One of the unfortunate aspects of estate administration is addressing problems caused by out-of-date or incomplete estate plans. Wills, Trusts and other documents need to be reviewed on a regular basis to address changes in family structure or applicable tax laws. News coverage on the Last Will and Testament of actor, Philip Seymour Hoffman, has drawn attention to some pitfalls associated with failing to update an estate plan.
Guardians For After Born Children.
A fundamental problem with Mr. Hoffman’s estate plan was the omission of his two children born after the Will was drafted. This resulted in a failure to name guardians for Mr. Hoffman’s after-born minor children. Section TWELFTH of his Will only appoints a guardian for one of his three children. At a minimum, failing to name a guardian for all of your children creates uncertainty. In families that are already experiencing discord, this uncertainty can cause disputes and litigation. It may also result in people, whom you do not know or approve, having a significant role in the lives of your children.
Omitted Children May Receive Unequal Distributions.
In general, failure to address after-born children in an estate plan may also have significant financial and tax impacts. Some states, such as New Jersey, have statutes for children omitted in a will, but these statutes may provide little in the way of tax or asset management planning. New Jersey’s omitted child statute, N.J.S.A. 3B:5-16, also has few provisions addressing imbalances in non-probate assets such as IRAs, Payable on Death Accounts, etc.
Depending on the size of Mr. Hoffman’s Estate, and the extent of his non-probate estate planning, his estate plan could result in significant taxes. For example, the Will only provides a Trust that terminates entirely when his child is 30 years old. If the Trust receives substantial assets from the Estate, terminating the Trust could result in additional estate taxes on subsequent generations. Application of the generation skipping transfer tax exemption to a dynasty trust should have been considered.
Estate planning documents should provide effective asset management strategies. Trusts are useful not only for tax planning purposes, but also for longer term asset management purposes. Distributing trust corpus to a beneficiary damages the creditor protection and asset management benefits of a trust.
In summary, it is crucial to review an estate plan on a regular basis to identify any issues related to family structure or tax issues. The review should include: 1.) the terms of the will and any trusts or beneficiary designations; and, 2.) the agents under a power of attorney and advance directive. Failure to keep an estate plan up-to-date can cause significant problems and be very costly for an estate.