At 36 years old, I was a cocksure lawyer who was confident that he had seen it all and had all of the answers in estate planning. When challenged by an elderly lady client to start with my very best advice-the advice that I’d give on my deathbed, I had no immediate answer and realized that I had never articulated my own estate planning beliefs and philosophies, which, to me, was a glaring personal omission. What was my most important advice? For what did I stand? What were my beliefs and philosophies about estate planning? I immediately took to remedying that situation. The only rule was that it all had to fit on one page to be a one page essence of my beliefs and philosophies on estate planning. They have been tweaked through the 20 or so years since the original list was prepared, but, by and large, they have stood the test of time, which gives me some modicum of comfort that these beliefs and philosophies are on the right track. Having been out of full-time law practice since 2005, I continue to think and to write about my beliefs and philosophies. With one possible exception, these are in no particular order of importance; they all are equally important in my opinion in their respective subject matters.
I consider myself to be a purposeful estate planner. By “purposeful,” I mean that I consider the client’s total life’s picture and employ traditional and holistic means to assist clients to achieve a “good estate planning result.” By “good estate planning result,” I mean a plan that achieves the client’s goals, reflects the client’s values and nurtures or at least doesn’t harm the relationships of those who survive the client. Notice that there is no mention of tax elimination or minimization in that definition. Some clients’ goals conflict with tax minimization; that’s just a fact. With this as a predicate, let’s begin:
the client is the one best suited to design the parameters of the estate plan–the estate planner should merely be a facilitator. Many clients come into the estate planning process without a clear idea of what they want to accomplish or indeed what is even possible to accomplish. Most estate planners assume that by the very fact that the client is in their office, the client is ready to proceed with estate planning, since it often takes some doing to get a client into an estate planner’s office. Years ago, I believed this. However, I learned the hard way that this isn’t always the case. Too often, the client will engage the estate planner with the question “what do others similar to me do?” This is a loaded question.
It is seductive for the estate planner to then take over the process and pigeon-hole the client into one of the estate planner’s pre-fabricated estate plans that too often are drafted with a view toward tax minimization and to make the draftsman’s post-death administration job easier. In my opinion, this practice explains at least some of the procrastination by clients in estate planning and subsequent failure to go forward with signing the documents, especially when that pre-packaged plan conflicts with what the client actually thinks when finally confronted with having to make a decision about his or her estate planning.
I believe that the job of the purposeful estate planner is first to listen, watch the client’s body language, and ask open-ended questions to guide the client toward solving his or her own estate planning problem. Too many estate planners, in my opinion, begin talking way too soon before sufficient questioning, listening and watching is done. This isn’t easy, particularly where the client is cost-conscious and puts the estate planner into the pressure-packed “expert’s category,” which can be a conundrum and a trap. Every client is different; some clients know exactly what they want to do and can get right down to it, while others are unsure and meander. The purposeful estate planner needs to figure out where the client is in the estate planning mental process and meet them there, not just assume that every client is ready to get started.
The purposeful estate planner is flexible with measuring fees by amount of time spent and is not locked in on strict hourly billing. In my opinion, one of the enemies of proper estate planning is inflexible time-based billing practices. In my opinion, estate planning lends itself to some sort of modified billing that can include flat fee arrangements as well as value-based billing. It is okay and perfectly acceptable that some clients pay more for your services than others. I believe that the fees even out over the course of a law career, or at least that was my experience. In my opinion, the purposeful estate planner will take a long-term view of his or her practice and not focus on maximizing the fees while minimizing the time spent on every client matter.
the client must be in control of the planning process. Clients fear the estate planning process and estate planners, which can cause procrastination and failures to go forward. Many estate planners, particularly those who have something to sell, sometimes, even pre-packaged estate plans, are taught to gain control over the situation in order to close a sale by systematically eliminating each of the client’s possible objections and roadblocks to the sale. This is wrong-headed in my opinion and causes many clients to flinch, to procrastinate and to not go forward in the estate planning process. I have identified 12 distinct fears that clients can have over estate planning. These fears include obvious fears like death anxiety (mortality salience), but there are many other possible fears that clients can experience in estate planning, and most estate planners don’t look past mortality salience, which is why some estate planners don’t enjoy the same closure rates as others.
