Here’s why you want to stress test your estate plan now

Raquel Porter, Head of U.S. Estates

People with significant assets know they need a solid estate plan to ensure their wealth is used as they desire. It obviously takes a lot of work to create these roadmaps for your family’s future.  

But if you want to be sure your plan will actually accomplish what you intend, you still have to regularly check that your estate plan is up to date as life events occur and financial and tax circumstances change.

Here, we offer a quick list to help you stay aware of when you should stress test your estate plan and what you should review.

Circumstances change

It’s time for you and your advisors to take a fresh look at your estate planning documents when there have been significant changes in: 

• Your balance sheet—If your asset composition and size have changed significantly since you first created your plan, review your balance sheet with your advisors. If your assets have grown significantly, are you comfortable with the amount of assets going to your beneficiaries? Do you have sufficient liquidity to cover your estate’s potential tax burden?  
• Your family members—Births, adoptions, marriages, divorces and deaths all may require adjustments to your estate planning and trusts. 
• Market volatility—When markets drop, you should look at your planned giving to make sure you will still have enough for yourself and your dependents. Down markets can also create an opportunity for you to gift “beaten up” assets, thereby transferring more wealth to loved ones while using less of your lifetime gift exclusion amount.  
• Tax laws—Keep an eye on changes to federal and state tax laws that may impact your investments and your estate plan.
  
• Closely held assets—If you own a business, make sure your succession plans are also up-to-date. If you have already sold that business, speak with your advisors to see whether any revisions to your estate plan are needed.

Check that you have the right person to handle your affairs

Settling an estate involves winding down all aspects of your personal financial, tax and business affairs. The larger the estate, and the more complex the assets, the greater the time and effort required.

You may want to name a corporate executor to support your family through the process because:

• It can take three or more years to fully close an estate—even when a team of experienced estate professionals are handling the process.
• Serving as executor is a demanding, full-time job that can be overwhelming for a friend or family member, especially during a time of grief. And mistakes can be costly.
• It also happens that someone who agreed to serve as your executor when you first drew up your estate plan may no longer be ready, willing or able to do so when the time comes.

Be sure the basics are (still) in place     

It also is wise to periodically inventory your assets, identifying where they are held and how they are titled and safeguarded.    

• Know what you have and update your records. This includes all your financial investments, digital assets, retirement accounts, insurance policies, deeds, and contents and location of any safe deposit boxes.

• Look carefully at how your assets are owned. We cannot overemphasize how important it is for you to know whether the assets are held jointly or solely, as titling can make a big difference in how assets transfer to people.
  
  If you have a revocable trust, make sure that your assets are retitled in the trust. By properly funding your trust, you ensure that your trust works as designed and avoids the likelihood of a probate proceeding upon your death.
  
  
• Confirm beneficiary designations are updated. Retirement accounts such as an IRA, a 401(k) and insurance policies, pass by “beneficiary designation,” not by what is stated in your will.
  
  It is critical that you name both primary and contingent beneficiaries. If you fail to do so, your assets will pass according to whatever your retirement plan lists or whomever the insurance provider has as its default beneficiary (typically that will be your estate or, if you’re married, your spouse).
  
  If your life circumstances change (due to divorce, remarriage, birth of a child, etc.), you may want to change your intended beneficiaries. 

Ask the next generation for their (latest) perspective

If you’re going to give money to the next and future generations, you’ll want to check that your gifts, trusts and bequests are structured in such a way that supports their lives and ambitions. 

No matter how emotionally close you may be to the young people in your family, it’s best not to assume you already fully understand them. For one thing, different generations by definition often have their own perspective, even world views. 

So, for example:   

• Marriage—Younger generations are getting married later and therefore tend to accumulate more individual assets before marrying, which can have significant implications for their wealth planning. In 2019, only 44% of Millennials (born 1981-1996) were married, compared with 53% of Gen Xers (1965-1980), 61% of Baby Boomers (1946-1964) and 81% of the Silent Generation (1928-1945) at a similar age.¹
  
• Philanthropy—As we noted in “Your Children, Your Trusts: How to Bridge Generational Gaps,” Millennials and Gen Z are more likely to donate to charity than any other generation. Many times, trust documents are written to distribute funds to beneficiaries according to the ascertainable standard (to help pay for their health, education, maintenance and support). However, this standard provision wouldn’t allow your children to withdraw trust funds to support their philanthropic endeavors. You can put in place alternative structures that would help your beneficiaries support nonprofits.

Be sure to ask each one of your younger family members, individually, about their hopes, dreams and values—and check in with them often. Involving younger family members early and often in your estate planning and trust creation are critical because, bottom line, you are all building your family legacy together.   

Make provisions for any “passions and pursuits” assets

Consider non-financial assets. You may own tangible personal property of significant value—art work, cars, yachts, planes and other collectibles, etc.

Such assets should be appraised periodically as well as properly insured and safeguarded. They can also be difficult to divide among heirs and financially burdensome for them to maintain after you are gone.

It’s best if you, far in advance, think through and occasionally revisit, how you wish to distribute such treasures. 

Solid plans often make use of such strategies as: 

• Transferring ownership of these assets to a limited liability company (LLC). This approach can help protect you now (both from liabilities associated with the property and from public knowledge of your ownership). You also might gift shares in that LLC over time to next generations so their inheritances and responsibilities may be absorbed gradually.
  
• Setting aside funds to pay the taxes on, and to maintain, these assets. Make sure your estate plan reflects your intention on who bears the payment of taxes and expenses.
  
• Create an exit strategy. One or more of the heirs that receive these assets may not wish to have them over the long haul. You should consider thinking through the circumstances under which one heir might buy out another; or how the assets might be sold. 

We can help

Your J.P. Morgan team will work closely with your estate planning lawyer and other advisors to help you make sure your estate planning documents, structures and funding are optimized to support the goals you have for yourself and your loved ones.

¹ Pew Research Center, How Millennials Approach Family Life, 2020.