The New Era of Estate Planning

It is always worthwhile to take the extra step of asking clients to detail a brief history of their wealth, to write a letter of intent to beneficiaries, or even to put into place incentives that can help guide the chosen fiduciaries and the future generations of the estate who will receive its benefit. This ensures that the estate plan remains true to your client’s wishes, perhaps with emphasis on education or charitable giving, along with other intents. It is also worthwhile to run through a number of “what if” scenarios to help ensure the client provides instructions for a variety of circumstances that may occur.

Insist on Reviewing Asset Titling. You can’t be too thorough when it comes to asset titling in estate planning. Thoughtful estate plans can be derailed by not paying close attention to how assets are titled. Naming the eldest child to represent all children, or adding individuals to accounts as a convenience without consideration that they could be viewed as an account owner, are examples of issues that may need to be addressed. Additionally, neglecting to look at the bigger picture will likely result in lopsided titling and will not reflect the true intent of the client. A careful review should be done for every major asset and account, including life insurance, pensions, IRAs, executive compensation plans and annuities. Titling should be reviewed on a regular basis and especially after life changes.

Trying to undo undesirable titling after a client passes away can result in unintended probate, additional expenses, long delays and, perhaps most importantly to many clients, the loss of privacy. All of these are easily avoidable consequences, and advisors should emphasize the importance of getting it right the first time.

If using trusts, clients must also remember to retitle assets in the name of their trusts. This can get confusing if multiple trusts are in play (such as a living trust for each spouse), so it is crucial that the client is certain and clear on what assets will be controlled by whom in a particular trust. This is particularly important for clients who own property across more than one state, as improper titling could result in undesired probate in multiple states.

Make a Contingency Plan for Disability. Most clients do not like the idea of planning for disability. After all, they’ve already “prepared for the worst” by estate planning. Nevertheless, planning for disability is a critically important part of the planning process. Here’s a point that advisors should drive home to their clients — it is much more likely for the average person to become disabled than to die prematurely. If this happens, and the disability prevents the client from adequately caring for his or her family, managing financial affairs or working, there must be a contingency plan in place to address those needs.

Perhaps the most important consideration is the possible loss of income resulting from a disability. Typically, disability insurance helps cushion the potential impact, and advisors should work with their clients to calculate the need and the amount of disability insurance that would be appropriate.

Next are the powers of attorney. Without specified powers of attorney, there can be costly and time-consuming proceedings by the court to determine who will manage the health and financial matters of the client and their dependents. Many advisors will recommend using a revocable living trust for this assistance with the management of property. However, the trust can only control assets titled in the name of the trust, so it is crucial that the client title assets correctly, and to plan for the management of any financial assets which may not be part of the trust.

Another area that should be part of your planning discussion involves looking at life insurance coverage. Many clients have not considered the multiple ways that life insurance can fit into their financial plan. Common uses for insurance include paying off debt (including a mortgage), funding education for children, or as a wealth replacement tool to make a taxable estate “whole” after payment of estate taxes. If structured correctly, the proceeds of a life insurance policy can be paid free of estate tax by utilizing an irrevocable life insurance trust established during the client’s lifetime. Life insurance may also provide critical liquidity for the payment of estate taxes for business owners whose families can face serious issues when a business owner has not planned properly.

For example, problems can arise if a business owner passes away unexpectedly leaving a large estate tax burden, no succession plan and little liquidity to cover the tax bill. This type of scenario may force the sale of the business against the family’s wishes and possibly at a “fire sale” price.

Choose the Right Fiduciaries. A successful estate plan very much hinges on having the right representatives to carry out a client’s wishes.

Aside from a capable financial advisor, a well-chosen estate-planning attorney is key. The estate planning documents are the only guide for the trustees to direct the management and transfer of wealth, and poorly drafted documents will cause many challenges and confusion. The potential for issues only grows as the value of the estate increases. Furthermore, the chosen attorney does not only work for the client, but also the client’s survivors and other named fiduciaries. The attorney should be a trusted choice for the client, and his or her entire extended family.

When it comes to choosing the right fiduciaries of the estate plan, many clients make decisions based on personal relationships and an assumption of willingness or competency. It’s important to understand that considerable demands are placed on the fiduciary, and that it can feel like a full-time job to act as one. At a minimum, the duties are time consuming and include the oversight of legal and tax matters, handling disbursements, maintaining records, reporting to beneficiaries and managing assets. It is not a role to be taken lightly or chosen based on convenience. Clients often favor a close family member or friend, but a fiduciary may feel heavily pressured by the family or lack the skills to understand business and legal matters.

Advisors should present the choice of a corporate fiduciary to clients, as they may benefit from more experience, objectivity and technical knowledge. Of course, a corporate trustee may lack an intimate understanding of the family and its dynamics. A balance can be reached for the client using a corporation (bank or trust company) in combination with an individual serving as a fiduciary. The corporation can fulfill the administrative, tax, legal, investment, recordkeeping and reporting duties of the trustee, while the individual fiduciary can have influence over more personal decisions such as discretionary distributions from the trust to the inheritors as outlined in the trust agreement. This combination can be especially important when the estate has significant value or involves complex client situations or assets (business interests, real estate and valuable collections).

There is no time like the present to help assure your clients that they have a current and effective estate plan in place. One thing we can all be sure of is that the future will certainly bring change. Helping your client prepare for those changes is one of the most important services you can provide.