Some of the other fears include fear of not doing the right thing in the estate plan (so as long as they’ve done nothing, they haven’t erred) and fear of the unknown. One of these potential fears is clients sometimes fear the estate planner taking control of the client’s estate planning process. The purposeful estate planner will bend over backwards and do everything humanly possible to put and to keep the client in control over his or her estate planning process. I maintain that clients who are in complete control of their estate planning process go forward and conclude the work at a much higher success rate than where the advisor controls the estate planning process, which may seem counterintuitive, but this was my experience, and it comports with common sense and basic human nature, as most people like to be in control.
an estate plan must mirror the client’s desires, goals and values–not those of an advisor. This is related to a belief that I discussed earlier, but it is separate and distinct in that the client’s ultimate estate plan must mirror the client’s desires, goals and values and not those of anyone else. Too often, the estate planner is overly paternalistic and makes lots of decisions concerning the client’s estate plan, often buried in the so-called boilerplate, which express the estate planner’s desires, goals and values instead of those of the client, who should, in my opinion, be making those decisions. In my opinion, clients whose estate plans reflect their personal desires, goals and values are much more likely to have bought into the plan, are far more likely to sign documents implementing said plan, and are usually happier and more confident about his or her estate plan.
estate planning can have psychological implications for the “receivers” or “perceived receivers” and can affect relationships after the client’s death. In my opinion, it is imperative that the purposeful estate planner make it crystal clear to each and every client that what he or she does in the estate plan can have lifelong psychological ramifications on others and can adversely affect the relationships going forward of those who survive. Clients really need to understand this. It screams out for dialogue between the client and the takers and/or those who might expect to be takers of the estate in order to allow the client to explain, in person, his or her thinking that went into formulation of the estate plan.
This dialogue goes a long way toward reducing the post-death rancor and angst as well as relationship destruction. Where heirs aren’t given any explanation for an estate result that doesn’t meet their expectations, they often default to hurt and anger, as they often blame persons who came out better and come back swinging with a vengeance in court. Too often, there is a simple explanation that had the client, either during lifetime or at death, articulated it, it would have cut off any post-death litigation or hard feelings or hurt feelings of not being loved as much going forward. Simply put, one simple explanation could save thousands in legal fees for all concerned and eliminate or at least substantially reduce angst and hard feelings.
For example, a simple explanation that a client left less to an already well-off child because that child was well off may eliminate or substantially reduce that child’s hurt feelings as, if it isn’t explained by the client, the child may forever wonder whether the parent loved them less because they received less than their siblings, which could impact their relationships with their siblings as well as their own children. Such a child could take their hurt out on their siblings and their families, who usually ere innocent and blameless. If I was forced to pick a most important piece of advice out of all of these discussed herein, it would be this one. The client’s legacy impacts far more than the client’s property; it can alter and adversely affect others psychologically and can affect the relationships of those who survive. This is something about which I feel strongly.
family communication before death is essential to an effective estate plan. One of the most common causes of miscommunication and estate and trust litigation is a failure by the client to discuss his or her estate plans with those who will ultimately take as well as with those who perceive, rightfully or wrongfully, that they should or will take. This doesn’t mean that those folks should necessarily have the right to give input or have a vote about the estate plan; estate planning shouldn’t be a democracy. However, getting feedback from the proposed and potential beneficiaries can be invaluable in the final fashioning of the estate plan. The client may learn that the intended recipient doesn’t want the legacy, or may prefer it to go elsewhere or in a totally different way.
This often plays itself out in family businesses, where parents too often, without asking their children, assume that the children want to continue the business. Often, a candid and honest conversation reveals otherwise, so that a sale of the business while the parent is alive can be achieved, which usually provides a higher price than a post-death sale by disinterested and inexperienced children. Those who will not be receiving what they may have expected can begin to heal or to at least begin to get over it after having heard the client’s plan and the rationale for the plan directly from the client while the client is alive, which often substantially reduces or eliminates post-death challenges or poor relations going forward.
the hidden enemies of an estate plan are the “lack of’s”: liquidity, coordination, communication and diversification. Any of these deficiencies can spell doom for an estate plan or cause it to underperform. Having more than one of these enemies usually is disastrous for an estate plan. The lack of liquidity and/or diversification threaten estate plans financially, while the lack of coordination and/or communication can tear an estate plan apart from within. Too often, particularly in this post-probate world, estate planning is done in bits and pieces through execution of deeds, beneficiary designation forms and pay-on-death account forms. Failure to coordinate all of these too often unrelated bits and pieces can spell doom to the estate plan. The client whose estate principally consists of one asset, e.g., a family business interest, is not diversified and faces the risk of a wealth setback if the business flounders for whatever reason, even one that is out of the client’s control.
