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. 

Alan Ferrara & Matt Ferrara

Protecting Beneficiaries from Experiencing Problems with Their Inheritances

Inherited wealth comes with many advantages, but it also has disadvantages. Depending upon which source you consider, between $10 trillion and $30 trillion will pass by gift or inheritance by the year 2030. More of our clients, be they older with adult children or younger with small children, are becoming increasingly concerned that passing large sums of money may not be in the best interests of their families.

Over the last 30 years, the focus in estate planning has been upon reducing gift, estate or generation-skipping transfer taxes. The intent was to minimize the amount of a client's estate that was "shared" with the IRS. However, with the increased exemption creating a decreased focus on the tax implications of inheritances, more of our clients now focus on how distributions to their children may affect their lives. They worry about children losing the motivation to accomplish something of worth. They also worry about the significant complexity added to their children's lives when they acquire wealth and suddenly have a variety of relatives and strangers trying to tell them what to do with those newfound assets. Some clients even worry about their children engaging in addictive or self-destructive behavior or even a spendthrift lifestyle that causes them to spend their money too quickly.

I believe it was Warren Buffett who said, "You should leave your children with enough money so that they can do anything, but not so much they can do nothing."  With similar thoughts in mind, clients are starting to look at incentive clauses to discourage unproductive behavior and encourage worthwhile pursuits. Access to the trust funds may now be subject to incentive clauses, such as

•      Tying distributions to a demonstration of some type of personal accomplishment, such as receiving educational degrees (but making sure you avoid creating "professional student", contribution to charitable pursuits or distributions to equal income earned.

•      Requiring financial training to be able to manage wealth responsibly.

•      Matching earned income, at least up to a certain point

•      Providing funds for "extended family vacations" to encourage continuation of family relationships after the death of parents

•      Requiring periodic testing to provide knowledge of any substance abuse issues and limitations of distributions therefore

•      Matching contributions to retirement savings to encourage a beneficiary to save for retirement

•      Requiring a prenuptial agreement in order to protect the "family assets" from being lost to an ex-spouse.

Each of these incentive clauses, and many others, can have many benefits, but clients should also consider the drawbacks. Matching earned income with the trust distribution may work against those beneficiaries who have chosen public service, a religious vocation or chosen to be stay-at-home parents. Incentive clauses can be excellent ways to protect and pass on family assets, but should be considered carefully with assistance from qualified professionals.

When discussing such provisions with clients we take the position that it is not our place to tell the clients what action to take. Instead, we serve as an advisor, informing them of the potential consequences of their actions and allowing them to make the decision that they feel is best for their loved ones. This method allows the clients to achieve their goals while minimizing the chance that their intentions will be subverted after they are gone.

Alan Ferrara

Discussing Planning with Family

     Last week I wrote about the increased privacy that clients gain from using trusts in their estate plan. Using Living Trusts, clients who choose to make different distributions to their children can keep the value and terms of those distributions private from other children. While this increased level of privacy can prevent discord in some situations, clients should consider how much information is too little information when discussing estate planning with their children.

     As we have said many times before, estate planning is an ongoing process. After documents are drafted, signed, and the funding process is complete, there is still the implementation of the plan to consider. By discussing their estate plan with beneficiaries, clients can help those beneficiaries understand the reasons for their decisions and ease the beneficiaries into the implementation and administration of the plan. This is not to say that clients need to provide their beneficiaries with the clients complete financial records or inform the beneficiary of the size or terms of their eventual bequest. Instead, clients can use this opportunity to provide the beneficiaries with a general sense of the scope of the client assets and the reasons underlying decisions regarding distribution of those assets.

     For example, for clients with a relatively small estate it is important that all the children understand that their parent does not have significant wealth and that the cost of medical expenses are likely to substantially impact those assets remaining after the parent passes.  While the client may make it clear to children that the intent is to distribute any remaining assets equally to all children, it is important they understand that an equal share may not amount to much. I

     Alternately, for clients with a substantial estate who opt to hold assets in trust for beneficiaries to be distributed over their lifetimes, and perhaps their children's lifetimes, it is important that those beneficiaries understand the reasons their parent has for making this decision. In both of these situations, communication with potential beneficiaries can reduce the chances that a beneficiary will challenge the validity of the parent’s estate plan because they understand that all beneficiaries are being treated equally and that there are long-term fiscal benefits of their parents' plan.

     It may even be more important for the client to discuss estate planning documents with the successor trustee so that that fiduciary understand the reasoning behind the document provisions and can appropriately make decisions with full knowledge. The trustee can also clarify the reasons for the document provisions to the beneficiaries.

     In all cases it is important that children understand who is responsible for administering an estate plan after their parent passes away, what is expected of that person, the location of the parents’ estate plan documents, and information about their parents’ legal and financial advisors. While these discussions are not always easy, they are an important part of the estate planning process that clients should not neglect.

Matt Ferrara