Key Estate Planning Questions Every Investor Must Answer

Estate Planning can be confusing and even intimidating to most people. They do not deal with the issues regularly, so the terms and concepts can be confusing. Most estate planners are not helpful, as discussed in our October 2008 visit (available on the web site archive). They are not adept at simplifying and explaining concepts.

Yet, estate planning can be simplified, regardless of the size of your estate. Simplifying estate planning not only helps develop a better plan, but it also reduces the cost of estate planning.

The heart of estate planning is to make key decisions about your wealth and loved ones. Those key decisions can be captured in several questions. Though many planners do not ask the questions directly, the answers are needed to produce the estate plan you want. Here is a review of the key questions you must answer for successful estate planning and to reduce the cost and time involved in the process.

Who’s in charge? I put this first, because it usually receives the least attention. An estate plan is only documents. People use those documents to implement the plan. Those people often determine whether or not the plan is successful. The key people are the estate executor or administrator (the term used depends on your state) and the trustee or trustees.

Often these selections are an afterthought, with the oldest child or sibling named. Yet, that person might not be qualified to fulfill the position or might live in a different state, making the job more difficult and costly. Also, the selection could trigger negative family dynamics.

Other times the estate planinng specialists is named the executor and a bank or other corporate trustee suggested by the planner is named trustee. These appointments can raise the cost of managing the estate or trust. In addition, professionals might not be familiar with the specifics of your wishes or of family dynamics. A growing problem with corporate trustees is the rapid rate of mergers, failures, and other corporate changes.

Consider some other approaches. Appointing both a family member and a professional to a position can be effective. The professional provides technical knowledge plus experience with other estates or trusts. The family member might better know your wishes and the family history. You might consider splitting the duties between different people. Or a committee of more than two, combining family members and close friends, can be appointed. Some estate plans require a unanimous decision for any move in such committees.

How much should I give now and how much later? The tax law encourages early giving, as we discussed many times in the past. To the extent you are confident that your lifetime needs still will be taken care of, early giving can reduce long-term taxes.

There also are non-tax reasons for early giving. Some people enjoy seeing their wealth benefit others instead of imaging how it will help after they are gone. Others want to see how small gifts affect people and how they are handled. This experience sometimes causes a estate planning revisions.

Lifetime giving can take many forms. There are straight gifts of money and property or gifts made through trusts. Expenses can be paid for a person, such as tuition or medical expenses. Some people provide a down payment for a house or capital to start a business. A popular gift in recent years is to foot the bill for family vacations.

There are risks to early giving. The gifts might change the recipients for the worse. They could waste the money. They might stop working, producing, and contributing. The gifts also could change your relationships with people. All these are reasons to consider making small gifts first.

The major risk of lifetime giving is depleting your own resources. Life expectancies are increasing, and expenses in the latter years can be heavy. Consider that when deciding how much to give now.

Should there be controls and incentives? In the last two decades interest in conditional gifts accelerated, whether the gifts are made during life or through the will. Parents are concerned outright gifts might create disincentives and cause heirs to be lazy, spoiled, or even destructive. These concerns are in addition to longstanding worries about mismanagement and waste of wealth.

The solution is to put wealth in trusts with controls. We have discussed these in past visits. One control is to distribute income only if the beneficiary is employed or a full-time student. Some trusts base distributions on the beneficiary’s income.  Others distribute principal only after the beneficiary reaches certain milestones. The milestones could be an achievement (earning a college degree, staying employed) or time-based, such as reaching certain ages.

Conditional trusts have their benefits, but some of them go too far or are inflexible. For example, when distributions are income-based, they discourage an heir from low-paying work that has value to society. The conditions also might channel heirs into activities that don’t really interest them or best use their talents in order to boost trust distributions. Or the conditions might be so tightly written they cannot be adapted to unforeseen circumstances. The incentive trusts also are an attempt to control loved ones from beyond the grave.

An incentive trust or other condition can have its place. But some flexibility and discretion needs to be built into the package.

Should heirs get equal shares? In most families this is not an issue, but some parents have reasons to consider unequal shares.

There might be reason to believe one child will waste the money. In that case, an alternative is to leave the wealth in trust with restrictions or with discretion by the trustee. There should be contingent beneficiaries in case the money is not distributed to the initial heir.

Another reason for unequal shares is the children achieved different levels of financial success. Parents might want to leave more to the child who has a lower income or had financial setbacks. If this is done, the more financially secure child should be told that it is not a measure of affection or some kind of punishment.

Unequal inheritances might be necessary when a family business, real estate, or similar assets are involved. There might not be a way to separate or divide the business; some of the children might not be involved in the business; or the children might have difficulty working together. In these cases, life insurance might be used to equalize inheritances. Or it might be possible to separate voting rights and control of the business from the right to receive income. If the business generates enough cash flow, it might be possible for the child who runs the business to buy out the others.

There are other solutions for other situations. The key is for you to decide if unequal inheritances are appropriate for your estate and family.

Should someone be excluded from the will? An extreme form of unequal shares is to disinherit someone who expected to inherit. Disinheritance generally is legal, but often is considered a bad strategy. The person could challenge the will or demand money from the others in return for not challenging the will.

For someone who is considered unfit to inherit, an alternative is to leave the person an amount that is meaningful to him or her and add a no-contest clause to the will. The clause states an inheritance is forfeited by someone who unsuccessfully contests the will. This is legal in many states. The key is to find an amount that the person won’t want to risk losing.

Who should inherit? This question often has an obvious answer. But some people prefer to leave wealth directly to the grandchildren instead of letting them inherit from their parents.

Others have complicated families including second spouses, stepchildren, and more. Additional complications might arise after your death, for example if your spouse re-marries. Without careful estate planning for these situations, the final destination of your wealth is in doubt.

Determine who should benefit from your estate and who should not. The estate planning specialist can discuss the implications and develop trusts or other methods to fulfill your objectives.

Leave only money? People often have valuable but specialized assets, such as collections, or they own sentimental assets. These assets often require special treatment. You need to have the items organized so a knowledgeable person can understand their value to you and have a good idea how to take care of them. You also have to decide if anyone in your family wants them and will be a good caretaker. If not, it might be better to either arrange for someone else to receive or buy them from your estate. Or you can make the sale or gift during your life.

Personal items also can have emotional value to family members far exceeding their monetary value. We discussed in past visits the importance of identifying such assets and different ways to consider distributing them.

Should non-family members benefit? Charities or people outside the family might be objects of your affection. If so, identify them, decide if you want to benefit them now or through your estate, and determine how much to give. This is something you should communicate to family members in advance so they are not surprised.

Give something of yourself? More people are resurrecting a tradition known as the ethical will. This is a non-legal document containing a personal statement. The statement can be an individual or family history, lessons learned, enduring principles, goals for the family or guidelines for living. The ethical will can be left in any form: writing, audio recording, or video recording. The best-known example is the best-seller The Last Lecture by Randy Pausch and Jeffrey Zaslow, which first appeared as a YouTube video and an article in the Wall Street Journal. Some even leave humorous statements to establish the kind of memory they want people to retain.