Even though there may be little that the client can presently do about being non-diversified and, in fact, the client may be wealthy because of having taken the risk of non-diversification, since reward usually follows risk, the purposeful estate planner will advise clients about this risk. I’ve discussed the overarching importance of communication several times herein, but the point is worth repeating and underscoring: in my opinion, you can’t have too much communication in estate planning, either between the client and his or her potential beneficiaries, or between the client and his or her advisors, as well as between the advisors themselves.
the only constant is change–an estate plan must be flexible and anticipate reasonable contingencies. The principal problem with most estate plans is that they are fixed in time and are based upon a finite, fixed set of assumptions. This conflicts with the reality of life that Heraclitus expressed about 2,500 years ago that the only constant in life is change. People can die suddenly, become incapacitated, or fall prey to alcoholism or drug abuse. Financial fortunes can wax and wane. People marry and get divorced and marry once more. Relationships are formed while others fall apart.
Estate and financial planners and fiduciaries die, change firms, merge and/or retire. The purposeful estate planner will anticipate and address reasonably foreseeable events and build in safeguards and alternatives should any of those events occur. For example, when selecting trustees for a trust that is expected to last for a long time, e.g., a dynasty trust, the purposeful estate planner will not only provide for successor trustees, but he or she will include a method for selecting additional successor trustees when the named successors can or will no longer serve. The estate plan also should consider a family business succession plan where the client’s estate includes a family business interest, and that business succession plan must be carefully coordinated with the estate plan.
in refraining from absolutisms in estate planning. There is no one absolutely correct way to address any particular estate planning issue. Estate planners who fail to adhere to this principle fall prey to Maslow’s admonition about the person who only has a hammer begins to think that every problem is a nail. Every client’s situation is unique and different. What works for some clients won’t work for others. Indeed, what may usually be lousy advice for most may fit a particular client’s situation perfectly. The purposeful estate planner will remain nimble and open-minded about all possibilities for solving a client’s problem.
an estate plan must work irrespective of death order. One of the immutable truths of life is that people sometimes die out of actuarially expected order. The estate plan that hinges on, for example, a senior generation member predeceasing those in younger generations often is a house of cards that comes crashing down when a member of the junior generation dies first. The same is true in the estate plan that assumes that a healthy spouse will survive a not-so-healthy spouse. This problem is seen a lot in buy-sell agreements between those of different generations. Nature has a strange and sometimes inexplicable knack for upsetting the estate planning apple cart. The purposeful estate planner will draft an estate plan that still functions if deaths occur out of expected order.
an estate plan should provide a system of checks and balances on power and authority. Estate planning necessarily involves a passing of the torch of leadership and control. As Lord Acton observed long ago, power tends to corrupt, and absolute power corrupts absolutely. Power shifts can expose people and leave them vulnerable to oppression, even to being terminated in employment or as a beneficiary through, for example, a spiteful exercise of a power of appointment. The purposeful estate planner will build in a series of checks and balances that simultaneously allow exercise of authority and provide protection to those who are subject to that authority, which can be in the form of veto powers, powers to remove and replace trustees, co-sale or tag along rights, accounting rights, or similar type protections. Building these protections into an estate plan can significantly reduce post-death problems in my opinion.
where a challenge to an estate plan or where there is a a situation where the beneficiaries will not be able to coexist is foreseeable, a client should consider building in a reasonably negotiated “out” for the potential contestant-otherwise, the only out is the courthouse. Wealthy people usually find that they have no peers down at the courthouse. The purposeful estate planner will anticipate and plan in advance for realistically possible post-death problems and estate plan challenges. Sometimes, the fix is so simple as a modification of the spendthrift clause to permit voluntary purchases and sales of beneficial interests so that the interests of beneficiaries who can’t get along in the same trust can be separated, which occurs frequently when step-relations are lumped together in the same trust.
