The Danger of Having an Out of Date Estate Plan

In this series, Business Attorney and Certified Public Accountant (CPA) Denice Gierach of The Gierach Law Firm, LLC, speaks of the many unseen risks associated with having an out of date estate plan.

In addition to being the founder of The Gierach Law Firm, LLC, Denice is an estate planning attorney, business attorney, and Certified Public Accountant (CPA), with more than 30 years of legal and business experience. She holds a Master’s Degree in Business Management from Northwestern University’s Kellogg School of Business, and has been named one of twenty "Influential Women in Business" by Chicago’s Business Ledger. ______________________________________________________________________

For successful business owners and inheritors of significant family wealth, having a detailed estate plan is one of the smartest things you can do to ensure your material assets are sufficiently protected from state taxes, federal taxes, and predatory inheritance claims.

Unfortunately, having an estate plan is far from enough.

Why?—because estate plans, trusts, and wills come with a “Relevance Expiration”.

To be clear, a “Relevance Expiration” is neither a true legal term, nor an expiration affixed to a specific date. Once an estate plan is created and the paperwork signed, it will remain legally valid and enforceable indefinitely. However, “Relevance Expiration” is the only way to describe what happens to an estate plan as life changes.

Let me explain in the most rudimentary of ways.

The estate plan you create today names your wife and your brother as the co-trustees of your estate, and the sole inheritors of your assets—your business, your house, your car, etc.

But, five years from now, you’re divorced from your wife, and you’re no longer speaking to your brother.

Your existing estate plan, while still entirely legal and enforceable, has “expired” in its relevance as you will (in all likelihood) not want to hand over all your assets to your ex-wife and estranged brother.

Granted, the above is an extreme example, but it’s not unheard of, and it clearly conveys why it’s so important to keep an estate plan up-to-date—something that many wealthy professionals fail to do.

So, what is up-to-date?

Well, that all depends on the opinion of the estate planning professionals you’re partnering with, but reviewing your estate plan and powers of attorney at least once every 36-months, is a good idea.

Many people who come into my office are guilty of not updating their estate plans for more than five years, despite enduring significant lifestyle changes. When I sit down to review their existing estate plans, I typically come across several red flags, some of which I’ll share with you now as The Danger of Having an Out of Date Estate Plan.

Dealing with divorce

As referenced in our sample above, a divorce can throw an existing estate plan into total turmoil.

And when you consider that anywhere from 40% to 50% of marriages in the United States end in divorce, it’s not unreasonable to think that you’ll need to update your estate plan because a marriage falls apart.

If you fail to update your estate plan, your ex is going to walk away with a lot more than alimony in the event of your death. The beneficiary designations must also be updated on all your assets after a divorce. Why?—because depending upon the jurisdiction you live in, the beneficiary designations can override what’s written in your estate plan.

Life and death

In the last five years, how many weddings have you been invited to? How many of your friends and family have had children and grandchildren?

And at the other end of the spectrum, how many obituaries have you read and how many funerals have you attended?

The point is that life and death happen, and they happen all the time—often more frequently than we acknowledge.

The birth of a child, the death of a sibling, the arrival of your first grandchild, these are major events that can dramatically change how you want your estate plan to look. But if your estate plan hasn’t been updated, what you want doesn’t matter. The only “want” that will be reflected is your “want” as it existed on the day you drafted the terms with your attorney.

Checking-in (and updating as necessary) your estate plan every time there is an addition or subtraction from your immediate family is essential. Of course, doing this requires both discipline and vigilance. An easier solution is to create a standing review with your estate planning attorney every 36-months to ensure your intentions are reflected and your inheritors are taken care of.

Taking care of taxes

Every year, federal and state authorities make changes—some of which are significant—to existing codes and statutes that deal with taxes.

For business owners and families of means, some of these changes will have to do with estate and inheritance taxes.

If you’re not investing the time and the energy to review your estate plans with your attorney on a regular basis, you could miss out on immediate and long-term tax savings.

