Wednesday, December 18, 2013

The Value of Assets to Beneficiaries

     In the estate planning process, one of the most difficult decisions for clients is how to distribute assets to their loved ones. Frequently clients run into problems because their desire to treat beneficiaries equally conflicts with their reasons for wanting to provide for those people in the first place. Often we find that when clients begin to consider their own goals in making gifts, and which of their assets can serve those goals best, clients have an easier time making decisions.
     In one instance, our client desired to treat her three children equally. Prior to beginning the estate planning process, the client achieved this goal by dividing her assets and a modest life insurance policy between her children by using beneficiary and transfer on death designations to assign different assets to each of her children. While this initial form of planning worked when the client was younger, the client expressed concern about unbalancing her gifts as she took larger retirement distributions or needed to sell stock in order to pay for medical expenses. The client also wanted to reward her daughter who lived with her and maintained the residence for that effort, and to ensure that another child had an additional source of income.
     As we discussed the client’s income and assets, we learned that she supplemented her modest pension with dividends from stock in companies with substantial long-term stability. We suggested that the client pass these stocks along to the child who would need additional income, holding the stock in trust so that the trustee would distribute income from the dividends to the child and be able to sell the stock in the event that the child needed additional funds. Following that child’s death, the client’s two other children (or their children) would receive the remainder of the stock free of trust. The idea that her son would have a continuous source of income appealed to our client. However she was still concerned about equality between the three children.
     Outside of her stock holdings, the client had approximately $200,000 worth of assets and was uncomfortable with the idea that she had given specific property, the stock and her residence, to two of her children without leaving anything identifiable to the third child. This perceived inequality threatened to derail the entire planning process until we began to discuss the value of various assets. A quick search showed that the client’s stock holdings had a value of approximately $250,000, which was likely to continue to appreciate. The client also knew that the value of her residence decreased substantially following the end of the housing bubble, but that her daughter intended to continue living in the home for the foreseeable future.
     Taking this information into account the client quickly realized that while the residence had value to her daughter as a place to live, the saleable value meant little when dividing her estate. Additionally, knowing that her other two children would inherit her stock holdings after their brother’s death allowed the client to feel more comfortable dividing the remainder of her assets between those two children, despite the knowledge that those assets would be significantly less valuable than the stock at the time of her death.
     To summarize, by helping our client realize that by giving particular assets to each of her children she was better able to achieve her goals than if she just divided assets equally at her death we pushed through a barrier that previously kept the client from establishing an estate plan. As planners, we all need to look at the big picture of the client’s goals because the client’s personal feelings can often create situations where they cannot see the forest for the trees and therefore fail to act. 

Wednesday, December 4, 2013

What is Really Important in Estate Planning

When clients ask, “What's really important in estate planning?” we as professionals put on our "expert hat" and generally respond with something like "you want to maximize estate tax savings" or "you must avoid probate.” We go on to wax eloquently, often a great length, about the many strategies for protecting assets and saving taxes. While these are laudable goals, they fail to take into account what should be the primary goal in estate planning, protecting the client’s loved ones.
As planners we are often more comfortable with the details of estate tax law than we are with discussing the personal situations of our clients. We tell them all the wonderful things they can do, rather than determining what they want to do, then try to fashion a tax and probate savings strategy around that. Discovering what clients really want for their families is sometimes difficult because they may not know themselves. They may be struggling with various issues with their spouses, children, grandchildren, or even parents and have not been able to voice those issues to anyone.
While we are all great technicians, perhaps we should spend much more time becoming great listeners. We serve our clients best not by telling them what they can do, but by asking them questions to better understand their concerns and desires for their family.
Some questions that may help clients articulate their wishes include:
  1. Do you know the current value of all of your assets and how they are owned?
  2. What kind of future lifestyle do you and your spouse want to enjoy?
  3. Are you worried that the lifestyle you want to maintain may mean your children will receive a smaller amount than you would like to leave them?
  4. Do you have any concerns about the financial acumen and spending habits of your spouse or significant other?
  5. What is your relationship with each of you children, and will that affect what you would want to leave them at your death?
  6. Do any of your children have any issues such as alcohol or drug dependencies, troubled marriages, gambling problems or other issues that affect their ability to handle money that you leave them at your death?
  7. If you could place restrictions on the money these children eventually receive, what would you like to do?
  8. Do you have any elderly relatives to think about if something happens to you unexpectedly?
  9. Do you have any charitable inclinations you would like to have met from the funds available at your death?
  10. Are you comfortable that the assets you currently have are sufficient to allow you to make small, or even large, gifts to your children or grandchildren?
  11. Whom do you trust to make medical and financial decisions for you and your family if you are incapacitated or after you pass away?
After clients answer these questions, and more that stem from them, then we can explain the technical issues. In this way, our clients understand that within all the strategies and documents their true wishes and hopes for their family can be met.
In this ever-changing world, it is not enough to know the law. We must make a concerted effort to know our clients better and understand their needs before making any recommendations. Only then can we truly serve them well.