Estate Planning -

a Family Affair 

November 2019

Introduction 

If estate planning were just cold, hard numbers, it would not be one of the financial tasks that people avoid the most. Not only does creating an estate plan force people to confront their own mortality, but it also forces them to decide who gets their assets, whether all heirs should be treated equally and who will play the key roles in settling their estates.

With the possible exception of divorce, emotions come out more in estate planning than anywhere else. To help get past the uncomfortable thought of death, it may be helpful to remember that dying without a will, in many jurisdictions, will result in the state governing the distributions of assets—and it may not go the way intended. While many people have a will or similar documents, estates comprising more complex assets generally require a greater degree of complexity in estate planning.

Revisit an estate plan

Estate plans should be reviewed at least every five years or whenever there is a major life change, such as a birth, death, or financial windfall or loss, or if there is a change in estate laws in the jurisdiction. It is particularly important to revisit plans in one's fifties or sixties. By that time, assets may have become much more complicated, heirs have grown older (including the addition of grandchildren) and intentions may have changed. Rather than focusing primarily on protecting family in the event of early death, the impetus may shift towards using an estate to assist the next generation or build a legacy.

Additionally, some of the estate-planning strategies used in the past may no longer be required or relevant. For example, in the US, the new tax law more than doubled the federal estate tax exemption, letting each person give up to $11.18 million without it being subject to the estate tax. The number of people who have to worry about federal estate taxes has therefore plummeted. However, the federal estate tax exemption is scheduled to drop to about $5.5 million in 2026 which will reverse this trend markedly, reinforcing the necessity of reviewing estate plans. Some planning may also become counterproductive over time: for example, people who bought life insurance to help cover estate tax bills may reassess whether they need the coverage as jurisdictions change their estate tax exemptions and allowances. 

Instead of creating estate plans primarily to avoid taxes, many people can now focus on what they want to accomplish with their money. Back in the early 2000s, people were very focused on estate taxes; now they’re looking at trusts for probate avoidance, privacy and planning. 

Do you need a trust?

Rather than just divvying up money when you die, a trust can help you control what happens to it for years afterward. With a trust, you can specify when your heirs will get the money and how it can be used. Money in a trust can also avoid probate, the process of passing assets through a will. That can be expensive, time-consuming and public.

A trust can also protect money from your heirs’ creditors or an estranged ex-spouse if your children get divorced. If you have a child with disabilities, you can set up a special-needs trust that can be used for the benefit of your child after you die without jeopardizing your child’s eligibility for government benefits. In some jurisdictions which apply inheritance tax to trusts, a type of trust known as a credit-shelter trust can allow spouses to double their estate tax exemption. A trust can be particularly helpful for blended families. You can set up a trust to pay out income to your current spouse as long as he or she is alive, then pass the remaining assets to your children from your first marriage. You can choose a family member, trusted friend, or financial institution to manage your trust—or a combination. Trust service fees are typically about $4,000 per year, or more for trusts over $2 million

Take time to think through what you want your trust to accomplish. To pick the right kind of trust, it is important to work with an estate-planning attorney who is an expert in your jurisdiction’s laws. It can also help to have your financial team work together on your plans, including CPAs, financial planners and estate-planning attorneys, where applicable.

Having the talk

Some well-off people avoid discussing estate planning because they do not want their children or grandchildren to know how much wealth they have accumulated. They do not want to disincentivize your kids from having their own successes or set the expectation that there is something large coming to them. Children may structure their lifestyles anticipating a large inheritance, only to find out that their parents have other intentions, such as donating most of their wealth to charity.

Even if you don’t want to provide specifics, it is important for your heirs to understand the framework of how they will receive any inheritance, along with the reasoning behind your decisions. If you are doling out funds through a trust in which the bene­ficiaries receive income but no access to principal, they should know that in advance.

 

Progressive conversations over time may be the most effective strategy, feeding out a little information, monitoring the response and calculating next steps from that. When your children are in their late teens or twenties, start having general discussions about your family’s views on wealth. Next, you can introduce them to the structure of your estate plan—telling them, for example, that you have money in a foundation and that you’d like them to help determine where to direct it, or that you have sufficient funds in a trust for, say, their children’s educations. In later conversations, you can reveal numbers, such as how much money is in a trust or foundation. Make sure your kids also know where to find key documents and who to contact for questions and assistance when you die.

