Just like an annual physical, your estate plan needs periodic checkups. A good checkup will include a review of your estate planning documents (Wills, trusts and powers of attorney), beneficiary designations (for your retirement plans, life insurance and annuities), and the value and titling of your assets. How do you know if it is time for a checkup? Here are five reasons why the right time may be now.
How do you know if it is time for a checkup? Here are five reasons why the right time may be now.
Tuesday, March 3, 2009 – 00:00
I am surprised at how many people, affluent people, don’t have Wills. Married individuals often rely on holding their homes and bank/investment accounts in joint names with their spouse and naming their spouse as primary beneficiary of their life insurance and retirement plans. This works but it is only partially effective. What about assets such as your medical practice or other health care related equity interest? In most situations these assets cannot be owned jointly with your spouse and they do not allow for a beneficiary designation. Without a Will, these assets will pass in accordance with your domiciliary state laws of intestate succession. In Pennsylvania and New Jersey your wife would receive approximately one half and your children or grandchildren (your issue) the remainder. If you do not have issue, then one half goes to your spouse and the other to your parents. Your spouse will only get your entire estate if you have no issue and are not survived by either of your parents. This is not the distribution that most of my clients want. Having a Will allows you to override the state laws and customize your distribution scheme to meet your own needs.
Change in Marital Status
Whether you are newly divorced or newly married, a change in marital status requires a thorough review of your estate plan. In Pennsylvania, all bequests and references to a former spouse appearing in a Will that predates the divorce are void and ineffective for all purposes unless it appears from the Will that the provision was intended to survive the divorce. So far, so good, at least for those who die as residents of Pennsylvania. However, the statute does not apply to beneficiary designations for life insurance policies or retirement plans executed before a divorce and the effect of the divorce may be different for each policy or plan.
In a very recent Supreme Court case, Kennedy v. DuPont , the decedent never got around to removing his former wife as a beneficiary of his employer’s Savings and Investment Plan (SIP). Like most pension and profit sharing plans, the SIP is governed by ERISA. The Supreme Court held that even though the divorce decree specifically divested the former spouse of her interest in the SIP, the plan administrator was bound to distribute the SIP in accordance with the “documents and instruments governing them”, the beneficiary designation form on file: meaning, the former spouse got the money in the SIP.
Contrast this to the rights of a new spouse where the deceased spouse did not revise his or her estate plan after the marriage. Barring a prenuptial or post nuptial agreement, if the deceased spouse died without a Will or did not execute a new Will after the marriage, the new spouse is entitled to the intestate share (discussed above). Depending on the family structure (second marriage, children of prior marriage, etc.) this may prove to be too generous or too sparse of a bequest. A new Will can alter the statutory scheme to meet your personal needs. Again, IRAs and life insurance plans will be distributed to the beneficiary on record without any adjustments for the subsequent marriage. But under ERISA, the new spouse is entitled to an interest in an ERISA plan which supersedes the beneficiary designation on file.
The birth of a child is one of the strongest motivator for clients to formulate and execute an estate plan. The issue foremost on the parent’s mind is appointing a guardian to raise their children in the event both parents die. As part of your Will, you can nominate a person to serve as guardian of minor children. While the ultimate decision rests with the court, the parent’s recommendation for guardian is given great deference and is appointed unless it is not in the child’s best interest. If there is no Will to guide the court, the court will use its own judgment in selecting a guardian.
Almost as important as who will raise the children, is who will manage their finances. This need can arise while one parent is still living if the other parent dies without a Will. As I described above, if a parent dies without a Will the children will inherit approximately one-half of the probate estate (or the entire estate if there is no surviving spouse). This can be a very large sum especially in cases where the death was due to another’s negligence and the estate receives an award in a survival action. In Pennsylvania, the child’s surviving parent cannot serve alone as guardian of the minor’s money. In addition, there are statutory restrictions on how the money can be invested and what the money can be used for. Finally, the child will receive the entire amount when they turn eighteen. Just the thought of a child having a million dollars at the age of eighteen drives most parents to include trusts for their children under their Wills. Trusts allow you to determine who will manage the child’s funds- including the surviving parent, how the funds will be invested, when distributions will be made and what they will be made for and to address any special needs or concerns.
Wills Written Before 2002
Prior to 2002, a very large segment of the professional community with otherwise simple estate plans – everything outright to the surviving spouse – needed to incorporate trusts into their estate plan for the sole purpose of reducing the federal estate tax payable at the death of the surviving spouse. At that time, a couple with combined assets totaling $675,000 in 2001 or $1 million in 2002 (federal estate tax exemption) were faced with a potential federal estate tax of 55% on the value of their combined estates that exceeded the federal estate tax exemption when their estate passed to next generation. Because each individual was entitled to his or her own federal exemption, trusts were established and funded at the first death equal to the deceased spouse’s federal exemption amount sheltering the assets from federal estate tax at the second death. This allowed the surviving spouse to use his or her federal exemption to shelter an additional amount at their death virtually doubling the amount that passed to the next generation free from federal estate tax.
Today, an individual’s federal estate tax exemption is $3.5 million. Fewer couples require the tax planning trusts that were so integral to a prudent estate plan formulated in 2002. Upon review, you may be able to simplify your estate plan and remove the mandatory funding of the exemption trust.
Retirement is the perfect time to simplify your life, consolidate your assets, organize your files and update your estate plan. Relationships and family situations may have changed since you last looked at your documents. Do you still need to name a guardian for your now 38 year old daughter and mother of two? What about the trusts for your children? Should they be discontinued or continued for a longer period of time and permit distributions for your grandchildren’s needs? Are there concerns with creditors or difficult marriages? Do you want to include a bequest to your grandchildren? Are you now in the position to make charitable bequests or gifts? Unnecessary provisions should be removed and trusts and distributions modified to reflect current situations and needs.
A big trend that you, as health care professionals, should be wary of is the tendency to voluntarily take retirement funds from a plan governed by ERISA (401(k), 403(b), pension and profit sharing plans, etc) and moving them into IRAs. While IRAs may afford greater flexibility and more investment options, ERISA plans provide greater asset protection from claims of malpractice creditors. Some plans may require you to take your retirement funds out of the plan and roll them into an IRA upon retirement. If that is the case, you will have no option but to comply. But where there is a choice, make sure you understand the potential exposure and risks involved.
Each major juncture of our lives: marriage, divorce, birth of children and grandchildren, retirement, and changes in the tax law signal a time to review your estate plan. The checkup may be quick and painless, reassuring you that everything is as it should be. Or, it may require changes in your documents and beneficiary designations. Knowing everything is in order will make you feel better.