When Should You Update Your Estate Plan?

Logan Baker, JD, LL.M., MBA

Lead, Senior Wealth Strategist

Summary

There are three main circumstances that may require you to review and update your estate plan.

When Should You Update Your Estate Plan?

If you already have an estate plan in place, you may think that you’re prepared for any potential changes that may impact your life. In reality, having a completed estate plan means you’ve only completed half of the work; it’s equally important to keep your estate plan up to date.

Below are three situations that might necessitate a reevaluation and revision of your estate plan.:

1. Life events

Life transitions come in multiple forms, including marriage, divorce, the birth of a child, illness or death of a family member, a change of financial situation, or a move to another state. These significant events often signal the need to reassess and modify your estate documents to address any necessary adjustments.

Changes to your estate documents may include: creating a special needs trust for a beneficiary who will need public assistance; updating a trust to adjust for divorce or remarriage; estate tax planning due to an unexpected increase in wealth; creating a trust to manage children’s inheritance; or a complete redo of the entire plan if you have moved to a new state.

2. Tax law changes

While not all tax changes necessitate a revision of your estate plan, they may present a good opportunity to review your documents.

The SECURE Act, enacted in 2019 (and still undergoing clarifications through ongoing regulations) introduced significant changes to the rules for IRAs and other retirement accounts. Many estate plans drafted prior to the implementation of this legislation may require updates to avoid adverse tax implications. Additionally, the Tax Cuts and Jobs Act of 2017 introduced noteworthy adjustments, such as an increased estate tax exemption and reduced income tax rates, set to expire on Jan. 1, 2026. This will reduce the exemption amount from its historically high level ($13,610,000 in 2024) to approximately $7,000,000, contingent upon inflation numbers. To capitalize on available opportunities, any existing estate tax planning strategies should be executed before the expiration date.

Any estate plan created before 2011 is likely inconsistent with portability rules enacted that year, resulting in potentially devastating income tax consequences for surviving spouses and beneficiaries. Estate tax portability, available to married couples when one spouse dies, entails the surviving spouse electing portability by filing an estate tax return. Despite the availability of portability, there are circumstances where a credit shelter trust may prove advantageous. At Mercer Advisors, our approach typically involves providing a disclaimer option to allow the surviving spouse to select the most favorable option (be it portability, credit shelter trust, or a combination of strategies), by allowing for the creation of a survivor’s trust, credit shelter trust, and possible additional sub trusts if needed.

A survivor’s trust and credit shelter trust comprise an A-B trust, commonly used by married couples to minimize estate taxes. Upon the death of the first spouse, the A-B trust bifurcates into two distinct trusts: the survivor’s trust (or trust A) and the credit shelter trust (trust B). The credit shelter trust can hold the deceased spouse’s assets, up to their exemption amount, while the survivor’s trust retains the surviving spouse’s assets and any excess assets from the deceased spouse above their available exemption amount. The step-up in basis tax rule applies differentially to trust A and trust B, necessitating a thorough comprehension of how and whether this rule might be leveraged to minimize capital gains taxes.

Consider the hypothetical scenario of Joe and Karen, a married couple, who drafted their estate plan in 2007 when the exclusion amount was $2 million and portability did not yet exist. At the time, their combined estate was worth $4 million and each owned 50%. Had Joe died in 2007, a formula clause in his trust would have funded $2 million into the bypass trust and $2 million to the survivor’s trust for Karen.

Imagine instead that Joe dies in 2024, with no updates ever having been made to the 2007 estate plan. Their combined estate is currently valued at $10 million, still equally shared between them. Given the increase in the exclusion amount to $13.61 million, the formula clause pushes Joe’s entire $5 million to the credit shelter trust. This likely results in unnecessary overfunding of the credit shelter trust, as portability would have allowed Karen to inherit some or all of Joe’s estate exemption. Combining Joe’s estate exemption with her own personal exemption would likely have been more than sufficient to shield the assets from estate tax. Furthermore, the assets in the credit shelter trust will forfeit a basis step-up upon Karen’s subsequent death, potentially burdening their children with substantial capital gain taxes upon the eventual sale of the inherited assets.

3. Incapacity documents older than four years

As part of your estate plan, it’s crucial that your incapacity documents, such as powers of attorney and health care directives, remain current. A power of attorney grants someone you designate the authority to act on your behalf when you are unable to do so. Similarly, a health care directive outlines the actions to be taken in situations where you cannot make decisions for yourself due to illness or incapacity.

A notable trend nationwide is the increasing reluctance of financial and healthcare institutions to accept incapacity documents signed more than four years ago. The reluctance stems from concerns about potential litigation and uncertainty regarding whether the documents accurately reflect the principals wishes. While there is no federal or state law stating that incapacity documents expire after four years, the recommendation is to update them accordingly, given the prevailing risk-averse stance of many institutions.

Waiting until you require these documents to update them is often too late. Therefore, it is essential to proactively ensure your estate plan remains up-to-date. This includes not only revising incapacity documents but also updating your will and beneficiary designation forms for retirement accounts, life insurance, and annuities. Unfortunately, these critical documents are frequently overlooked during major life events.

If you are not a Mercer Advisors client and have questions about making changes to your estate plan, let’s talk.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning document preparation and other legal advice is provided through select third parties unrelated to Mercer Advisors.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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