(Dow Jones) It shouldn't be surprising that a financial planner preaches the gospel of having a plan.
But Steven Klammer, a lawyer and CPA at Davidson Trust in Devon, Pa., goes one step further to stress that when circumstances change, the best-laid plans need to change-sometimes a lot.
Take estate plans, which are notoriously affected by the whims of Congress. Klammer was recently reviewing a client's will, which was written a few years ago when the federal exemption on estate tax was just $600,000. At the time, the client rightly set up a so-called AB trust, in which married couples maximize their exemption by dividing their estate in half.
When the first spouse dies, the amount of his or her estate that is less than the estate tax exemption flows to the B trust, which can be used either by the spouse or descendants. Any portion of the estate subject to tax flows to the A trust, which belongs solely to the living spouse and is thus not taxed until his or her death. The strategy effectively doubles the estate tax deduction for individuals.
When Klammer looked at the finances of this couple, he saw that their total net worth was around $2.5 million-less than the estate tax deduction of $3.5 million most recently in effect. "There was no longer any need for an AB trust," he said. "Under current tax law the estate had no tax liability anyway."
So Klammer simplified the couple's estate plan to reflect the law, knowing that the law could change again. (The estate tax expired completely on January 1, 2010, and is scheduled to come back in 2011 with a $1 million individual deduction. Congress is currently deciding whether to reinstate the tax for 2010, perhaps retroactively.)
"No one thinks they're going to die tomorrow," says Klammer, "but the safe thing to do is go in and change the documents now, even if it means changing them again later."
Klammer stresses that legislation is just one factor prompting course corrections. Clients often don't realize how life changes might affect their financial plans, even in the short-term. He cites a client who had two retirement accounts-one a tax-deferred IRA and the other an after-tax plan.
"The woman was in her 60s and needed cash for living expenses," says Klammer. "Normally you would take the cash from the regular investment account first because there are no tax implications," leaving the IRA to grow tax-deferred. "But it turns out she had losses that year from her small business, which could be used to shield the income from taxability."
As such, says Klammer, it made more sense to shift gears and withdraw from the IRA-but only up to her business loss.