Don’t you love it when a client follows your recommendations to the letter? Consider, for instance, the following common scenario:
Taking your sage advice to heart, your client finally seeks the services of an estate planning attorney. The attorney drafts what will forever be known as the client’s estate plan. With the stack of freshly drafted documents in tow, the client enters your office and asks, “What now?”
As the client’s financial advisor, it is up to you to ensure that the estate plan is implemented correctly. Implementation includes, but is not limited to, retitling of assets, revising beneficiary designations, and securing life insurance. You also have an ongoing duty to manage the assets within the estate plan.
No two estate plans are exactly alike. While each plan may incorporate many of the same estate planning vehicles, the plans’ goals are as varied as the individuals and charities named as beneficiaries. These differences present unique challenges for advisors who manage the assets within those plans. Your ability to tailor the investment strategy so it complements the estate planning vehicles that hold the assets is a key contributor to overall plan success.
The following discussion focuses on factors you need to consider when managing assets as part of an estate plan.
Since trusts are the most common estate planning vehicles you will encounter, I will discuss various aspects of managing trust assets and provide a few examples of how investment decisions can directly affect the success of different types of trusts.
Understand the Goals
There are many different estate planning vehicles that may collectively make up the estate plan. Within each vehicle, you may find several named individuals. You may have a trustee charged with the fiduciary duty of “running” the trust. You may have a grantor, or creator, of the trust. And you will certainly recognize the beneficiaries, who may be numerous and have varied interests. For instance, some beneficiaries may have an immediate interest in the trust assets, while others’ interests may not vest until a future date. Then there’s the fact that beneficiaries may change over time due to birth, marriage, divorce, or death.
With so many different parties to a trust, how can you be sure that the proposed investment choices align with the needs of the proper beneficiaries?
To maximize the benefit of the estate plan to your client and your client’s heirs, you need to understand the goals of each trust within the plan. This doesn’t mean that you need the technical knowledge of the attorney who drafts the trust; rather, you should have a general understanding of how the trust works, the trust’s tax status, why the trust is part of the plan, and whom the trust is intended to benefit.
Don’t rely on the client to interpret the function of the trust for you. Take advantage of your professional relationship with your client’s attorney and ask the questions that will help you manage the assets in the most effective manner.
Consider asking the attorney some of the following questions when discussing the client’s estate plan:
- Is it a grantor trust, where all trust income is reported on the grantor’s individual return, or is it a separate tax-paying entity?
- Will the assets in the trust be subject to estate taxes, or will the assets pass to the beneficiaries estate tax-free?
- Is there an income beneficiary due to receive income payments from the trust for a term of years or for life?
- Has a qualified charity been named as beneficiary to the trust?
- How much liquidity does the estate need to meet administrative and estate tax liabilities?
These are only a few examples you can use to identify the investment needs of any trust. Now let’s look at a couple of common trusts found in estate plans and discuss how investment decisions can affect the outcome of the estate plan.
A bypass trust (also known as a credit shelter or B trust) is a common estate planning vehicle for married couples. It can effectively shelter the assets of the first spouse to die from federal estate taxes, which would otherwise be incurred if those assets passed directly to the surviving spouse. The use of a bypass trust allows both spouses to use their applicable exclusion amounts (currently $2 million and scheduled to increase to $3.5 million in 2009) at each death, which, in turn, allows the maximum amount of assets to pass to heirs estate tax-free.