Sometimes, if a challenge or other problem is anticipated, the estate plan can be confected in such a way as to penalize the challenger or reduce the value of winning a challenge. For example, the estate plan might contain an in terrorem clause where the challenger forfeits his or her inheritance by challenging the estate plan or even configure the estate plan in such a way as to force the challenger to sue his or her own children (where a generation is skipped, usually to the chagrin of the members of the skipped generation) or even a respected charity in order to receive anything from the estate. Sometimes, it involves making what is potentially available to the challenger an undesirable asset, such as a minority interest in a closely-held entity or even non-voting stock or an assignee interest in a partnership or LLC.
estate planning is a process, not an event, and is one that never ceases–until at least nine months after the client does. A prudent estate plan will provide for post-death contingencies. Too many clients and their advisors view estate planning as an event that ends when the will or trust is signed or the life insurance is purchased. The purposeful estate planner views estate planning as a process on several levels that continues throughout lifetime. Estate planning often is done in stages-a will or trust is executed, or a deed is signed, which may or may not be done at the same time (even though it should all be coordinated). Since life always changes, it is imperative that the estate plan be reviewed periodically and modified to address material changes in circumstances. I used to advise clients to have estate plans fully reviewed every five years or immediately following a significant life event, e.g., marriage, divorce, birth of a child, etc.
However, I used to urge clients to pull out their estate planning documents and read them once a year, either when going onto or coming off of daylight saving time. I used to continuously remind clients that it was their estate plan, not mine. The estate plan also should provide for what happens if one of the heirs, beneficiaries or legatees survives the client but dies during the administration of the client’s estate. Moreover, the purposeful estate planner will draft an estate plan that anticipates and provides for the event of disclaimers or failures to survive for a short period of time.
coordination of efforts between all of the client’s professional advisors is critical to the ultimate success of an estate plan. In my experience, communication problems between estate planning advisors arise in one of two principal ways. The first way is where the client tells each advisor just what the client feels that advisor needs to know and no more, while not telling all of the material facts to any particular advisor or to the advisors collectively so that the client retains some false sense of control over the situation. Communication between the advisors can surmount this problem—if the advisors anticipate this possibility and fully communicate between themselves. I used to require complete access to all of the client’s other advisors in my engagement letter.
The second way is where the advisors fail to properly communicate between themselves. Sometimes this happens because of fear that the other advisors will encroach on the advisor’s “turf,” which causes that advisor to withhold information, to be overly protective, or to not be forthcoming or cooperative. Sometimes these communication problems are caused by a power struggle between the advisors to be the client’s “most trusted advisor.” Still other times, the problem is that the advisors either don’t trust, respect, or like each other.
The problem is that the client and the beneficiaries of the estate plan are the ones who ultimately suffer. This suffering is avoidable if the advisors check their egos at the door, leave behind that sometimes unquenchable urge to be the client’s “most trusted advisor” and remain open-minded and cooperative and truly put the interests of the client first above their own. The key to an effective estate planner communication where multiple advisors are involved is collaboration and the willingness and humility to acknowledge a good idea that they didn’t come up with and spread the credit among all members of the team. But this can be difficult to achieve if the advisors don’t want to do so or who don’t truly believe in collaboration.
information withheld from advisors is one of the biggest reasons for estate plan failure or underperformance. What very few estate planners ever do is much due diligence past incorporating the answers from a client’s fact finder, assuming those answers to be complete and truthful. I used to do a lot of speaking to lay audiences, and I always asked if anyone had ever either lied to, or misrepresented the facts, or omitted important facts, to a professional advisor. I asked this question because it happened to me in one very large client transaction.
While this is purely anecdotal evidence, the answer was almost always the same: at least half admitted to doing so, usually sheepishly raising their hands half-way. Quite often, clients underestimate their investments or net worth, often for fear that an investment advisor would pitch them to move more of the client’s wealth to the pitching advisor. Even though this evidence wasn’t scientifically gathered, I have no reason to doubt these audiences because these people weren’t my clients, so they could be more candid. The purposeful estate planner will maintain a healthy skepticism about the client’s representation of the facts, paying particularly close attention for what isn’t said or where things just don’t add up.