Missing out on new opportunities

Innovative new investment and financial products come online all the time. The exchanged-traded fund, the 401(k), the mutual fund, life insurance—once upon a time, these were all brand-new entities that offered savvy investors (and their future heirs) creative ways to not only grow their money, but protect it from risks associated with fluctuation in the economy, and rule changes by the IRS.

The problem is, you can’t predict when new, highly-advantageous financial products are going to come online. And unless you’re extremely detailed observer of the financial industry, you’re probably going to miss out on lucrative opportunities to avoid taxes, and take better care of your inheritors—just one more reason to make a habit of reviewing your estate plan with both your financial advisor and your attorney.

More money, more problems

As your wealth grows with time, it stands to reason that your asset portfolio will grow as well. New properties will come into your ownership, additional bank or investment accounts will be opened in your name, and formerly cherished possessions like a much-beloved car or golf club membership will be sold-off or surrendered.

As individual assets are added or subtracted to your portfolio—or, stated another way, as your net-worth significantly increases or decreases—updates should be made to your estate plan.

Without those updates, that new lake house you bought for your grandchildren to enjoy, or the antique silver coin collection you acquired at auction to give your wife your 25th anniversary, will end up in probate upon your death, where their fate will be determined by a court-appointed judge.

Assuming a trust is a part of your estate plan—and it should be—the new assets (and their corresponding accounts) will need to be listed in the name of the trust. Make sure to audit your assets every couple of years to make sure everything is properly titled, and to make sure all the assets included in your estate plan are set up to disperse in accordance with your wishes.

Moving can cost you

As you age, you may decide to start living in the warmer climes of the southeastern or southwestern United States. Or, you may decide to move to a state that owns a favorable tax-structure, like Washington, Florida, or Texas.

But moving your primary residence across stateliness without updating your estate plan can come with unforeseen risks. Many people move across stateliness assuming, incorrectly, that such a move will have no impact on their estate plan.

While your existing estate plan will remain a legally binding document in your new state, the terms surrounding its enforcement may change drastically. These changes can lead to costly trips to the courtroom for your inheritors, and delays in the execution of your estate plan.

Avoiding these expenses and delays means updating your estate plan the moment you move your primary residence across state lines.

Interests and intentions will change

Of course, the biggest risk of not owning an up to date estate plan is that it will not accurately reflect your interests and intentions.

Though your major priorities won’t change on a day-to-day basis, they will change, and at least once every two years you can bank on one aspect of your existing estate plan becoming inaccurate.

This goes beyond things like the birth of a child, or the death of a spouse—charitable organizations, religious associations, social clubs, schools, and public services are all commonly designated recipients of an estate plan.

Pretend for a moment you decide to leave $100,000 to the main library in your hometown which is in desperate need of repair. But, two years prior to your death and the execution of your estate plan, the main library receives a federal grant for all the repair work it needs.

The library no longer needs your $100,000 for repairs, but there are countless other local organizations—like the fire department—that could greatly benefit from such a sum. If your estate plan isn’t updated that money is still going to be allocated to the main library.

Obviously, this is a rough example, but it accurately depicts the risk that’s tied to keeping an out of date estate plan on your books.

A final thought

If you can remember one thing about estate planning make it this—the enforceability of your estate plan rarely changes over time, but you—and your desires—do.

And that means you cannot think of your estate plan as a static, one-and-done legal document like a marriage license or a social security card. It is a legal document that needs to be reviewed, reconsidered, and rewritten with relative frequency, ideally every two-years at a minimum.

If you’re an Illinois-based business and need help talking to your family about what it means to be a productive employee in a productive family business, talk to the talented business law professionals at the Gierach Law Firm. We are more than happy to sit down for a 1-on-1 conversation about your family business. Just call 630-756-1160 for a confidential consultation today, or email an inquiry to [email protected].

Brought to you by The Gierach Law Firm, LLC

[email protected]  https://www.gierachlawfirm.com/ (630) 756-1160