating a plan to reflect the current family structure is of vital importance.
Death. Under California’s anti-lapse statute, a gift to a predeceased child will pass to that child’s heirs. This provides some protection that certain sides of a family will not be cut out completely when there is a death, but oftentimes one beneficiary’s death fundamentally alters a plan maker’s distribution plan. It is therefore essential to review the plan and update accordingly whenever there is a death in the family.
Fallout. Even the closest families are not like the Waltons. Family members or friends who are close when an estate plan is formed can become estranged later in life. Without updating the plan, a people may inherit even though the plan maker no longer wants them to be included in the plan. Simple but essential changes to the estate plan eliminate this risk.
Marriage and Divorce. As children grow from adolescence to adulthood, many things change in their own lives that may affect and could possibly frustrate their parents’ estate plans. One such possibility is a child’s marriage and/or divorce. Under California’s community property laws, inheritance is separate property and therefore safe from divorce. However, if the inheritance is commingled with community property in such a way that it cannot be fairly distinguished, then the entire inheritance will be considered community property and thus subject to a spouse’s recovery through divorce. Proper planning at the outset and proper maintenance can help avoid the predator of divorce.
Addiction. Tragically, approximately one in every ten Americans over the age of 12 suffers from addiction to alcohol or drugs. When parents create estate plans with their children as beneficiaries, few foresee that their children may suffer from addiction later in life. An outright distribution to a person with addiction can have devastating effects, and thus it is of paramount importance to make changes as soon as the issue arises. Parents do not have to cut their children out of their plans completely to protect the children from themselves. Trusts can be created to provide the trustee the power to withhold distributions if the trustee has concerns about a beneficiary’s addictions.
Disability. In this author’s workshops, he always asks his audience, “who here has disabled beneficiaries?” Usually, no one raises their hand. However, the reality is that no one knows whether their beneficiaries will be disabled at the time of their death. If a disabled beneficiary were to receive an outright distribution, he or she may be disqualified from any need-based care he or she is receiving (such as Medi-Cal). A properly formed estate plan will already have so-called “special needs planning” built in (note: but if the plan is written by a general practitioner attorney, then it probably won’t), but all plans should be reviewed and updated accordingly upon any event of disability.
Changes in State and Federal Law. Wills and trusts are controlled by both state and federal law, and are always subject to change based on shifting political climates. One major political party may want to abolish the estate tax completely, whereas the other may want to lower the exemption threshold. Recently, the Supreme Court held that inherited IRAs are not protected from creditors (Clark v. Rameker (2014)). Changes in law can greatly affect an estate plan. For example, a carefully crafted trust can shield an inherited IRA from creditors. Without regular review by a dedicated estate planning attorney, people may not even know that some of their underlying assumptions have been altered by changes in law.
In an upcoming post, I will discuss the all-important how to maintain the estate plan.