How life changing events, such as selling a business or receiving an inheritance, can impact your estate plan
A foundational paradox of estate planning is that an estate plan provides for future events (such as incapacity and death) but can really capture your true preferences only at the moment it is created. Your decisions contained in the estate plan — e.g., who oversees your financial and health care decisions, who cares for your children, how your assets are passed on at death — are based on your exact situation, feelings, and knowledge at the time you make the plan. But life does not remain static, and as life events occur, it is important to update your estate plan to reflect your new realities.
There are two main categories of life changes that may require an update to your estate plan. The first category includes changes among the important people in your life as people get older, pass away, or no longer are trusted. Divorces, births, and children aging into adulthood may also need to be incorporated. If your estate plan documents are not updated to reflect these changes, there are three potential negative effects that can occur: (1) you may end up having someone you do not want making important financial or health care decisions for you, (2) you may end up having someone you do not want inheriting your assets, or (3) you may end up having no viable options listed to manage your finances or health care decisions, which can lead to an expensive and time-consuming court process.
The second category relates to changes to your financial situation, such as the receipt of a sizable inheritance or the sale of a business. Large shifts in the size of your estate can cause unintended gifts to be made — or omitted — in your estate plan or can lead to unexpected tax consequences.
For example, let’s say your trust gifts your business to your daughter, who has been helping you run it, and, to try to even things out, your home to your son. Remaining assets get split equally between them. If you sell your business and do not update your estate plan, then the gift to your daughter will have lapsed while the gift to your son would remain, leading to an uneven distribution between them. Similarly, let’s say you left 10% of your estate to a sibling or a charity and the rest to your children; if you had an unexpected windfall of assets, the 10% gift may be much larger than you intended.
If you inherited money in a trust, it is important to see how, if at all, that inheritance can be reflected in your estate plan. Your attorney should review that trust to see where the inherited assets go at your death and whether you have any ability to change that distribution if it is not your preference.
Finally, if your assets grew unexpectedly, you may have developed estate tax exposure that could be mitigated in your estate plan. People who pass away in 2022 can gift up to $12.06 million per person (called the “exemption” amount) free of estate tax. We expect that number to decrease to approximately $7 million per person starting in 2026. Assets gifted at death that exceed the exemption are taxed at 40%. Whenever there is a growth in the size of your estate, we recommend speaking to your Lido team and estate tax attorney to discuss whether there are any tax effects that could or should be addressed.