Elizabeth Anderson, CFP®, CTFA, Senior Analyst, Client Needs Research
When a major life event occurs (such as the death of a loved one), it might seem obvious to meet with trusted individuals — like your financial advisor and attorney — to discuss next steps. However, there are other times when life’s milestones require you to evaluate who can make decisions on your behalf — or whether you should change your primary, secondary/contingent beneficiaries — and other important pieces of your estate plan.
Start with core documents
Although most people don’t think about estate planning until they have assets to pass, it’s important for all adults to have core estate documents in place. Because estate planning isn’t just about transferring assets, completing core documents is an important first step to help ensure your estate plan has a healthy foundation should something unexpected happen. Those documents are:
- A financial power of attorney
- A will (or will and revocable trust)
- A health care power of attorney/living will/health care directive
Once you’ve completed your core documents, review them every three to five years to ensure they’re aligned with your goals and adjusted for any recent or anticipated changes in tax law.
Below are six common life events that should cause you to review or update your core estate documents.
1. You get married.
Marriage brings many exciting changes — including adjustments to your finances and your estate plan. You should work with an estate-planning attorney to conduct a comprehensive review of your estate plan or put one in place if you have not already done so. You might assume that you will share everything with your spouse once married and that your new spouse can automatically make decisions on your behalf. It’s not that straightforward.
In addition to addressing asset transfers through your will (or revocable trust), you should review with your attorney how your assets are owned and how you’ve set up your primary and successor beneficiary designations. Some account types — such as 401(k)s and certain pensions — default to having your spouse as your beneficiary and require your spouse’s consent to name an alternate beneficiary. For other accounts, such as checking or savings accounts, you may choose to add your spouse to your account or keep them separate. You should also review any transfer-on-death (TOD) agreements to ensure they align with your wishes following your change in marital status.
Finances can be a delicate subject to discuss. Depending on your situation, you might also want to consider whether a prenuptial agreement or separate property agreement (common in community property states) might be appropriate. These documents can establish the ownership status of certain property or future interests in property and how those assets will be treated in the future.
2. You become a parent.
Along with all the exciting new changes to your family, you’ll probably start to think about how to protect your family’s newest member, such as whom you might want to serve as a guardian should something happen to you. In your will, you can appoint an individual (or multiple) to serve as either guardian of the person and/or guardian of the estate of any minor children or dependents you might have at your passing.
- A guardian of the person cares for the minor on a day-to-day basis.
- The guardian of the estate makes the financial decisions.
These roles can be served by the same person or different people — it’s your choice. While appointing a guardian is an obvious change, you might also want to think about updating the terms of your will or trust to provide for lifetime trusts for a minor upon your passing. Keeping assets in trust for your children allows you to set parameters on how the assets are used and when they might receive them outright. You can appoint a trustee — a trusted individual or corporate fiduciary, such as Edward Jones Trust Company — who will be responsible for managing the assets and making distributions according to the terms you’ve created. If assets aren’t kept in trust, your child could receive their share of assets upon reaching their majority (the age of majority differs by state — usually between ages 18 and 21). In addition to updating your documents, you may want to revisit your life insurance coverage and discuss 529 plans for education funding.
3. You move to a new state or buy property in a different state.
Estate and tax laws differ by state. When you move to a new state or buy property in a different state, consult a local estate-planning attorney to review your existing plan and make any needed updates. There are advantages to updating your plan even if your existing documents remain valid in your new jurisdiction. Among the benefits to updating your plan is the local attorney’s familiarity with your new state’s laws and consideration of differences in estate and inheritance taxation.
In addition, if you have property in a different state than your state of residence, your plan should specifically address how that property be handled upon your passing. If you fail to plan for out-of-state property, your estate might have to be probated in multiple states — increasing the cost and burden of the administration.
4. You divorce your spouse.
Divorce will cause many life changes including an overhaul of your estate-planning documents. Many states have laws that will invalidate beneficiary designations, provisions in wills or trusts, or the appointment of your former spouse as agent under powers of attorney. However, not all states have those laws, and not all the laws operate in the same manner. As such, it’s important to work with both your family law attorney and your estate-planning attorney to update your documents in a timely fashion. You may even want to consider consulting with your estate attorney before filing for divorce to see if there are any updates needed prior to filing. After your divorce has been finalized, you may need to make changes to your documents to comply with any divorce or custody judgments. Changes to your beneficiary designations will probably also be necessary.
5. Your child turns 18 and/or starts college.
Even if they have no assets or limited assets in their name, your college-aged child might encounter a situation in which they need a trusted person (such as a parent) to act on their behalf to make medical decisions or handle their financial decisions (like paying bills) should they be unable to do so themselves. An estate-planning attorney can assist them in appointing agents under financial and health care powers of attorney and creating other core documents.
6. You inherit assets from a loved one.
Receiving an inheritance or bequest creates an opportunity to review your goals. Depending on the size and asset composition of your inheritance, you might want to consult with your professional team — including your financial advisor, your tax preparer and your estate-planning attorney — prior to accepting the assets so that you can evaluate all your options.
- You might need to make decisions about how and when to receive the assets or whether additional advanced tax planning might be helpful.
- For example, it may make sense to have qualified retirement assets kept in an inherited IRA, or you might be able to stretch the distributions from certain annuities over multiple tax years.
- You might want to consider disclaiming your inheritance so that it can pass to other beneficiaries, such as your children. Your estate-planning attorney can advise you on the impact and requirements for disclaiming.
- A large inheritance might necessitate updating your core documents to plan for estate taxes or create trust structures to better match your new financial situation.
Your financial advisor can help you think through how these milestone events could affect your overall financial strategy.