There are various reasons why clients do this. One reason is that the client may feel vulnerable and want to maintain control by holding onto key facts. Sometimes, clients are embarrassed, rightly or wrongly, by what is not revealed. Sometimes, clients are hiding something from his or her spouse or family and can’t tell the advisor in front of his or her spouse or family. I uncovered some material facts that had been either misrepresented, underrepresented, or omitted on a few occasions. When I confronted the client about this, every client was trying to maintain control over the facts and letting go of all of the material facts made them feel vulnerable and in danger of losing control. One ramification of misrepresenting or omitting material facts is that it gives clients a false, if not irrational, ground to disregard our advice and documents when the client knows that the facts are other than what have been represented, but the client can’t say why the advice is being rejected.
risk management principles should be applied in the estate planning process; asset protection and investment diversification should be considered. Client families and wealth face lots of different types of risks. The purposeful estate planner will advise the client to take active steps to reduce or eliminate these risks. Estate planning has come full circle, from a time when there were ethical issues inherent in even discussing asset protection with clients to a time where failure to address asset protection may well constitute malpractice. Risk management principles, including segregating high risk assets from passive investment assets, should be employed in the estate planning process. The purposeful estate planner should discuss appropriate asset protection techniques ranging from asset segregation in entities to proper property and casualty insurance as well as umbrella insurance to self-settled asset protection trusts. I’ve already written about the risks of not being diversified, but it is worth underscoring the importance of alerting the client to this risk again.
significant analysis of asset values, cash flow and income must be made before any gifting is done. In my opinion, too many estate planners over focus on asset values and prospects for appreciation in the gifting calculus, and they don’t spend enough time analyzing the cash flow aspects of a proposed gift. If the cash flow aspects aren’t sufficiently considered, the client could be left exposed after having made a large irrevocable gift. For example, the client who is still working in a family business and living off of the salary of that business may well be best advised not to gift significant interests in the business entity because the loss of control could imperil his or her livelihood or if an offer is received to sell the business where the buyer doesn’t want to keep the client on at the present salary and perks. I have seen good and fair offers to buy family businesses get rejected when the client realized that his or her share of the post-tax sales proceeds after the large gift of interests wouldn’t support his or her lifestyle at the same pre-sale salary level, often to the family’s detriment because the time was right to sell and the price was attractive.
it is okay not to want to gift property; it is perfectly consistent with human nature not to want to do so. Too many advisors are mesmerized by the tax and estate planning benefits of inter vivos gifts. Some of these estate planners pressure clients to make gifts in order to achieve these so-called benefits under the guise that gifting is something that they can’t afford not to do. Advisors like these neglect to consider the loss of access to the capital that the gifted asset represents. It is the nature of human beings to gather and accumulate possessions. What isn’t so natural is to part with significant assets during lifetime because of the real fear of running out of money or living too long. The purposeful estate planner recognizes this difficulty and allows the client to become totally comfortable with irrevocably parting with significant assets before allowing the client to do so, notwithstanding the potential tax benefits of gifting, never forcing a client to make a significant irrevocable gift.
it is rarely too late to do some planning. While it is true that some estate planning techniques are risky at the end of expected life expectancy or after the client becomes terminally ill, there are many things that can be done to assist the efficiency and effectiveness of the client’s estate plan even at the end of the client’s lifetime. For example, asset holdings can be rearranged in order to qualify the client’s estate for tax benefits such as paying the estate tax in installments. It is appropriate to revisit beneficiary designations and the estate planning dispositive documents close to the time of death to see, for example, whether powers of appointment should be exercised.
boilerplate is more important than you think. Estate planners make lots of very important decisions that are buried in the boilerplate of documents. The purposeful estate planner will carefully review his or her boilerplate for every client with a fresh mind in order to ascertain what items to discuss with a particular client so that the estate plan more carefully mirrors the goals and desires of the client.
fair isn’t always equal; equal isn’t always fair. Many clients slavishly adhere to the principle of treating children equally, sometimes too slavishly in my opinion. Often, it is the children who remind and pressure clients about this; I call this the “what about me?” syndrome. The purposeful estate planner will point out to clients that leaving estates equally to children isn’t always a fair result, particularly if one child is needier than other children or where the client helped one child far more during lifetime than the other children. The bottom line is that equal sharing of the client’s estate is not always a fair and equitable result.
estate plans that are built upon bridges of trust are best. In my experience, the best estate plans that I ever had a hand in involved an element of intergenerational trust in passing on the torch of leadership. How does one engender that trust? It’s simple to articulate, but it sometimes is difficult to put into practice. At some level, it involves a letting go or surrender of some level of control by the senior generation. But it also requires the younger generation to be circumspect, respectful and magnanimous about the use of that received power and control. Building in safeguards into the estate plan in the form of checks and balances on authority can assist greatly in the building of this bridge of trust. This can be seen in the common installment sale to the junior generation in exchange for a promissory note, where the senior generation’s interests are adequately protected through security devices such as pledges and/or mortgages.
