We have all suffered through an incredibly difficult year. In the wake of the CoViD-19 pandemic, many of our clients have felt the sting of losing a loved one. As we begin to crawl out of the quarantines and look to restarting our normal lives many are considering how to update their estate plan after losing a spouse or another loved one. Such an update often sees changes driven by passage of time, changes in control and beneficiaries, and ‘funding,’ which is the process of updating titles and beneficiaries.
Passage of Time
Estate documents are ideally reviewed annually and should be examined at least every five years. It is rare that a ten-year-old plan does not need updates both for fiduciaries (a fiduciary is someone who would act on your behalf at your death or incapacity) and beneficiaries (a beneficiary inherits from you after your death), but also for legal and technical updates. Some such technical updates are driven by changes in law and others by our experience. In my twenty-plus years of trust drafting I have learned a lot and those lessons require me to update my templates a little every year, as my experience dictates.
Durable Powers of Attorney have a particularly short shelf life among estate documents. We have found that such documents are often rejected by financial institutions when they are five years old. An update following the loss of a loved one is an excellent time to update Powers of Attorney.
Often, a widow or widower finds that the death of a spouse is the right time to convert from a will-based plan to a living trust. This results both from an increase in assets and from the fact that Probate is often a non-issue between spouses but can cause large costs and delays when property passes to children, charities, or other loved ones through a will.
Update for Control
When a deceased loved one was named in a document as a fiduciary, the documents need to be updated. If the deceased spouse (or child, etc.) was named as the first executor/trustee, then the hierarchy should now be reevaluated. Additional fiduciaries may be added, and sometimes the experience of seeing which friends and family were helpful and which were absent during an illness or crisis precipitates changes in a plan. This is also a good time to investigate replacing family or friends with a professional fiduciary like an attorney or trust department.
Your plan names many fiduciaries, so you will want to review (and perhaps revise) your appointed guardians, trustees, personal representatives (which is the English term for the Latin executor), financial agents, and health care agents.
Update for Beneficiary
Similarly, the loss of a loved one often requires changes to a plan’s beneficiaries when providing for the loved one had been a primary focus of the plan. Such a change pushes second-tier beneficiaries to the front and can trigger reevaluation of the whole plan in light of new family dynamics and changes in how important some people and values feel to you over time.
What Can be Changed, What Cannot, and How to Tell the Difference.
Sometimes the death of a loved one makes a trust irrevocable, thus limiting the power of the survivor to make changes. Even in the case of irrevocable trusts, the survivor may be granted a ‘power of appointment’ which allows them to make alterations to the trust after the death of the trust’s Grantor (a Grantor is a person who creates a trust, also called a Trustor and Settlor). You will need the help of your attorney to identify and exercise a power of appointment.
Asset Titles and Funding
When you made your JGB estate plan, we gave you a checklist of how we think your assets should be titled (i.e. how the account title should read) and who should be designated beneficiaries of your life insurance and retirement accounts. The biggest disaster we see in our clients at the death of the first spouse is when these recommendations were not implemented and assets are drawn into the expense and misery of probate unnecessarily. Make sure to check these instructions and review your account titles and beneficiaries regularly!
Even when accounts were titled properly, the loss of a loved one requires a close reexamination and often modifications of account titles. Life insurance, for instance, is delivered in the form of a check pretty quickly after a death. The survivor needs to deposit and invest those proceeds in line with the estate plan. Life insurance proceeds often provide the survivor with more cash-on-hand than they ever possessed before so it is important to confer with your lawyer and trusted financial advisor.
Qualified Retirement Accounts (e.g. IRA, 401(k), TSP, Roth, 457, 403(b), etc- all are referred to as IRAs in this article) are particularly important. In addition to changing how Required Minimum Distributions are calculated, the death of a spouse has profound impact on the title of an IRA. A spouse does not exactly inherit the decedent’s IRA – more precisely they typically roll that IRA into a new IRA that belongs to the surviving spouse. It is that roll-over that causes the change in required distributions because the survivor is a different person who is often a different age. The roll-over creates a new IRA for the spouse. The creation of the new IRA for the spouse also means that the spouse must list new beneficiaries even if the intended beneficiaries have not changed. Be sure to name the beneficiaries of the new roll-over IRA according to the instructions we provided you. Your attorney and financial advisor can help- be sure to reach out.
The death of a loved one is a difficult time. Sometimes it takes a few months before you feel up to revisiting your estate plan, but it is critical to review your situation with your attorney. We need to make sure that your plan still is on track to achieve your goals and to double-check that those goals have not moved since we made the plan. We stand ready to assist whenever you are ready.