The Basics: Estate Planning In Confusing Times

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The proposed tax law changes, the pandemic, the threat of inflation and general economic uncertainty - all of these and more means you can become too focused on the more esoteric aspects of income and estate tax planning and overlook the basics. At times like this it is important remind yourself of the basics of estate planning and what it entails. 

Estate Planning is a process -- a process of maintaining and protecting your control of assets during your lifetime, and transferring your assets to your beneficiaries at death. The steps in the Estate Planning process are:

Deal with the immediate problem. Many times, estate plans are motivated by an imminent risk that makes what has worked in the past not work for the immediate future,

1. Gather basic information,

2. Establish your goals and objectives,

3. Review your investment plans, asset protection plans, income protection plans and debt management and integrate them into the estate plan,

4. Gather information on specific assets such as real estate holding, limited partnerships, private businesses and so on,

5. Review the common solutions used for achieving your goals and objectives,

6. Consider alternative scenarios and their impact on the execution of those solutions,

7. Outline and integrate the steps needed to implement the solutions to achieve your objectives with your overall wealth management plan,

8. Implement the estate plan and adjust as necessary, and

9. Periodic review of the plan and implementation to ensure that events outside of your control, such as changes in the tax law, do not require any adjustment in the implementation of the estate plan.

   An Estate Plan can be as simple as a one-page document or as complex as a multigenerational, international family enterprise with multiple trusts partnerships and other entities. The complexity is driven by your goals, and the objectives which you, and the various stakeholders in your estate (including your family, your future family, employees, institutions and businesses) agree upon in broad outline. Although, it is not necessary to disclose your estate plans to your various stakeholders, it is well to bear in mind what their interests may be and form a broad consensus on the common goal that everyone agrees to in planning.

   Once there is agreement, drafting and implementing an Estate Plan becomes simpler. If, however, there is no agreement on the common goal, or there are unresolved conflicts between the stakeholders in your estate, the planning and execution will be significantly more complex, because alternatives will have to be built in for people upset with the settlement of the estate, based on their assumptions of what your intent was in setting up the Estate Plan. It is important, therefore, not only to communicate the Estate Plan as it is today, but what it will look like in the future to address the concerns of the stakeholders now, rather than waiting until after your death, to minimize their filing a lawsuit. Articulating a common goal, and the objectives of the common goal, builds consensus: consensus minimizes litigating the estate.

   What type of planning if any, you will need, depends on several factors. To begin, ask yourself the following questions: 

   • Do all of your current documents reflect your goal and objectives on transferring your assets during your lifetime and at your death?

   • Are all of your assets correctly titled, beneficiary designation forms and life insurance beneficiary forms correct and up-to-date?

   • Are all necessary Trusts, based on your goals and objectives, properly set up and funded? and,

   • Do you have the necessary documents and contingency plans in case of some unexpected incapacity?

   • Each one of these questions helps to surface some of the hidden assumptions that people make about their Estate Plan, and also the most common mistakes that people make when planning.  

     Also, try running through the following scenarios:

   • What would happen if you lived to be 100?

   • What would happen if you died tomorrow?

   • What would happen if you became incapacitated today?

   • What would happen if someone who is your beneficiary dies, becomes disabled or is otherwise unwilling or unable to receive the assets at your death?

     As to actual documents, the most important documents which you should have: a Will, a Health Care Proxy and a Durable Power of Attorney. These documents allow you to designate someone else to handle your personal and financial affairs in a situation where you are temporarily, or permanently, unable to do so for yourself, as well as after your death. 

     The next check what is in existence today, such as: 

   • The title to real estate,

   • The beneficiary designation on deferred compensation plans e.g. an IRA,

   • The beneficiaries on life insurance,

   • The ownership of bank and investment accounts, and so on.

     Don't assume that, just because you completed a document 5 or 10 years ago, that either is currently up-to-date or, in the case of a beneficiary designation form, the custodian or asset manager has accurately recorded your intent. 

     Finally, take a look at what, if any, financial planning and wealth management planning has been done in the past. This doesn't necessarily mean that there is a formal written plan, but it may take the form of budgeting for payments of required minimum distributions, protecting assets from creditors and long-term care costs, making sure that life insurance premiums are paid and so forth.

     I hope that this refresher on what estate planning is about and how it is done will be helpful in grounding you as you are barraged with the multiple alternatives being discussed today.