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I can't be the only person with this issue!
In my experience, since DPS moved to an enterprise solution, a lot of us aren't doing much with Alternate Layouts anymore.
That said, I played around with the question. Here is my workflow, and results:
This is a 2-page spread with a linked story (word doc):
I created an alternate layout with the default settings, including Link Stories and Copy Text Styles to a New Style Group.
Here's the second layout. Click on the image to enlarge. Note the new style group, and that this new file is a Internal Linked Story.
I went back to the Word doc, which has the exact same style names and changed "Premium" to "BEST" on the first line, and saved the file.
InDesign indicates that the original file is out of date. I Alt/Opt clicked on Update Link to update all linked files.
Both files updated simultaneously. No formatting was lost.
Your reply is awesome, thank you for the great screen shots!
I think the problem is I had style sheets that I applied to the various layouts instead of using the one InDesign generated. InDesign automatically generated paragraphs with incredibly confusing names since I have A LOT of different alternate layouts for this one job. (Every week I need to have a poster, a flyer, little things that fit into an insert on the napkin holders in the cafeteria, an ad for the newspaper, social media squares and a web banner, all with exactly the same text.) I wanted to go and re-create the file using the automatically generated style sheets that I edited to where they work for that layout, but I just have been too swamped to do that yet. I did want to reply to thank you for your very thorough and helpful response. I think if you had just described it, my reaction would have been "but I already tried that," but looking at your visuals I think I've realized why mine didn't work. I'll post again once I've tested with the monster document I need to update every week.
I'm glad I could help, Cindy.