Now is the Time: Review the Fine Print of Your Estate Plan

Given recent market and economic volatility, you may be reevaluating your charitable giving approach. While you consider your short-term strategy, this is also the perfect time to check into the nooks and crannies of your estate plan to make sure it still reflects your long-term plans.  

I was recently at an event on the topic of legacy giving, and one of the speakers asked attendees to raise their hand if they had a retirement account (either a 401(k) or individual retirement account). Nearly every hand in the room went up. The same presenter asked for a show of hands of individuals with retirement accounts who have checked their beneficiary designations in the last 5-10 years. Nearly every hand went down. 

Life events and the passage of time can wreak havoc on your plans if you don’t stay on top of your beneficiary designations—as can missing small but critical details. For instance, suppose a donor created a donor advised fund ten years ago and decided to name her DAF as the beneficiary of her retirement account. But instead of naming The Chicago Community Trust as the beneficiary, she inserted the name of her DAF with no reference to the Trust. That is problematic, as the Trust needs to be listed as the sponsoring charity of the DAF or the retirement account custodian may be unwilling to transfer the assets in the account to the DAF.  

This donor would have never known had she not asked her Philanthropic Advisor at the Trust to review her legacy plan. The advisor was able to point out this small but important detail, and ultimately ensure the donor’s legacy plan would be successful. Here are some other things to consider:  

Revisit contingent beneficiaries  

If you named individuals and/or charities as contingent beneficiaries in your estate plan, you’ll want to revisit those every few years to make sure your plan still fits your goals. Suppose you name your aunt Beverly as a beneficiary of your will, and your cousin Nicki as the contingent beneficiary if Beverly dies before Nicki. If both Beverly and Nicki die before you, it is important to understand what happens to those bequests. The gift you intended to pass to Beverly or Nicki could end up going to another family member or end up caught in red tape.  

If you wish to make philanthropy part of your estate plan and have concerns about outliving your beneficiaries and contingent beneficiaries, you may want to include The Chicago Community Trust as a contingent beneficiary or as a residuary beneficiary of your estate. 

Are formula clauses your friend or foe? 

While not extremely common, many estate plans do include a formula clause. As we’ve discussed before, a formula clause in a will or trust allocates an amount to family or friends up to whatever the applicable lifetime exemption from federal gift and estate taxes is at the time of the decedent’s death, with any excess going to charity. Formula clauses may be especially desirable when an estate includes a significant amount of hard-to-value assets, such as business or partnership interests, and the decedent’s estate wishes to minimize potential federal estate tax liability. 

Under the 2018 Tax Cuts and Jobs Act, the lifetime exemption from federal gift and estate taxes increases to $10 million per person, adjusted for inflation. In 2023, the lifetime exemption is $12.92 million per person ($25.84 million per married couple). However, in 2026, the lifetime exemption amounts are expected to revert to pre-2018 levels, adjusted for inflation. 

This means that a trust with a formula clause that was created in 2019 may have a radically different outcome if the settlor dies in 2025 vs. 2026. Now is the time to ask your estate planning attorney if your estate plan includes formula clauses that benefit The Chicago Community Trust, and if those formula clauses need to be adjusted.