A third party, such as your financial adviser, estate planner or attorney, can help steer the conversation. A professional can also explain the more complex aspects of your plan to your children. For example, you may have your attorney review the structure of your estate plan, your accountant discuss its tax implications, and your financial planner go over such technicalities as how the money will be transferred upon your death. A professional can also ease tensions and encourage both sides to talk.

Equal or not?

In some cases, leaving different inheritances to your children makes sense. For instance, a child with a severe disability or mental incapacity may need more financial support in life than your other children. Or parents who regularly give financial gifts to one child—sort of an inheritance advance—might leave more to others to even things up.

However, many estate-planning experts say unequal inheritances can tear the family apart after your death. Any differences among siblings tend to create animosity and, at someone’s death, when emotions are running high, it is extremely easy for people to get hurt feelings. Even children who are financially better off than their siblings can feel unloved or punished for their success if they receive a smaller inheritance. That is why most parents end up leaving children equal amounts.

However, there are ways for parents to give more to one child without stirring up hard feelings. For instance, parents who want to reward a child for being a caregiver can pay that child like an employee while they are alive, and then treat the caregiver the same as the other children in the will. If other children have any questions about how the caregiver is paid, the parents are still around to explain their thinking.

Communication is even more important when you plan to treat heirs differently, either by bequeathing unequal amounts or by giving one heir a lump sum while creating a trust with restrictions for another. The worst time for people to find out that they are being treated differently than their siblings is during the reading of the will. 

When choosing an executor (to carry out your will’s instructions), a trustee (if you have set up a trust), and agents who will make medical and financial decisions on your behalf, many parents divide the roles among the children, without regard to whether a child is suited for the job. Some name two children to the same role to avoid hurt feelings, but this can lead to chaos if two children are named as a health care agent but disagree on a parent’s care. To avoid problems, name one person to fill a role, but include a backup in case he or she is unavailable.

Give it away before you die?

Giving away some of your assets while you’re alive will give you the satisfaction of watching your beneficiaries enjoy the gifts—especially if they need the money to, say, pay college bills or make a down payment on a home and as a bonus, they will have a chance to thank you for it. You can also be sure that your gifts go to the people you intend to receive them and the more property you keep out of probate, the less your heirs will have to deal with the costs and delays that can come with the process.

Lifetime gifts can also serve as a barometer of how your heirs will manage inherited wealth. You could, for example, give $10,000 to your child, tell him that you expect him to invest it, then check in a year later to see how he has managed the money. If he blew it on a shopping spree or a luxury vacation, that may guide how you set up his inheritance.

Tax considerations are still part of the equation. For example, as previously stated, in the US, while the vast majority of people do not have to worry about estate taxes now, the federal estate tax exemption is scheduled to drop to about $5.5 million in 2026. In addition, several states still have lower limits, so giving away some of your assets while you are alive will shrink the size of your estate, reducing the chance that it will be subject to federal and state estate taxes.

However, if your assets will likely be subject to estate tax, it may be wise to give away stocks that you expect to appreciate significantly in the years ahead. Any appreciation that occurs during the time until your death will escape estate tax when you die.

To avoid the risk of giving away money you will need later, work with a financial adviser to project expenses you are likely to have in the future, based on your life expectancy, spending habits, and projected rates of return on your investments. Health care expenses are especially important to consider.

Account for how your personal spending may fluctuate, too. Sometimes people spend a little more when they are newly retired, but after they get the travel bug out of their system, they will settle down and spend a little less. Once you have set a projection for how much you will spend, build in a cushion of an extra 10% to 20% for unexpected needs.

How to avoid probate

Probate is the court-supervised process of passing assets through a will (or through state law if there is no will) after you die. Money in a trust generally does not have to go through probate. In the US, life insurance death benefits and money in IRAs, 401(k)s and other retirement plans with beneficiary designations pass directly to the beneficiary without having to go through probate (and the beneficiary designations supersede your will). Bank accounts and brokerage accounts held as joint tenants with rights of survivorship pass directly to the joint owner after you die. Many states now permit people to own bank accounts and other financial accounts with a transfer-on-death designation. The accounts can pass on assets outside of probate when you die, and you do not have to give up any control over your accounts while you’re alive.

About the author(s)

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.