How to Weed Outdated Assumptions from your Estate Planning Strategy

Is your estate planning based on some incorrect assumptions? Unfortunately, it probably is. A lot of changes occurred over the years, and they affect the underlying assumptions of many plans.

Plus, some traditional estate planning assumptions weren’t valid in the first place. We know that, because we have better information now. Be sure that neither you nor your estate planner is using assumptions that aren’t valid.

Here are some areas where I see incorrect assumptions regularly being made.

Estate Planning Strategy #1

Irrevocable trusts. When I first learned the law, an irrevocable trust really was irrevocable. The only way it could be changed was for someone related to the trust to persuade a court. Estate planners had to emphasize to clients that, once in place, an irrevocable trust couldn’t be changed.

Now, that’s not always the case. It might not even be the case with a trust you set up years ago.

More than 20 states now allow what’s called a decanting of an irrevocable trust, and many of the laws permitting decanting were enacted only in the last five years. Decanting means you can create a new trust with some different terms and have the old trust merged into the new trust. This doesn’t let you get the assets back or change from a beneficiary who already has a vested interest. But you probably can stretch out the trust, delaying when distributions are made. You also change the trustee, the location of the trust and some other terms.

Another way a trust might be changed without court action is to swap assets. Many irrevocable trusts allow the trustee to exchange assets in the trust for different assets of equal value. The optimum time to swap assets is when your intention was to remove future asset appreciation from your estate, but the assets in the trust no longer have the appreciation potential you thought they had. You can swap them for other assets you have that are more likely to appreciate.

People who already have irrevocable trusts should consider these two tools to refine the trusts or fix problems.

These two tools also should cause some people who rejected irrevocable trusts in the past to reconsider them. The inability to change an irrevocable trust kept many people from using them despite benefits such as lower estate taxes, creditor protection and more. You might want to take a fresh look at them.

Estate Planning Strategy #2

Asset management succession. You’re probably satisfied with the way your assets are managed and structured and expect the system to continue under your heirs. After all, you built the estate and created this investment structure. Why wouldn’t your heirs want to continue it? That’s probably an assumption of your plan.

But surveys show your asset management structure is one of the first things to change and likely will be changed significantly after your passing. An overwhelming majority of surviving spouses and children who inherit will change financial professionals, usually in less than a year. Whether you use an investment manager, financial planner, estate planner, broker or a mutual fund company, the new owners of the assets are likely to change the firms and people involved.

The main reason this happens is that most people don’t consider portfolio succession planning in their estate plans. You should explain to whomever is going to inherit your investments how you manage them and why you think that is best. If you work with a financial professional you believe does a good job, introduce your heirs to that professional soon. Explain why you use that person or firm and encourage your heirs to continue using them. Otherwise, the surveys indicate your portfolio and planning are going to be overhauled, and fairly quickly.

Estate Planning Strategy #3

Charitable gift planning. A couple of invalid assumptions are commonly made about charitable giving.

One assumption is that estate taxes are a major motivation for significant giving. Estate planners often mention charitable giving strategies only to people who would receive substantial estate tax benefits. Since only a small percentage of estates face the federal estate tax these days, only a few people receive charitable giving advice. As I’ve pointed out in the past, simple gifts of cash often aren’t the most efficient way to contribute to charity. Because of the standard assumption, however, most people don’t hear about the alternatives.

Yet, data show that many people give for non-tax reasons. Estate planners can help them by showing the different vehicles for giving, how to generate maximum impact and benefits from gifts, and more. Planners also can help evaluate charities or enter into donation agreements.

Another assumption is that the estate will and should be used to make substantial gifts. Now, most people receive no estate tax benefit from charitable giving but can receive significant income tax benefits. Many of you should be looking at ways to give during your lifetime to reap the income tax deductions in addition to seeing the effects of your gifts. But you’ll need good planning to ensure that you don’t give away more than you can afford.

Life insurance also can be a good way to make charitable gifts. The charity won’t receive the money until the donor passes away, but the life insurance provides leverage to the donor. The ultimate gift probably will be several times the premiums the donor paid. This strategy rarely is presented as part of an estate plan.

When you are charitably inclined, talk to your estate planner about it and determine the best ways for you to give.

Estate Planning Strategy #4

Transition planning. The law and most estate plans need to be updated regarding disability and incapacity. We’ve seen that in headlines of celebrity cases in recent years. The turmoil at Viacom over the condition of Sumner Redstone is only the most recent example.

People are living longer, and mental capacity tends to diminish as we age. Most estate plans need better provisions for the day when the estate owner might not be able to manage financial affairs effectively. Plans especially need ways to protect the principal owner from being taken advantage of by others, whether they are strangers, family members, friends or business associates.

Sure, most plans have powers of attorney, and living trusts have provisions for a successor trustee to take over when the original trustee is incapacitated. But these tend to be boilerplate provisions that don’t adequately handle many of the potential problems.

The plan documents should have an objective standard for determining whether a person is disabled, without having to go to court. The estate owner needs to set this standard when he or she is healthy and active. The standard might be an agreement of two or three people named by the principal. Or a doctor or group of medical professionals might be named to make the determination after testing the principal. There are a number of other possibilities. The point is that most disputes and delays can be avoided if you set an objective standard ahead of time and a way for triggering the determination.

Another good move is to name a trust protector. This is an independent person (or a group of people) who reviews the financial actions of a trustee. The protector receives and reviews financial account statements and other important documents. The protector is empowered to take action, even removing the trustee, if that is deemed in the best interests of the principal.

Even when a trust isn’t involved, it’s a good idea to have one or more reliable people receive or have access to your financial information so they can review it for signs of problems.

There’s no substitute, of course, for carefully selecting trustees, agents, and other people involved in your estate plan. Look for careful, diligent people you can trust who know when to seek help managing your affairs.