Gauging Your Estate Plan’s Success
Stress tests can actually take the stress out of our biggest, most complex tests.
That’s how regulators evaluate financial reserves, community organizations prepare for disasters, and doctors and trainers measure how healthy we are. It’s also how families can prepare for inevitable, potentially sudden change. Stress testing an estate plan can help ensure that – when it really matters – your plans can stick.
What could a gathering of the people named in your estate plan and your advisors reveal? Are there any existing or potential, practical or interpersonal conflicts that can be addressed sooner rather than later, or before it’s too late? Is there sufficient liquidity to pay taxes and meet other pressing needs? Which assets go into which entities? Who will cover any unexpected costs, any outstanding debts? Who will make those and other, often very difficult, decisions? Estate plan stress tests can strengthen family and advisory relationships, clarify roles and responsibilities, and reassure those involved. Everyone will know what to expect, what to do, and who to turn to when the time comes.
Here are brief highlights of some possible findings and solutions.
THERE ARE CONFLICTS AMONG FAMILY MEMBERS.
Family conflict is a significant and increasing challenge in estate planning. There are more blended or otherwise complicated families and, as a result, more potential for differing expectations and disputes over inheritance. This exercise will allow you to think through who would inherit specific assets and, if you own a business, who would manage the business assets. Detailing the plan with the appropriate legal documents and clearly communicating your intentions and wishes can go a long way in avoiding conflict. It’s a good idea to review and update your documents at least every five years or so, or when there is a major life event such as birth, death, marriage, divorce, or the sale of a business.
I’M UNCERTAIN WHAT, WHEN AND HOW MUCH TO LEAVE MY CHILDREN.
Many families struggle with how much their kids should inherit and how they will receive it. Certainly, a level of maturity is needed to manage assets and make spending decisions. But even adult children may not have the financial sophistication to handle a large or complex inheritance. A trust can protect assets against any existing and future creditor claims and against failed marriages, provide for family members with special needs, and distribute assets at predetermined ages or other milestones. You can leave assets in a trust for a child’s lifetime and a skilled fiduciary (or co-fiduciary) can help distribute the funds properly and prudently. The principal can also be left in a dynasty trust and benefit multiple generations, subject to the state’s perpetuity rules. See Justin Miller’s article, “Gifting and Letting Go: Emotional and Practical Perspectives,” Independent Thinking, Vol. 45, June 2022.
MY HEIRS WILL NEED LIQUIDITY TO COVER TAXES.
At present, the annual federal estate tax exclusion is $12.92 million (double that for married couples). The remaining estate will be taxed at the top federal statutory estate tax rate of 40%. More concerning for many high net worth families is that the exemption amount is scheduled to be cut roughly in half after 2025 to an estimated $7 million per person. Federal estate taxes are due nine months from the date of the decedent’s death and must be paid before remaining assets can be distributed. So, it’s important to make sure you have sufficient liquid assets to pay taxes. It is also worth thinking now about annual giving and more significant wealth transfer strategies to minimize that potential tax bill.
THE TERMS OF MY TRUST MIGHT CAUSE PROBLEMS FOR MY HEIRS.
Some areas that are often overlooked in trust documents include trustee’s breadth of authority (trustee powers), the beneficiary/beneficiaries of the trust receipts and disbursements (principal and income), and the responsibility for paying the estate tax (estate tax apportionment). This usually becomes relevant when an estate owns private businesses that make uneven distributions to a trust. Make your intention clear; ask the right questions to kick the trust’s tires; and ensure that the trust language is flexible.
THE VACATION HOME SHOULD BE A PLEASURE, NOT A BURDEN OR CAUSE FOR STRIFE.
A family vacation home can present unique emotional and planning challenges. To minimize family strife, speak individually with each child about their hopes for owning and using the property and how they see family dynamics playing out. Then communicate your decision clearly, whether the property is to be kept in the family or it’s to be sold or gifted to charity.
MY TRUSTEE AND I NEED TO TALK, BEFORE IT’S TOO LATE.
It’s critical for all family members to understand what will happen next. What are the roles and responsibilities of each member, and who will make specific important decisions? The trustee is charged with the responsibility for managing or administering the trust, and if the trust document is unclear as to the grantor or settlor’s intent, the trustee is left to speculate, which can lead to misinterpretation and potential unintended consequences.
THE WRONG FIDUCIARIES ARE NAMED IN MY DOCUMENTS.
Are the fiduciaries and successor fiduciaries named in your documents still suitable? A fiduciary is an individual or corporation that is essential in implementing your plan and carrying out your wishes, and can include an executor for your will, trustee of your trusts, and agents you name for healthcare and property. Individuals age or quarrel; corporations can merge into others or be acquired. Often the best solution is to appoint a willing and able family member as one fiduciary, and a professional co-fiduciary (such as a trust company) as the other, to manage the assets and handle the administration, recordkeeping, and tax responsibilities.
Stress testing your estate plan can inevitably raise issues that need to be resolved. And there’s no time like the present. The reward should be peace of mind, in the knowledge that you and your family are prepared – and that your hopes for them can be realized.
Michael Cozene is a Partner and Wealth and Fiduciary Advisor at Evercore Wealth Management and Evercore Trust Company. He can be contacted at firstname.lastname@example.org.
This is Only a Test By Julio Castro
Wealth and Fiduciary Advisors help stress test family estate plans, working directly with your family and your other trusted advisors. While every family situation is unique, the process should include several key steps.
- Collect information about each financial entity and prepare a diagram detailing the ownership and governance of each, along with a list of their respective assets. For illiquid and business entities, it’s helpful to understand if the business is dependent on the patriarch or matriarch, if there are any other family attachments to it (practical or sentimental), and any debt and/or liquidity provisions.
- Prepare a detailed balance sheet of all assets, with each categorized by ownership (i.e., individual, joint, trust, retirement, etc.) and, in the case of contractual assets such as life insurance, retirement accounts and annuities, the designated beneficiary.
- Prepare a detailed estate flow chart based on the terms of the existing documents, assets and entity ownership. This chart should model asset flow based on conservative assumptions and current market values and relevant assumptions, including federal and state estate taxes. This will show you what each of your beneficiaries are expected to inherit, enabling you to determine if that is consistent with your wishes.
- Prepare a liquidity summary to illustrate the availability of funds to meet tax liabilities and other costs.
- Prepare a summary of ancillary documents to ensure that healthcare and property agents are consistent with your wishes.
- Gather key members named in your estate plan along with your professionals – your trustee/s, trust protector, estate planning attorney and accountant – to evaluate your entity analysis, balance sheet, estate flow chart and liquidity summary.
This forum allows the key participants in your plan to enhance their understanding of your unique situation and clarify roles, and it simulates how your plan can play out. From there, your wealth and fiduciary advisor can create a plan of action to help ensure that your goals can be fulfilled.
Julio Castro is a Partner and Wealth and Fiduciary Advisor at Evercore Wealth Management and Evercore Trust Company. He can be contacted at email@example.com.
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