Planning for the future is an essential part of life.
With the unpredictable nature of our world, fluctuating economy, and the ever-evolving laws and regulations, having an updated estate plan is a necessity rather than an option.
Your estate plan represents your life’s work, your legacy, and an updated plan can mean the difference between leaving a cherished heritage or an unforeseen burden to your loved ones.
Why Your Estate Plan Needs Regular Updates
It’s a common misconception that estate planning is a one-time task.
In reality, it should be an ongoing process that evolves with your life, legal changes, and financial shifts. An outdated estate plan may fail to reflect your current wishes or accommodate new laws, which could lead to undesirable consequences.
If your estate plan isn’t up-to-date, it could put your family through unnecessary hardship, including the ordeal of probate, the invasion of privacy, and the weight of considerable tax burdens.
For Example: Estate Planning and Divorce
Let’s assume that John, a successful entrepreneur, created his estate plan in 2000.
At that time, John was married to his first wife, Mary, and they had two children. In his will, John stated that all his assets should be divided equally between Mary and their two children.
However, in 2005, John and Mary got divorced, and John later remarried in 2010 to his second wife, Susan.
John and Susan had a child together in 2011.
If John hadn’t updated his estate plan after these significant life changes, upon his death, his outdated estate plan wouldn’t reflect his current family structure. His second wife and their child could be left without any inheritance because they were not included in his original will.
This is a clear example of how an outdated estate plan may not reflect current wishes.
For Example: Changes in Tax Codes Make an Impact on Estate Plans
Regarding new laws, let’s consider the example of the Tax Cuts and Jobs Act (TCJA) that was enacted in 2017.
This law doubled the federal estate tax exemption, which is the amount an individual can leave to heirs without having to pay federal estate tax.
Before the enactment of the TCJA, if an individual’s estate plan was set up to limit their estate’s value to the previous federal exemption limit to avoid estate taxes, they wouldn’t take full advantage of the new higher exemption limit.
If the individual passed away without updating their estate plan to reflect the changes made by the TCJA, they could potentially miss out on tax benefits that could have resulted in more of their estate being passed onto their heirs.
This illustrates how failing to update an estate plan to accommodate new laws can lead to undesired financial consequences.
Understanding Probate and Its Challenges
When an individual passes away, their will enters a legal process known as probate.
This process involves the verification of the deceased person’s will, the inventory of their assets, the settling of their debts, and ultimately, the distribution of their remaining assets as dictated by their will. Probate can be a lengthy and emotionally strenuous process, often taking anywhere from 12 to 18 months to complete. During this already challenging time, your family members would be navigating the intricate probate process. This can be avoided with proper estate planning. Yet, a report by the American Association of Retired Persons (AARP) reveals that an alarming 60% of Americans die without a valid will1, leaving their estates to be subjected to the probate process.
The Financial Implication of Probate
Probate is not only a long-drawn process, but it’s also expensive.
The actual cost can vary widely, but it typically includes attorney fees, court costs, executor fees, and other related expenses. According to a study by The American Bar Association, the total cost of probate can reduce an estate’s value by up to 3% on average2.
That means that for an estate valued at $500,000, this translates to a potential loss of $15,000. This is a substantial sum of money that could have been used for your family’s welfare or to perpetuate your legacy in a meaningful way.
Protecting Your Privacy in Estate Matters
Privacy is a key concern when it comes to managing your estate. A little-known fact about probate is that it lacks the element of privacy most of us value.
When your will enters probate, it becomes a public document. This means that the specifics of your estate, including detailed lists of your assets and who you’ve chosen to inherit them, can be accessed by anyone.
This lack of privacy could expose your family to unwanted solicitations or even disputes among potential claimants.
Preventing Excessive Tax Burden for Heirs
Even with a properly drafted will, there’s another critical issue that your heirs may have to confront – taxation. Your heirs may have to pay estate taxes on the assets they inherit from you.
The IRS disclosed that the estate and gift taxes collected in 2020 amounted to a substantial $18.4 billion3. Depending on your estate’s size, your heirs could be looking at a substantial tax bill that could put a strain on their finances at a time when they are already grappling with loss and grief.