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Whether you’re remarrying, your child’s graduating from college, or some other big event arises, your life circumstances are bound to shift—and all these moments call for a second—or first—look at your estate plan.
FOR MANY PEOPLE, IT’S STANDARD OPERATING PRACTICE to revisit their estate plans—including their wills, powers of attorney and in many cases one or more trusts—either annually or once every several years. Having crossed that chore off their to-do lists, they forget about it until there’s a death in the family that forces them to take another look.
But taking that kind of approach misses one of the more important dynamics of any family: things are always changing. You might make a life decision, like remarriage or a large financial commitment, that has reverberations for other family members. Your children graduate from college, take jobs, get married, start families—and perhaps face a financial challenge. Any of those events can be a cue for you to think about changing the terms of your trust. Or, if you don’t presently have one, to think about getting started.
“There’s a myth out there that trusts are ‘set it and forget it.’ The fact is, they’re often flexible and can be written to ensure that your plans are executed to match your wishes and needs, even as those needs change,” says Bonnie Woods, Managing Director, Division Trust Executive at Bank of America. The most flexible kind of trust is a revocable, or living trust, which lets the grantor retain control during their lifetime, allowing for the addition or removal of beneficiaries or the redistribution of assets. It can even be dissolved at any time.
“You should approach asset protection, and wealth management in general, with the same discipline or regularity as you would for your physical health,” says Iran Harvell, Senior Trust officer at Bank of America. “There are infinite reasons to revisit a plan. It’s not something that needs to be held off for year’s end or tax season. Anything that potentially triggers a transfer of wealth should also trigger a conversation with your advisor.”
Often people don’t recognize the opportunity or need of a trust until a critical moment. But if you’re checking in with your advisor frequently, you can adjust your trusts as needed and avoid exposure to potential risks.
Here are several situations that commonly lead people to revisit their trusts.
A second marriage could usher in any number of financial complications. Not all divorces are amicable, after all, and not all second marriages are without children. Updating your trust plan can help bring clarity, thereby averting discussions with family members around touchy money matters. With a revocable trust, you could add and re-distribute assets between stepchildren, or add or remove an ex-spouse.
A longtime client of Woods used this option recently, following a health scare that made her wonder what might happen to the wealth she brought to her second marriage in the event of a more serious medical issue. Because she already had a revocable trust in place, her advisor suggested altering its terms so that, if she were to pass away, it would take care of her second husband for life while continuing to support the children from her first marriage. That way, even if the widower’s relationship with his stepchildren soured, he would remain comfortable but couldn’t restrict the children’s access to their portion of the funds.
Parents love all their children equally, but that doesn’t mean siblings should all receive the same financial treatment. Woods recalls one corporate executive who learned that her 21-year-old son wanted to pursue a career as an artist, while his sister was two years into law school. This led the executive to think hard about what their needs might be, and how she wanted to support them.
She brought these thoughts to a conversation with Woods. “As we looked at a trust plan together, we considered whether or not to equalize all the monies given upon their parents’ death,” says Woods. “The client decided to assume that the daughter would be fine throughout her career, while the son might struggle.”
For her daughter’s trust, the executive set up fairly common distribution parameters (one quarter of the assets distributed at age 25, half of the remainder at 30, and the rest at 35). But for her son, she put different mechanisms in place that were intended to encourage his perseverance. The trust would pay for his living expenses until age 25 and gradually increase support if he kept at his art career diligently, releasing the funds in full when he reached age 35.
This way of organizing the trust also gave the executive flexibility. If her son stopped practicing art, he would no longer receieve living expense payments—but if he started pursuing a college degree or found an apprenticeship that would lead him toward another meaningful career, they would continue.
As your children grow up, they may wind up in unexpected circumstances that complicate their financial situation. Say your daughter attends medical school and becomes a successful surgeon—which comes with the risk of malpractice lawsuits that could jeopardize any assets in her name. Or your grandson goes through a bitter divorce and is subject to an aggressive lawsuit.
One key advantage of a revocable trust is the opportunity it affords you to revisit the original document and remove or add assets from your estate while maintaining control over how they’re disbursed. It would shield its assets from any lawsuits your daughter might meet, and would certainly protect the family’s accumulated wealth from a vengeful ex-daughter-in-law, while still granting the son and his children the benefit of the assets.
Family gatherings in the mountains or at the shore can create lifelong bonds between siblings, in-laws, even distant relatives. But a vacation home can be costly to maintain and can’t be divided easily among siblings. And it can also create a tax hassle for heirs.
A number of these issues can be avoided if families place their existing vacation home into a revocable trust, or make the initial purchase through one. That allows the parents to name their children as the ultimate beneficiaries without having to go through a lengthy probate process when they pass away.
At death, most revocable trusts become irrevocable trusts, which means that they cannot be changed without the permission of all the trust’s beneficiaries. This would prevent the home from being seized through any legal action brought against one of the beneficiaries. Meanwhile, a trustee and even a successor trustee can be named to manage the asset so that the home is maintained indefinitely—unless the money runs out or the heirs decide to sell. “The goal is to ensure that the house remains in the family for generations without having it become a potentially taxable asset in the estate,” explains Harvell.
Opinions are as of 02/12/2021 and are subject to change.
Investing involves risk including possible loss of principal.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
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