Is It Time for an Estate Review?

Common scenarios that warrant a thorough estate review

03/21/2014

Getting the proper estate planning documents in order is crucial for safeguarding your financial future and protecting your family. Once they are in place, however, it is equally important that you update them when necessary and conduct periodic reviews to ensure that all assets are included and that all information is correct. It is particularly important to review your estate when your family or financial situation changes or if you think you may have fallen into a common estate planning pitfall.
 
The following situations require a careful estate review:
 

Family changes 

  • Marriage. This is the time to update your will and your living trust to include your new spouse and to consider what will happen to your separate property in the future. If you live in a community property state—predominantly those in the West and Southwest of the country—be sure to discuss the implications with your financial advisor.
  • Loss of a spouse. If you lose a spouse through divorce or death, you should review your estate and change applicable portions, including beneficiaries, powers of attorney and trustees.  
  • Children. When a new child comes into your life through adoption or birth or as a stepchild, be sure to designate guardians in your will and set up an inheritance in your trust. “The benefit of a living trust versus a will is that you can specify ages at which the child inherits assets rather than a will, which generally releases the proceeds when they become an adult (age 18),” states Forbes contributor Michael Chamberlain, CFP, AIF. 

Financial changes  

  • New home situation. If you purchase or refinance a home, be sure that it is included in your living trust, if you have one. According to Chamberlain, people frequently forget to include a new home’s title in their trust or they remove it when refinancing and then forget to return it after the process is over. Making sure that all properties are included in the trust ensures that it provides maximum benefit.
  • New accounts. If you acquire new accounts, it is important that they all be included in the trust so that your assets don’t end up going unnecessarily through probate. This will also make it easier to transfer titles to a beneficiary. 
Julie Garber of the will and estate planning portion of About.com provides advice to couples on wills, trusts and estates. She describes what is known as an “I love you” will and why it is a bad thing. This is a will in which a couple leaves everything to each other, with the remainder going into a trust for the children when both parents are gone. Garber describes that these plans are dangerous because they do not benefit from tax planning and may not work as intended if the couple moves to another state that has different laws regarding estate tax.
 
“Be sure to upgrade from ‘I Love You Wills’ to a plan that incorporates AB Trust planning and, if applicable, state estate tax planning with ABC Trusts long before your youngest goes off to college. And be sure that if you move to a new state your estate plan is reviewed by a qualified estate planning attorney in your new state,” Garber says.
 
Garber cautions that even if you don’t fall into this pitfall, it is also a common mistake to leave taxable portions of your estate to your spouse outright instead of leaving them to a marital trust. “In other words, instead of having a true AB Trust system, the plan only creates a ‘B Trust,’ and the taxable portion, or ‘A’ portion, will go outright to the surviving spouse instead of into a Marital Trust,” she says.
 
One advantage of a marital trust is that it is irrevocable, such that it can prevent assets from being seized by creditors of the surviving spouse. It also prevents the assets from being split in divorce and ensures that assets go to the children of a deceased first spouse and not those of a second surviving spouse.
 
Another issue arises if spouses are each other’s sole trustees of their revocable living trusts, because it “poses a serious problem if one spouse becomes mentally incapacitated[,] because the other spouse won’t have any access to accounts titled in the name of the incapacitated spouse’s Revocable Living Trust,” Garber says.
 
Be sure to speak with your financial advisor or attorney to determine how your revocable living trust will function in the event of incapacitation.
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