one should carefully consider choices of executors, trustees, agents, officers, etc., including backups, advisors and alternate choices, and institutional trustees should not be overlooked. The best laid estate plans can be torn asunder if the wrong people are put in charge, so this requires very careful consideration. The purposeful estate planner should caution clients not to pick fiduciaries who will have an inherent conflict of interest without adequate safeguards. For example, the agent under a durable power of attorney should have to account to someone after the principal’s incapacity, since without such protection, suspicious family members may try to intervene with some sort of court proceeding such as conservatorship. That agent under a durable power of attorney generally shouldn’t serve as sole executor of the principal’s estate or as successor trustee of the principal’s trust because that would mean that the agent’s final accounting would be to himself, which is a conflict of interest.
Selection of fiduciaries also can inform what powers are given to each fiduciary. And there may be express limitations on the exercise of certain rights and powers by certain fiduciaries. For example, in a blended family situation where the client’s estate plan includes a significant bequest or provision for children, it often is appropriate to limit the powers of an agent under a durable power of attorney to modify that estate plan by, for example, modifying trusts, exercising powers of appointment or discontinuing a client’s pattern and history of gifting. In blended family situations, I used to provide for affirmative and negative constraints on the power of an agent under a durable power of attorney, where the agent only represented one side of the client’s family, e.g., a spouse or partner or a child.
trusts are management vehicles–they should not be more restrictive than is necessary. All other things being equal, all assets should be held in trust. Because life can turn so quickly and be unpredictable, I recommend that all assets be held in trust absent a compelling reason to do otherwise. However, the trust instruments themselves should give flexibility to the trustee to react to changing circumstances, particularly if something bad happens to the client. And beneficiaries can and should serve as a co-trustee in most situations where they are competent and able to do so. Trusts can be used simultaneously as wonderful teaching opportunities as well as effective asset protection devices, which can protect the client from former spouses and other predators.
some situations warrant special attention: where less than all of the client’s children work in the family business; where the client contemplates separating the building from the family business by bequest or sale; and all subsequent marriage situations, especially where either has children from a prior marriage or relationship-even if relationships now are good. This is not to say that the purposeful estate planner should not treat clients whose situation don’t fall into the special category laid out above as special. However, in my experience, these enumerated situations require special attention from the estate planner because of the inherent complexity of those situations. For example, in a subsequent marriage situation where the client has children who aren’t the children of the client’s current spouse or partner, the estate plan should be crafted in such a way that protects all sides after the client’s death, which is when superficially good relationships often break down.
The spouse or partner may grin and bear his or her step-children while the client is alive, but really actually neither likes nor trusts their step-children. Step-children often feel the same way about a step-parent. The casebooks are replete with a disproportionate number of cases that involve post-death squabbles in blended families, where the blending either never truly existed or fell apart after the decedent’s death. The purposeful estate planner will be circumspect about these situations and draft an estate plan that will work even if the relationships fall apart and the sides become estranged and even in open conflict after the client’s death.
estate planning documents don’t pay taxes or debts–dollars do. An estate plan must provide for sufficient liquidity to pay taxes and expenses at each death. Illiquidity is an enemy of the estate plan unless it is carefully planned out in advance. Too often, second-to-die life insurance is used as the liquidity vehicle, but this ignores the taxes, debts and expenses that either could be paid or that are due or otherwise payable at the first death. Liquidity is an advantage for a properly crafted estate plan. For example, suppose the estate has an asset in it that is valuable but that is expected to significantly appreciate during the surviving spouse’s overlife. It may be far better to forego a QTIP marital deduction and pay tax on a lower number at the first death, but this isn’t possible without a liquidity plan for the first death. Having sufficient liquidity at both deaths give the heirs and fiduciaries more options.
tax considerations should not drive an estate plan. Too often in my opinion, estate planners focus too much attention on the estate tax considerations of the estate plan, and spend too little time on the more important and often more vexing non-tax issues. In my opinion, the tax piece is the easiest piece of the puzzle to solve in estate planning, which is why many estate planners want to stop there: it is the path of least resistance. The sad fact is that delving into the non-tax aspects of an estate plan often fall out of the bailiwick and comfort zone of some advisors and can get sticky. These types of advisors really are estate tax technicians much more so than true purposeful estate planners.
