Most Estate Planning strategies are deficient. Even wealthy people who consult with high-priced lawyers have key gaps in their plans. I’m not even talking about people who don’t bother to develop an estate plan. I’m considering only people who developed plans. Too many of them have plans that aren’t going to meet their goals, preserve their assets, and pass them to the intended loved ones and charities.
This unsatisfactory report on the condition of estate planning in America comes from a survey conducted for U.S. Trust, a unit of Bank of America, of 500 Americans with $3 million or more in investable assets. The survey shows the most common gaps in estate planning. From that it’s easy to see the solutions.
Incomplete understanding. About half the survey participants said they don’t fully understand some aspects of their plans. I suspect this leads to most of the gaps we discuss below. You need to understand your planning goals and strategies. You don’t want an estate planning professional whose attitude is that he or she knows the law and you have to trust that the right plan will be generated. Not fully understanding things probably is why many people complete only a few parts of the plan and don’t pursue the rest.
You need to ask questions about anything you don’t understand and make the estate planner take the time to explain it. Take notes so that you’ll remember the explanation later. Ask questions until you believe you understand the plan. When the estate planner can’t explain things adequately, find another estate planning adviser.
The partial plan. About four in 10 in the survey said their estate plans were not comprehensive. This usually means the plan has a basic will and the beneficiary designations of insurance contracts and retirement accounts are updated. But 51% don’t have instructions for the distribution of personal property. In the past I’ve identified these issues as those most likely to cause disputes and splinter families. Only 30% of estates have a power of attorney. I consider both a financial power of attorney and medical power of attorney to be essential to a plan. Personal property and assets haven’t been documented by 56% of plans. The documentation serves two purposes. It makes processing the estate faster, less expensive, and less painful for your executor and heirs. The documentation also ensures your plan covers everything.
Many plans also don’t use other tools, such as revocable trusts to avoid probate and aid disability planning, irrevocable trusts to protect assets from taxes and mismanagement, and charitable giving strategies.
Sometimes these gaps occur because the client didn’t place a priority on finishing the plan. Beyond the basic will, an estate plan requires meeting with the estate planner, understanding the choices, and making decisions. This work is easy to defer, and I advised in the past that doing a plan in stages is a good idea, especially when parts of the plan require hard decisions. But it’s also important that you place a priority on completing the stages. A partial plan is better than no plan. But being satisfied with a partial estate plan makes about as much sense as mowing half the lawn or painting half the house. Completing the plan, and then updating it every couple of years, needs to be a priority.
No business succession plan. Perhaps the most astonishing finding in the survey is that only 3% of business owners have succession plans. A business isn’t going to survive for long when there isn’t a clear plan dictating who will own and manage it (they can be separate people) after the current owner. There’s a much reduced probability of the owner’s loved ones receiving much value from the business without a succession plan. It’s not enough to think ?the kids will figure it out? or ?one of the kids will run it.? Too often, someone who doesn’t know much about the business is thrust into a position of deciding what to do about it. A business without knowledgeable leadership loses value quickly. If you expect the business to provide some wealth to your survivors, you need to have a succession plan in place and revisit it often.
Children in the dark. Parents generally plan to leave wealth and assets to their children when they can, but many worry what will become of the wealth. Only about a third of survey participants strongly agreed their children will be able to handle their inheritances. Almost half do not believe their children will be able to handle the wealth until at least age 35. And two-thirds say their desires for dividing personal property aren’t understood by their children.
Most parents seem hesitant to discuss details of their wealth with their children. There can be good reasons for that, but it also means the children don’t learn from the parents how to create and manage wealth, the value parents place on it, and how the parents plan to distribute it.
There are two main solutions to this situation. One approach is to distribute wealth to trusts and other vehicles. This allows the children to benefit from it without managing it. You select professionals to manage the money and trusts. Remember, you can select a professional money manager to choose the investments, and then have one or more other people decide on issues such as making distributions to the children.
The other solution is to increase communication. Have regular meetings or retreats (for wealthier families) to discuss the amount of the wealth, the parents’ plans for it, and methods for managing it. The discussions can start with relatively minor topics, such as how to distribute personal possessions, and increase to more substantive matters over time. Parents can increase communication indirectly by introducing the children to their legal and financial advisors and having the advisors explain a lot of the details to the children.
If you don’t believe your children will be able to manage the wealth responsibly, part of your estate planning should be to select appropriate money managers who will take over the accounts. You can ?test drive? advisors by having them start to manage accounts now. When you think professional money management is a good idea, you should introduce the children and the money managers of your choice early to establish a relationship.
Limited sharing between spouses. Spouses don’t always fully inform each other about their financial situation and plans. In the survey, most spouses have discussed taxes and investment details. They’re less likely to have shared retirement income needs, where retirement income will come from, debts, details of estate plans, and plans for long-term care.
Communication on these items is essential to meeting long-term goals. The choices here are similar to those for with children. You can begin the conversation, even if you start with relatively minor items. Or you can have your legal and financial advisors assist with the process. When you believe your spouse won’t be able to manage the money or make other financial decisions, consider leaving the wealth in a trust or other vehicle that will be professionally managed.
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