Estate planning for elderly clients: weighing the issues

Most elderly clients aren’t likely to incur federal estate taxes this year. In 2015, the federal estate tax exemption is $5.43 million per person, effectively exempting every estate except those of the very wealthy. Planning for taxes is just one part of estate planning though, and advisors need to address the full range of concerns with their clients.

Retirement Advisor asked several advisors how they address some of the other important issues that could influence a client’s plan.

Concerns about competency

Kevin Reardon, CFP with Shakespeare Wealth Management, Inc. in Pewaukee, Wisconsin, prefers to start discussing competency early in the retirement planning process because he’s found clients are more willing to acknowledge mortality and incompetency before they’re “knocking on the door.” People intuitively know there’s a chance their cognitive skills will slip over time, he says, and he asks them to take certain steps before that happens.

He asks clients to sign authorization forms allowing his firm to contact their other advisors. He also asks for written authorization to make emergency contact with a person the client designates. That request often prompts a conversation. “The client will ask, ‘Well, what do you mean?’” he says. “And, I say, ‘Hypothetically if you’ve been to my office a dozen times but you arrive late because you got lost that may indicate there’s a problem. Or if I’m explaining something to you on the phone for the third time, it might indicate there’s some slippage.’”

Observing clients’ behavior over time helps identify potential problems, says Jeff Jones, CFP with Longview Financial Advisors, Inc. in Huntsville, Alabama. His firm tracks all client meeting notes in its customer relationship database.

Centralizing the information and impressions in that way helps staff spot changes. “If we begin to notice behavior changes such as conversations that we’re having multiple times, clients who will forget that we discussed the topic or they forget about an important decision they have made or were trying to make, we’ll just begin to make notes in our database,” he says.

Jones also works with clients to anticipate the risk of incapacity and says most clients understand the need for documenting how Jones should proceed if he senses a problem. He has them complete a form that gives him permission to discuss the client’s case with someone other than the spouse.

“We have certainly had clients that will respond as you might expect, that it’s not going to happen to me or it’s not in my family history,” he says. “We just very gently explain that we understand that but with any financial plan there is always risk and this is just another one of those risks. You can’t buy insurance for this so there are other methods that you have to use to address the issue.”

Trusts and powers of attorney also play a central role in helping clients, but advisors need to ensure that the financial institutions with which the client works will accept the client’s documents. For example, Jones’ firm custodies client assets at Fidelity, which has its own power-of-attorney document. If the client is a trustee, in the case of a revocable living trust, the trust language needs to allow for an alternative trustee as well, he adds.

Mom always liked you best

Feuds among heirs over an estate’s division are almost a cliché. In large estates, the amounts involved may justify the battles, but most advisors can cite contentious settlements over relatively small estates. Tensions among heirs are often the cause, although that’s not apparent to the advisor until problems develop.

Mitchell Kraus, CFP, CLU with Capital Intelligence Associates in Santa Monica, California, recalls a case in which his client was one of three adult children whose surviving parent had recently died. The wills and trusts were standard, and each child was to receive one-third of the estate.

No one wanted the parents’ home, and no unusual assets were involved, so it looked like an easy settlement. Unexpectedly, though, the two other children attempted to modify the planned distribution.

The parents had paid for Kraus’s client to attend private university but sent the siblings to public colleges. The siblings estimated that private-university education had cost about $40,000, and they wanted that amount carved out of the estate and shared between them before the balance was distributed in thirds.

Kraus didn’t know the siblings well, but they didn’t strike him as greedy. The real problem, he eventually concluded, was a long-held resentment that the parents had paid for his client to attend private university.

“There are underlying issues in a lot of families that parents never thought about,” says Kraus. “They never wanted to treat anybody differently but the case is that kids remember these things and they remember it with feeling…To this day — that was seven or eight years ago — I know my client doesn’t get along as well with her siblings as she used to because there’s this underlying tension.”

One technique to avoid problems like this is to have clients discuss their estate plans with their children, says Kraus. In his experience, parents often highly value their children’s ability to get along, and that approach can let children air and work through their perceived grievances. Discussing the estate plan can allow the parents to explain their decisions, both regarding the estate and other actions.

He cites a case in which the parents planned to leave their older child an outright distribution while having the estate buy a lifetime income annuity for the younger child. There was some initial tension until the younger child realized that she had never been able to save or hold on to money. Once she accepted that her parents’ decision was based on their concern for her, the parents were able to start drafting their estate documents.

“I think both daughters are very happy with knowing at the end of the day they’re being treated differently because they’re loved the same,” says Kraus.

Last-minute planning

Ideally, clients plan their estates well in advance of incapacity or death. But given our aversion to discussing mortality, it’s not surprising that some people find themselves racing against the clock to establish a plan.

Advisors at South Barrington, Illinois-based Vermillion Financial Advisors, Inc., a financial planning firm, meet with all clients regularly, says Mark La Spisa, CFP. Consequently, the firm’s staff can monitor changes in clients’ lives and respond to those changes more quickly.

“We’re always listening and looking for opportunities to see if there’s anything urgent that has changed,” he says. “That’s usually where we’ll catch that all of a sudden, the tone has changed from everything is good and the kids are great and the grandkids are great and all this other stuff to something serious happened. You know, I went to the doctor and he told me that I’ve got cancer.”

La Spisa says the first response when something significant has changed is to review the existing estate plan and its documents. Do the documents still support the client’s goals in light of the new circumstances? If not, he works with the client and his or her attorney to change the documents as needed to support the client’s goals.

Paying attention to survivors is also important, he adds. “A big issue is helping the soon-to-be survivor get acclimated to what life is going to be after retirement and how their life is going to change,” he says. “We’ll update the retirement analysis as far as what that will look like after losing a spouse. We also try to prepare the survivor for when the end finally comes — what do they need to do.

“We talk about no-decision periods and blackout periods for making major changes, what they need to address right away and what they can take their time (with) because just about every surviving spouse I’ve ever met thinks they need to take care of everything in 30 days,” he adds.

Post-mortem decisions

Effective estate planning doesn’t end with the client’s death. Survivors can use a variety of techniques to optimize an estate’s plan, says Wilson Moy, CFP, CPWA with AAFMAA Wealth Management & Trust in Reston, Virginia.

These include qualified disclaimers, which allow a beneficiary to redirect property to other beneficiaries. For example, if a surviving spouse is financially secure and doesn’t need the estate’s assets, he or she could disclaim the inheritance and the property would pass to the next beneficiaries in line.

Surviving spouses can also take advantage of estate tax “portability,” which allows a surviving spouse to use a deceased spouse’s unused estate-tax exclusion. It’s a valuable option but it must be affirmatively elected, says Moy.

“Even if there is no taxable estate at the first spouse’s death, an estate tax return still needs to be filed in order to elect the portability option. Filing a (Form) 706 on a nontaxable estate will incur some additional administrative services and fees and things of that nature, but that would be relatively nominal in consideration of potentially passing on up to $5.43 million or whatever unused portion of that federal exemption to the surviving spouse.”

Choosing the alternative valuation date is another potentially valuable post-mortem planning option. An estate’s assets are valued at the owner’s date of death, but the executor can choose to value all the estate’s assets six months after that date. That option gives the administrator a degree of flexibility that could reduce taxes on a taxable estate, Moy points out.