Your life just changed — shouldn’t your plans for your family change, too?
Whether you’re remarrying, your child’s graduating from college or some other big event arises, your life circumstances are bound to shift — and all these moments call for a second — or first — look at your estate plan.
FOR MANY PEOPLE, IT’S STANDARD OPERATING PRACTICE to revisit their estate plans — including their wills, powers of attorney and in many cases one or more trusts — either annually or once every several years. Having crossed that chore off their to-do lists, they forget about it until there’s a death in the family that forces them to take another look.
But taking that kind of approach misses one of the more important dynamics of any family: Things are always changing. You might make a life decision, like remarriage or a large financial commitment, that has reverberations for other family members. Your children graduate from college, take jobs, get married, start families — and perhaps face a financial challenge. Any of those events can be a cue for you to think about changing the terms of your trust. Or, if you don’t presently have one, to think about getting started.
“There’s a myth out there that trusts are ‘set it and forget it.’ The fact is, they should be crafted in a way that reflects your goals, even as they evolve over time,” says Lynn Bebeau, director, Wealth Strategies at Bank of America. The most flexible kind of trust is a revocable, or living trust, which lets the grantor retain control during their lifetime, allowing for the addition or removal of beneficiaries or the redistribution of assets. It can even be dissolved at any time.
“You should approach asset protection, and wealth management in general, with the same discipline or regularity as you would for your physical health,” says Katie Carlson, Head of Wealth Strategy at Bank of America. “There are infinite reasons to revisit a plan. It’s not something that needs to be held off for year’s end or tax season. Anything that potentially triggers a transfer of wealth should also trigger a conversation with your advisor.”
Often people don’t recognize the opportunity or need for a trust until a critical moment. But if you’re checking in with your advisor frequently, you can adjust your trusts as needed and avoid exposure to potential risks.
Here are several situations that commonly lead people to revisit their trusts.
A second marriage could usher in any number of financial complications. Not all divorces are amicable, after all, and not all second marriages are without children. Updating your trust plan can help bring clarity, thereby averting discussions with family members around touchy money matters. With a revocable trust, you could add and re-distribute assets between stepchildren, or add or remove an ex-spouse.
A longtime client of the bank used this option recently, following a health scare that made her wonder what might happen to the wealth she brought to her second marriage in the event of a more serious medical issue. Because she already had a revocable trust in place, she merely altered its terms so that, if she were to pass away before her second husband, it would take care of him for life while continuing to support the children from her first marriage. That way, even if the widower’s relationship with his stepchildren soured, he would remain comfortable but couldn’t restrict the children’s access to their portion of the funds.
Parents may love all their children equally, but that doesn’t mean siblings should all receive the same financial treatment. Bebeau recalls one corporate executive who learned that her 21-year-old son wanted to pursue a career as an artist, while his sister was two years into law school. This led the executive to think hard about how her children’s needs might differ over time, and how she wanted to support them.
She brought these thoughts to a conversation with Bebeau. “As we looked at a trust plan together, we considered whether each child would benefit from different boundaries that reflected their different career choices,” says Bebeau.
In the end, the executive chose identical trust provisions for her children, recognizing that the boundaries set would benefit each child differently. By authorizing the trustee to make distributions for each child’s healthcare needs, education, maintenance and support, the trustee could evaluate each child’s different situation to make distribution decisions. For example, if her son decided to go back to school, the trust assets could be used to support his educational pursuits. Should either child take time out of their work to raise a family, trust assets could support these additional responsibilities. The executive also took an important step by adding any future grandchildren as potential beneficiaries, so that trust assets could also be used to support them. The executive also chose to keep the assets in lifetime trusts for her children to protect their inheritance from a potential divorce or any other creditor issue that might arise in the future.
This way of organizing the trust gave the executive flexibility to address the differing needs of her children, without necessarily treating them differently as she crafted her estate plan.
As your children grow up, they may wind up in unexpected circumstances that complicate their financial situation. Say your daughter attends medical school and becomes a successful surgeon — which comes with the risk of malpractice lawsuits that could jeopardize any assets in her name. Or your son goes through a bitter divorce and is subject to an aggressive lawsuit.
One key advantage of a revocable trust is the opportunity it affords you to revisit the original document and remove or add assets from your estate while maintaining control over how they’re disbursed. It would shield its assets from any lawsuits your daughter might meet, and would certainly protect the family’s accumulated wealth from a vengeful ex-daughter-in-law, while still granting the son and his children the benefit of the assets.
Family gatherings in the mountains or at the shore can create lifelong bonds between siblings, in-laws, even distant relatives. But a vacation home can be costly to maintain and can’t be divided easily among siblings. And it can also create a tax hassle for heirs.
A number of these issues can be avoided if families place their existing vacation home into a revocable trust, or make the initial purchase through one. That allows the parents to name their children as the ultimate beneficiaries without having to go through a lengthy probate process when they pass away.
At death, most revocable trusts become irrevocable trusts, which means that they cannot be changed without the permission of all the trust’s beneficiaries. This would prevent the home from being seized through any legal action brought against one of the beneficiaries. Meanwhile, a trustee and even a successor trustee can be named to manage the asset so that the home is maintained indefinitely — unless the money runs out or the heirs decide to sell. “The goal is to ensure that the house remains in the family for generations without having it become a potentially taxable asset in the estate,” explains Carlson.
Opinions are as of 1/13/2023 and are subject to change.
Investing involves risk including possible loss of principal.
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