(Image courtesy of treehugger.com)

In my last blog post I promised to give some concrete examples of why an updated trust is better than one that simply keeps the “status quo”.  I will forgo the obvious examples such as inheriting money or growing your assets so that your original plan will no longer work.  I’ll also skip over the obvious changes in family circumstances which make your existing plan unpalatable.  These are reasons you already know. This blog post will concentrate instead on the not so obvious reasons to update.

One of the most important (and most common) reasons to update from your Chevrolet trust to a Cadillac trust is a second marriage.  A subtle problem may exist when you are in a second marriage and plan to leave your assets to your surviving spouse to use, and then hope that spouse passes them along to your descendants.

A typical estate plan provides for the surviving spouse to be the income beneficiary of a credit shelter trust with the remainder passing to your children. If your estate exceeds the minimum estate tax exemption then the remainder passes to a marital deduction trust, either a limited access trust commonly called a QTIP or outright to the survivor’s trust, depending upon your family circumstances.  However in many second marriages, the plan is for the amount that can pass without being subject to estate tax to pass directly to your descendants upon your death.  This is fairly common when the spouse may be close in age to your children.  Such plans usually satisfy the belief that it would be unfair to make your children wait for their inheritance, yet the inheritance is still shared between your spouse and your descendants.

The way most plans are written, the formula operates to leave as much to your descendants as will not increase the tax.  When that number is $1,000,000, in a $2,000,000 estate the surviving spouse would get half and the descendants would share the other half.  But as the exemption amount increased to 3.5 million dollars, the surviving spouse would get nothing – not the intended result.  Now the reverse is true, this year there is no estate tax and that plan would completely disinherit the spouse no matter how large the estate, but next year, the descendants will share only 1 million dollars no matter how large the estate.

I believe in “modeling” or “back testing” the results to be sure you will achieve the desired result, and it pays to model or back test frequently if a sound estate plan is important to you.

Unintended consequences can arise in many ways, this is just one graphic example.

Call today and arrange for me to review your documents and back test them against your assets and your intentions.  You will be glad you did!

I recently described the marvelous manner in which George Washington used a simple bequest of his swords to express his devotion to freedom and liberty and to instill those values in those who followed.

His Last Will and Testament also stands as a shining beacon of how failure to think through consequences and the personalities of your loved ones can undermine a well meaning estate plan.

Washington’s Will provided that all his slaves were to be freed upon the death of his beloved wife Martha.  On the surface this appears to be a reasonable and well conceived expression consistent with his desire to look after the comfort of Martha, but to ultimately underscore his love of freedom and liberty for all men, his own faithful servants included.  It was a powerful political statement.

When Martha became aware of this provision she was afraid that she would suffer a fatal event at the hands of her slaves who could wait no longer for the promised freedom.  The history books usually make a dramatic statement about Martha’s devotion to the ideals upon which our country was founded when describing her generous action of freeing her slaves soon after her husband’s death.  Few realize that her reluctant action was in part motivated by fear of the consequences of not freeing them.

This is a dramatic example of a logical exit strategy gone awry.  Today such mistakes remain all too common because of the mistaken beliefs that good estate planning is only for the wealthy.

One crucial fact often overlooked is the importance of making arrangements for minor children.

In today’s world where 1 out 2 marriages end in divorce, young children are often the natural objects of their parents affections and bounty.  If any thought is given to changing beneficiary designations after a divorce, many people remove the spouse and name their minor children or their “estate” as the beneficiary of their retirement accounts and life insurance until a more formal plan can be established.  That formal plan is often never implemented prior to a premature and unexpected death due to an accident or suddenly terminal illness.  The importance of these details often becomes enmeshed with concerns about the cost or the need for a formal estate plan when there are often no other valuable assets other than the untouchable insurance proceeds or retirement plan accounts.

If a decedent’s beneficiary is a minor, often the only choice is to have a conservator appointed and the money placed in a restricted account until the minor is 18.

There is no money available to raise the minor because the money is under the strict supervision of the court.  The other parent, however ill equipped financially to provide for the minor, quickly learns that a parent’s obligation of support means not using the minor’s own nest egg for the necessities of life.

And then the minor turns 18.  Whamo! all of the proceeds plus the accrued earnings spill out into the minor’s hands subject to all the hopes, dreams, and aspirations of a youth to often raised in an environment of scarcity and often with scorn for the restriction learned from the surviving parent.

If ever there was a case for a protective trust or careful legal work in the planning for one’s demise, this is it.  Don’t let this unhappy result become your child’s reality.