Five Reasons Baby Boomers Need to Update Estate Plan

I was born at the tail end of the baby boomer generation – which is said to include all those born between 1946 and 1964. We’ve been a royal pain-in-the-rear generation – first swelling the ranks of classrooms causing the construction of new schools, and then making college admissions hyper-competitive, afterwards increasing the demand for first home purchases and so on.

We even created a baby-boomlet of our own progeny in the 1980s and 1990s.

Now the oldest baby boomers are beginning to retire – while most remain in the prime of our working careers. We’re expected to put a strain on the Social Security and Medicare programs, and many haven’t saved enough for retirement. There are a number of reasons for that, from overconsumption to stock market and housing crashes to believing the mirage of never-ending youth.

And that last item – the mirage of never-ending youth – is also what traps those who haven’t looked at their estate plan in quite some time. When baby boomers arrive at my office, they generally produce existing wills that call for guardianships for their children (who are now grown adults themselves) and name long-deceased parents as executors and trustees.

Which brings me to today’s topic – the top five reasons that baby boomers need to update their estate plans.

  1. Relationships Change – Just as I mentioned above, your old wills, trusts and power of attorney documents might name people to serve in posts such as personal representative, trustee and health care surrogate who you may have lost touch with or who are no longer close to us. While attorneys in northern jurisdictions often name themselves as trustee of their clients’ trusts, you may now be a Florida resident or that attorney may have long since retired. It’s time to take a fresh look at who you have named to conduct your affairs for you in the event of your disability or death. Also, we may now be in a different relationship or marriage than we found ourselves in when we first prepared our estate plan. Blended families typical of second marriages require a thoughtful, detailed plan to prevent problems between a surviving spouse and step-relations;
  2. Children Grow Up – Your will drawn twenty years or more ago may have contemplated making distributions for your young children that are now fully grown with kids of their own. Your adult children may also be some of the best candidates to serve as your personal representative under you will or as your trustee under your trust. You may also want to protect the inheritance you leave your grown children from adult issues such as divorce or lawsuits;
  3. Your Health – While none of us like to admit it, age usually presents more health issues to deal with. You want to make sure that your health care surrogate documents are up to date, as well as your living will that designates what you want to have happen should you end up on life support with no hope of recovery. None of us wants to be the next Terri Schiavo, so it is important that your health care documents are up to date with today’s law and with your intent;
  4. Your Stuff – It’s probably time to review your assets and how your estate plan provides for you, in the event of your disability, and your loved ones after your death. In our youth our main assets probably consisted of a home, term life insurance and maybe a few investments. As we enter middle-age we may no longer have term life insurance (instead we may have whole or universal life policies that contain cash value), and we may have larger investment accounts as well as IRA and 401(k) accounts. As the types and amounts of assets that we own changes, it is important that our estate plan change with them. An estate plan built around a young family with term life insurance should look drastically different than an estate plan for someone in the prime of their working career or who is nearing retirement;
  5. Your Legacy – Finally, many of us like to consider what kind of legacy we leave behind. It might include a charitable legacy with institutions or causes near and dear to our hearts, or it might mean how we want our progeny to carry on with the wealth that we’ve accumulated. Perhaps we’re concerned that we’ll take away the incentive to lead a productive life, or we may want our wealth to be used for certain activities we find beneficial – such as education or health care.

There’s a lot to consider. Make it a priority to dust off the will or trust that you’ve neglected for so long, and use these five points to write down what concerns you the most about your own planning. Then take that to your attorney to provide a framework for your discussions and plans.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Different Baskets

When choosing how to approach your estate plan, it’s important to realize that the different types of assets that you own have different legal and tax treatments. The way that I most often explain it is to consider them grouped into separate baskets, and then deciding how you want your estate plan to distribute each type of basket.

The first basket consists of your Florida homestead. Florida law limits what you can do with your homestead in your estate plan. My recently published book The Florida Residency & Estate Planning Guide details the complex issues surrounding the devise of your Florida homestead through your will or trust.

If you are married, for example, and do not have a nuptial agreement with your spouse, then you must bequeath your homestead in fee simple to your spouse. You cannot bequeath a life estate interest or put your homestead in some kind of a trust that benefits your spouse for life and then distributes it to others. If you do, then you have an invalid devise. I’ve written other columns on this topic before. If your plan involves bequeathing your homestead other than outright to your spouse, then this basket needs attention – and likely will need at least a limited nuptial agreement dealing with this issue.

The second basket consists of your IRA, 401(k), pension and profit sharing plans (“Qualified Retirement Accounts”). Here, whomever you leave these accounts to will have income tax liability associated with any withdrawals, just as you presently recognize taxable income (unless you have Roth accounts) when you take distributions. While a spouse is the only beneficiary who can “rollover” the account into his or her own account, non-spouse beneficiaries will have Required Minimum Distributions (RMDs) upon receiving an inherited IRA, regardless of their age. If a minor is named as a beneficiary, a court process will also be required without proper planning. Moreover, if you name a trust as the beneficiary of this kind of account, income taxes may be accelerated without proper planning.

The third basket consists of stocks, bonds, mutual funds, cash and bank accounts that are not Qualified Retirement Accounts. These assets receive a step-up in tax cost basis at the death of the account owner, meaning that unrealized capital gains are usually eliminated.  These types of accounts have the fewest restrictions on how you can bequeath them in your estate plan.

The fourth basket consists of closely held business interests. These assets aren’t easily disposed of, as they are not traded on any stock exchange. Moreover, you may have other family members or third parties involved in the business or entity. There may be a shareholder, partnership or membership agreement that either restricts the disposition, or requires that the interest first be offered to the other shareholders at death. In the case of “S” Corporation stock, there are important elections that must be made within a certain time period after the death of the owner, and the type of beneficiary is restricted under federal tax law.

The fifth basket consists of annuities and life insurance policies, which have beneficiary designations. Annuities are similar to Qualified Retirement Accounts because the beneficiary will usually recognize taxable income when receiving distributions. Wills and trusts generally do not govern the disposition of these assets unless they are named in the beneficiary designation.  Trusts named as beneficiaries of annuities may incur higher income taxes than direct beneficiaries due to their compressed federal income tax rate structure.

The sixth basket consists of real estate that is not your Florida homestead. There may be inheritance taxes associated with this asset if it is owned in a state that imposes such taxes. In my book I detail all 50 states’ income, estate and gift tax consequences of owning property in each state.  Commercial real estate may be held in the form of a corporation, partnership or LLC discussed above. The ongoing management of this asset should be considered in your estate plan.

Yet another basket might be a trust in which you are a beneficiary and possess a “power of appointment” that would allow you to alter its disposition from the default provision in the governing document, which might be a parent’s will or trust. Your attorney should determine whether you have a power of appointment, whether it is limited in any way, and whether the value of the trust will be considered taxable in your estate for federal estate tax purposes.

There may be other baskets in any individual plan. So as you can see, when planning your estate, all of the different baskets should be considered, along with their unique legal and tax consequences. Failure to consider the intricacies of each type of asset might result in missing planning opportunities or in unintended adverse results.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.