One of the most significant estate planning mistakes individuals make is creating the estate plan and failing to regularly review it. However, reviewing it at least once a year is a great idea and can serve to protect your assets and ensure that the transfer of them occurs as you intended it. There are many reasons why a regular review of your plan is a good idea. You can have a change in assets, or you may want to look at how changes in law can impact your plan.
But another major reason to reevaluate your estate plan is to verify that your beneficiary designations haven’t changed. Many changes in your family or personal relationships can occur after you have drafted an initial estate plan, and you will want to update your plan to reflect current circumstances.
Some common events that can prompt a review of your estate plan and beneficiary designations include:
- Divorce/Marriage: When individuals go through a significant milestone like marriage or divorce, they should update their entire estate plan, including their will. It’s also good to review your beneficiary designations for any assets such as IRAs, annuities, or life insurance policies. Even if you do not have a trust in place, your beneficiaries should be named explicitly in these accounts. In the event of a divorce, if you fail to remove your ex-spouse, this individual may still be the primary beneficiary upon your death. This unforeseen distribution of the asset(s) will impact what remains for your intended beneficiaries. Similarly, if you enter a new marriage, your current spouse may lose out on assets if he or she is not your named beneficiary.
- Birth/Adoption: In the event that your family grows, you may want to include the new child or grandchild as a beneficiary. It would be best if you did this for every child you want to include as a beneficiary. Naming only one will not guarantee that the child will share the assets with other children who were not named (even if you request it). And suppose that child was the sole beneficiary and wanted to distribute it equitably with other family members. In that case, it may incur a gift tax for the recipients, leaving less available for them than would be if you named them all as beneficiaries.
- Death: If one of the beneficiaries you have named passes away before you do, they should be removed to prevent any complications. Even if you have more than one beneficiary named, the designations should be changed so that the executor of your estate will know precisely how to divide the assets between surviving beneficiaries.
- Life Changes: You may also want to consider reviewing your beneficiary designations if there are major life changes. For instance, if you have one child reach legal adulthood but still have minor children, you may want to redistribute funds to reflect the anticipated expenses that minor children will incur until adulthood. Similarly, the financial needs of your beneficiaries may change over time. If all of your children reach adulthood and are successful, you may want to leave assets to grandchildren. Or, if you have one child that will need long-term care due to a medical condition, it may be a good idea to plan for that.
Many estate planning professionals have encountered at least one instance where a failure to review the estate plan and beneficiary designations resulted in an unintended individual receiving the assets. For example, if you established an account or life insurance policy years ago and named a sibling as the beneficiary, that sibling will receive your life insurance proceeds even if you marry and have children and name them as your beneficiary in your will.
The beneficiary designation for life insurance policies, retirement accounts and IRAs supersede what is stated in a will, even if the information in the will is current, meaning that the sibling will inherit this asset. In a worst-case scenario, the named beneficiary may not recognize your current wishes and keep the asset. In the best-case, the named beneficiary may try to transfer the asset to the spouse and/or children – although this may be costly if the gift tax is levied.
While updating your estate plan and beneficiary designations is a great idea for every instance where your wishes change, you should review it annually at a bare minimum. A lot can change in a year. Completing this review will give you peace of mind that your wishes will be followed in the event of the unthinkable.
