Updating an Estate Plan – Organizing Your Thoughts

October 22, 2019

Preparing an estate plan can be an intimidating process, since final instructions for a family’s assets are memorialized.  Upon death, those instructions are fixed – forever.  Estate plans should be reviewed frequently as family circumstances change – children mature into adults and in-laws are introduced into a family.  When children are very young, parents focus on taking care of them, but when children become married, their spouses change family dynamics necessitating a review of plans.

Organizing estate planning thoughts can help make the process with the estate planning attorney productive and less stressful.  Here are major subject areas to consider before meeting with the attorney:

Basic Structure

The first consideration is the type of document to carry out a person’s final wishes: last will and testament or revocable living trust?  The document of choice in most cases is a revocable living trust (RLT).  When an RLT is signed, it is a new entity and to achieve maximum effectiveness, appropriate assets should be re-titled into the name of the trust.  An RLT avoids the court probate process and after the grantor’s (person who creates a trust) death, the successor trustee finalizes the decedent’s affairs and distributes assets.  Alternatively, if a last will and testament are chosen to be a person’s main estate planning document, it contains the disposition instructions carried out in the costly and cumbersome court probate process.  RLTs avoid probate and are generally preferable especially when out-of-state real estate is owned.

Surviving Spouse

A trust (or last will) usually first provides for the surviving spouse.  If all children are the result of decedent’s marriage with the surviving spouse, then planning is a little easier.  The first drafting decision is whether to give all the decedent’s assets outright to the survivor or hold them in trust for his or her benefit.  If held in trust and the survivor remarries, the assets should have better protection from claims of the survivor’s new spouse.

In a second marriage scenario, the trust grantor may want to provide for children of the first marriage.  In this case, whether some or all of the decedent’s assets will “bypass” the second spouse and go to children of the first marriage, needs to be spelled out.

Children and Protecting Assets from In-laws

After providing for the surviving spouse, attention then turns to children.  Essentially, there are three options:

  1. Distribute assets outright to children
  2. Stage outright distributions from children’s trusts
  3. Hold in trust and only distribute in the trustee’s discretion what the child may need for health, education, maintenance and support

Distributing assets outright is simple but does not shield the spendthrift child or protect assets from third parties.  Smaller estates usually are distributed outright in order to avoid ongoing costs of administration.  Staged distributions of principal, say one-half at 35 and the remainder at 50, give the trustee some control over the child’s spending and can delay outright receipt of assets to a point where a child is mature enough to make prudent decisions.  Holding assets back in trust should not disadvantage a child since distributions can always be made for health, education, maintenance and support.  The big advantages include: shielding assets from claims of creditors and keeping them non-marital in divorce settings.  This is sometimes referred to as a “back door pre-nuptial.”

Special Assets

Some families have assets that require special attention such as a family business.  In such cases, the trust should address how the ownership will be distributed.  For example, should a child active in the business be forced to share ownership with a non-active sibling thereby creating strain?  Maybe there are other assets that can “even out” inheritances among the children and avoid ongoing tensions.

Summary

Thinking through the main areas covered in an estate plan is critical for drafting accurate documents.  Being prepared for the meeting with an estate planning attorney is extremely helpful in creating an estate plan that transfers family wealth efficiently and fosters healthy relationships among loved ones.

Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning.  Mike shares his estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members.  Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute and Illinois State Bar Association. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.