The purposeful estate planner will assist the client in crafting a plan that meets with the client’s goals and values, even if it costs some tax at death. I distinctly recall several situations in blended family estate planning where the client simply wanted to divide his estate equally between his current spouse and his children from a prior relationship, even if it increased the total amount of estate tax due because of the reduction in the marital deduction and the estate tax apportionment in the client’s estate. As long as the client is aware of and signs off on it, the estate planner should feel comfortable with proceeding in that fashion. The bottom line is that the estate plan should reflect the client’s desires, goals and values.
it sometimes makes little sense to defer the estate tax. This one was more important when the estate tax applicable exclusion amounts were much lower and the rates were still graduated, because it often cost more in overall estate tax to defer the estate tax through the marital deduction, when all that transfer would do is push the surviving spouse into a higher estate tax bracket; the IRS came out better if the estate of the first spouse to die elected to defer the tax through the marital deduction. Even in this time of high applicable exclusion amounts, only one effective rate, and portability, it is important in my judgment not to knee jerk defer the federal estate tax in every situation.
For example, if you have a marginally taxable estate that has an asset in it that is expected to significantly appreciate in value, it may make more sense to employ a credit shelter trust and pay some estate tax at the first death, with the trust funded with that asset, which will get the asset out of both estates. If the asset is allocated to a QTIP trust and portability is elected, the appreciation may turn out to exceed the available applicable spousal exclusion amount, which will trigger estate tax at the second death, tax that could have been avoided through proper planning at the first death.
lifetime donations to family, especially of cash or other high basis assets, can reduce estate taxes, if the cash flow considerations are properly addressed. In my opinion, the most important consideration in deciding how to advise a client concerning gifting is an analysis of the cash flow issues both pre- and post-gift. Parting with asset value is one thing, but parting with cash flow from the asset is quite a different kettle of fish indeed. The client must be comfortable with that loss of cash flow, and, just as importantly, the loss of access to the capital that the gifted asset represents, i.e., the power to sell or mortgage the property. All other things being equal, it is best to gift assets that are expected to appreciate, but not necessarily when it is likely that the donees are expected to sell the asset shortly thereafter, especially if that asset has a low tax basis in the hands of the donor, who simply passes that low basis on to the donee.
income tax considerations should not be ignored. They often are more important than estate tax considerations. With the higher applicable exclusion amounts and talk of outright repeal of the estate tax in the air, thankfully, most advisors have now started focusing more attention on the income tax ramifications of the estate plan since very few clients really have to worry about the federal estate tax. But the income tax aspects of estate planning have always been very important. For example, if the client is charitably inclined and has an IRA or qualified plan, the client should strongly consider satisfying the charitable portion out of the IRA or qualified plan pre-tax assets instead of with post-tax assets because the charitable recipient is exempt from income tax while family members aren’t. The differences in the adjusted basis rules for inter vivos versus testamentary transfers can make a huge difference in the after-tax proceeds of a sale of an asset.
charitable estate planning tools require charitable intent–these tools rarely provide a better economic result than making no charitable gift at all. Very few things can get an estate planner in more hot water than trying to shoe-horn a non-charitably inclined client into a charitable technique under the guise that it produces a better economic result for the client, which plays right into the client’s greed. For example, charitable remainder trusts used to be marketed where the client’s income tax charitable contribution deduction was “invested” in a life insurance policy that was to make up to the client’s family what the charity received at the end of the charitable remainder trust term. In my experience, this was very seldom true, as the life insurance almost always cost more than the tax savings from the charitable deduction, particularly where the client couldn’t fully use the entire charitable deduction. In these situations, all you would end up with is an unhappy and dissatisfied client unless there is true charitable intent buttressing the transaction. In my opinion, there is no substitute for true charitable intent on the front end. Estate planners have been successfully sued for this mistake. Don’t make this error. Steer non-charitably and even marginally charitably inclined clients away from charitable techniques.
