Estate planning is the process for how you transfer your personal and investment assets, business interests, and wealth in general to heirs and others. This process can be very important for anyone who wants to be certain that their loved ones are adequately provided for and taken care of, and that the process is streamlined and cost effective. When done properly, estate planning aims to allow you to pass on your assets as you see fit, minimize the tax issues associated with transfer of wealth, avoid probate court proceedings to transfer title to certain assets, and provide protections for your heirs.
Even if you are not subject to estate taxes or don’t have family, estate planning can potentially enable you to decide which people and charitable organizations will receive your wealth at your death. Failing to plan can mean that you will let the government make those decisions for you-and few people are fond of that choice!
But if you think that your current estate plan is up to those tasks, you might want to think again. Here’s why your estate plan may need to be refreshed.
Most estate plans are old-and potentially outdated
First, some good news: Eight out of ten affluent individuals (those with investable assets of $500,000 or more) in one survey by AES Nation had some sort of estate plan in place. But even if you have an estate plan, you may not be nearly as well prepared as you think you are for transferring wealth according to your wishes. That’s because more than half of the estate plans these affluent individuals have in place are more than three years old – some much older than that.
Here’s why that’s a big deal-one that should raise a red flag that your plan could be outdated:
- Continual changes in tax laws mean that older estate plans may not take full advantage of current opportunities to transfer assets optimally.
- Tax law changes also could mean that some aspects of an older estate plan are no longer effective or necessary.
- Changes in your wealth status mean that your estate plan may no longer accurately reflect your financial situation-and your future needs and goals.
- Changes in your personal and family situation may make your estate plan ineffective in accomplishing what you actually want it to do given those changes.
ESTATE PLANNING UNCERTAINTY ABOUNDS FOR MANY
In order to attain the greatest benefits from estate planning, it’s a good idea to stay on top of your plan and revise it when appropriate-especially when new events occur that potentially affect your wealth.
Having an old estate plan can potentially create uncertainty in a key area of managing your wealth. Example: The vast majority of individuals-71.4%-with estate plans that were three or more years old said they did not know whether their plan would deliver the results they wanted. Just 17% of this group said they were confident their plan would deliver the results they wanted. And a little more than 10% said it would not perform as desired.
In contrast, an updated plan can potentially provide a sense of confidence. Consider the individuals with plans that were less than three years old: Nearly half said they knew their plan would deliver the results they want. About 15% said that their plan needs to be revised because it would not deliver the desired results. Fewer than 40% did not know or were unsure about how their plan would perform.
Those results are much better than the results of the group with the older plans-but the AES Nation data shows that a large percentage of people from both groups are uncertain about the effectiveness of their plan.
Next steps to consider
The messages from these findings that should be considered are:
- Have an estate plan in place if you want a say in where your wealth goes after you’re gone.
- Understand your plan – this is crucial – you need to know for certain where your assets will go, to whom, and when.
- Make sure your plan provides the necessary protections for you and your heirs while also providing the flexibility to take advantage of tax-saving opportunities in the future.
- If you own a business, make sure your personal and business succession are in sync with each other.
- Don’t let your plan gather dust in a binder, folder or drawer (or in the cloud, for that matter). Let it be a living document that grows and changes with you and your family.
Your next step: If you already have an estate plan set up, you might want to stress test it to see if it is still positioned to achieve your specific wealth transfer goals (especially given some of the tax law changes in recent years). By stress testing the plan, you can assess the outcomes it would likely deliver under various scenarios that could potentially occur. Many families regularly use stress testing to evaluate their existing strategies as well as strategies they are considering implementing.