gifting (or selling to family) without full-blown, complete appraisals by qualified appraisers invites tax disaster. I realize that clients hate to pay appraisers and often only begrudgingly do so because you told them that they had to do so, but the purposeful estate planner will be firm about this necessity. In tax valuations, actual value is irrelevant because it is the tax return value that is important, and that value may have no relation to true value; actual value is unknown because there usually hasn’t been an arm’s length sale at fair market value, and perceived, defensible value is everything. In my opinion, only a well-reasoned and comprehensive appraisal performed by a qualified, independent appraiser can protect the client from the vagaries and sometimes arbitrary and capricious valuations of the IRS, as well as the associated expenses and risk of having to defend value.
second-to-die insurance is rarely cheaper than traditional life insurance. It usually is fair to say the premiums on second-to-die life insurance are lower than premiums on single life insurance policies on either insured. However, the premiums in the second-to-die insurance policy usually must be paid until the surviving insured dies, which usually is a longer period. If the life insurance companies’ actuaries are right about the remaining life expectancies of the two insureds (and they are armed with mountains of data and usually are right), the total second-to-die life insurance premiums paid can exceed that which would have been paid on a single life policy. Second-to-die insurance is a tool, but it is one that can be misused.
in using life insurance, the goal should be to minimize the amount of term insurance, which includes universal and variable universal life policies. Term insurance certainly has its place. It is perfect to ensure the income of a younger insured since term insurance will provide more immediate death benefit. However, for long-term reliable coverage that won’t lapse before the insured dies, there is no better product that good old-fashioned whole life. While it isn’t as sexy and perhaps doesn’t provide for the same rate of return as other, newer products, whole life comes with usually unbeatable guarantees, including that the premiums, if paid until death, will result in the payment of the death claim.
Universal life and variable universal life involve the insured taking on more risk in order to achieve a higher rate of return. The problem with these policies is that the insurance piece is term insurance, and the costs of term insurance go up each and every year of the insured’s life. These premiums can become massive and eat up even a significant amount of policy cash value if the insured lives to a ripe old age. These policies often implode close to death, when alternative replacement insurance can’t be secured. Don’t forget that life insurance companies make profits by maximizing the premiums collected while minimizing the death claims paid; a significant part of any insurance company’s profitability consists of its lapse rate. Don’t ever forget that.
in comparing life insurance products by examining the policies and their components (load, yield, flexibility and guarantees)–not the illustrations. In my opinion, trying to rely upon the illustrations of a life insurance policy’s future performance is a fool’s errand. Trying to get behind the numbers in an illustration is virtually impossible, as life insurance companies have become adept at hiding those numbers. As a result, you have to make the company produce the actual specimen contract that is being purchased to scour it for guarantees and loopholes because the insured and the beneficiaries can only rely upon the contract. Moreover, it is fair to ask them the load, i.e., the costs, that are built into the policy, including, without limitation, surrender charges.
an estate plan must consider the client’s total situation–personal and business relationships, values, healthcare, management, property disposition, liability exposure, liquidity and cash flow needs and taxes. Too often, so-called estate planners just want to deal with a limited aspect of the client, usually the property and the taxes, but this does the client and the estate planning professions a grave disservice. The true estate planner will see the client as a complete person who is comprised of many related parts and will address all of those parts. In today’s extraordinarily litigious world, it is imperative that the estate planner review the client’s assets and lifestyle for liability exposure and consider ways either to eliminate or reduce that exposure.
Liquidity should be viewed as much as a separate asset as illiquidity is a liability. Insurability at standard rates also should be viewed as an asset that usually doesn’t last forever. There will be plenty of situations along the way where the client or someone in the client’s sphere needs services that the estate planner either doesn’t provide or can’t provide. The purposeful estate planner will be circumspect about his or her professional limitations and not be bashful about recommending that the client engage other professionals to help when the need is outside of the estate planner’s purview. Clear examples of this are in family business consulting or wealth psychology. Sometimes, the client’s family is stuck in conflict and needs a trained facilitator who is educated in family systems theory. Making appropriate referrals is a sign of wisdom and strength, not weakness or inadequacy.
Conclusion. Well, this is what I believe. I’m certain that my thinking may be flawed, especially given that I am a deeply flawed and imperfect human being. However, before you cast aspersions on my beliefs, consider your own. What do you believe in? Have you ever articulated or listed out your estate planning beliefs as I have done herein? If you haven’t, then I encourage you to take this journey, this less traveled road. You will learn a lot about estate planning that you may have once known but have since forgotten, and a lot about yourself.